According to the US Bureau of Labor Statistics, approximately 20 per cent of new businesses fail within the first year of their inception and 50 per cent within the first five years. Only a quarter of start-ups make it to 15 years and beyond. There are, of course, a variety of reasons for the high failure rate. One of them is lack of planning.
Being an entrepreneur is hard. Being a successful entrepreneur is even harder. In this article, I will identify some common mistakes that new business owners make, using a real-life experience as an example. If you are planning to start a small business, you should definitely read on:
- The Entrepreneurial Seizure
- Mistakes Many New Entrepreneurs Make
- Write a Business Plan
1. The Entrepreneurial Seizure
About six months ago, a former colleague (let’s call her Jane) phoned me out of the blue for advice on how to develop a website. I have not seen or spoken to her since I left the corporate world, so I was rather surprised to hear from her. She told me that she had started a home baking business in early 2021 and was thinking of creating a website to promote her baked goods. Baking is her greatest passion and she’s really good at it (her mocha eclair is to die for). Like many avid bakers, she spent a lot of time in the kitchen at the height of the Covid-19 pandemic, churning out an array of sweet treats. Then one day, she had an Entrepreneurial Seizure and decided to turn her hobby into a home business.
I first read about the term ‘Entrepreneurial Seizure’ in ‘The E-Myth Revisited: Why Most Small Businesses Don’t work and What to Do About It’ by Michael E. Gerber. (Great book! Highly recommended!) When you experience an Entrepreneurial Seizure, there’s no relief until you start your own business. The idea of being your own boss is just too enticing. You can finally sing your own tune and do what you truly enjoy. Hurrah! Nevertheless, you could be making the fatal assumption that ‘if you understand the technical work of a business, you understand a business that does that technical work’. According to Gerber, that’s the root cause of most small business failures.
Jane might be one heck of a baker, but does she have what it takes to run a profitable home baking business? Although her enthusiasm was evident, it was also clear to me that she was quite clueless as a business owner. Enthusiasm does not compensate for lack of planning. Neither does it sell cakes. I am no business consultant, but I gave my two cents’ worth out of concern. She was very receptive (one of her many good qualities) and we communicated a few more times after that. I even edited the copy for her website.
2. Mistakes Many New Entrepreneurs Make
The following are four mistakes that Jane made. I think new business owners are prone to making the same mistakes although they might manifest in different ways.
Preoccupation with Product Development
Gerber wrote that everyone who goes into business is actually three-people-in-one: the Entrepreneur, the Manager and the Technician. All business owners are a combination of these three characters and if they were equally balanced, we would be looking at an extremely capable individual. Unfortunately, ‘the typical small business owner is only 10 per cent Entrepreneur, 20 per cent Manager and 70 per cent Technician’.
The Technician is the doer (most likely doing a damn good job) and Jane is a quintessential Technician. For more than a year, she spent most of her free time on product development, making fine adjustments to her baked goods so as to attain the perfect look and taste. She is especially proud of her chocolate lava cake — a delightfully moist chocolate exterior with a sinfully rich, gooey centre. But what’s the point of achieving technical perfection when there are no customers to appreciate her baked goods? See the next mistake.
No Marketing Plan
Jane did not have a proper marketing plan. Her idea of promoting her baked goods was to put up photos on Instagram and Facebook, and wait. Weeks turned into months and nothing happened. She only made five sales in a year, all to friends and family.
I couldn’t help but asked, ‘Why didn’t you think of starting a website earlier? Why the long delay?’
She replied, ‘I thought I would try social media first. Also, I was busy with product development and I didn’t want to actively promote my baked goods until they are perfect.’
First, social media alone will not work in her case. She’s no influencer or celebrity pastry chef. With less than 100 followers on Instagram, she has no direct access to a huge audience to sell her baked goods to. Second, it’s easy to develop a website but difficult to establish online presence. It takes anywhere from six months to two years and regular updates (good content, photos, videos, etc.) to improve a site’s search engine ranking on Google. It’s A LOT of work and technical expertise, which is why many websites are perpetually in the ‘ghost town’ phase. A new website is like a brick-and mortar business operating in a really bad location. There’s no foot traffic and it’s up to you to create visibility and bring traffic to you.
A new website is like a brick-and mortar business operating in a really bad location. There’s no foot traffic and it’s up to you to create visibility and bring traffic to you.
When I first saw Jane’s price list, I was dumbfounded. The pricing of certain items made no sense to me. Take the cupcakes for example:
Box of 4: $12 ($3 each) Box of 8: $24 (STILL $3 each) Box of 12: $36 (STILL $3 each)
What happened to economies of scale? When customers buy more, they expect to pay less per unit. There’s no financial incentive to ‘upsize’ and buy 8 or even 12 cupcakes if each cupcake still costs them $3!
And how much could she possibly make from selling just 4 cupcakes at $12? One doesn’t have to be an expert to know that she would be making next to nothing after factoring ingredients, utilities and labour. Why bother turning on the oven at all? Why not sell a minimum of 8 cupcakes instead of 4?
Her reason: ‘Some customers might only want to buy a small quantity.’
My response: ‘Then they might not be your target market. Your business’ target market is not everyone. You need to figure out who your ideal customers are. You are not running a retail bakery with ready-made baked goods. Your business model is different. Every time you turn on the oven to fulfil an order, it’s a cost to you. To make a decent profit, you need to increase your minimum order quantity and be prepared to turn away customers who are not willing to meet that quantity.’
Your business’ target market is not everyone. You need to figure out who your ideal customers are.
She agreed but sighed heavily…
‘What?’ I asked.
‘It’s just that I bought 100 small boxes for 4 cupcakes,’ she said, letting out another sigh.
See the next mistake.
Starting a business is an exhilarating experience. First-time entrepreneurs often get carried away and spend on unnecessary things such as expensive renovation and equipment. This is something Mr Wow and I can identify with; we made the same mistake when we started our first business. Even before clinching our first corporate deal, we had placed order for 50 custom-made corporate gifts. SO DUMB.
So what did Jane spend on in the first two months of her business? Here’s the list of items:
- A larger, more energy-efficient oven
- Bakeware like tins, trays, etc. to replace old/rusty ones
- Embossed business cards (quality: 200)
- Five different types of cake boxes (quantity: 100 each)
- Custom-made stickers for the cake boxes (quantity: 1,000)
- Ribbons to tie the cake boxes (quantity: 10 rolls)
- Birthday candles (quantity: 50)
- Blank greeting cards (quantity: 50)
Okay, the oven and bakeware were necessities, but she should have thought more deeply about her business and the goals she would like to achieve before buying so many boxes, stickers and stuff. Thankfully, hers is a home-based business, so the financial damage (if any) is limited.
3. Write a Business Plan
Jane’s website is finally up, so it’s been some time since I heard from her. I assume no news is good news. The last time we texted each other, I encouraged her to write a simple business/start-up plan. Just a couple of pages to clearly spell out the key elements of her business such as value proposition, price and marketing strategy. This will give her some direction and increase the probability of success.
Home baking businesses in Singapore have mushroomed in recent years. I know Jane’s delectable baked goods are definitely good enough to compete with others, so it’s about reaching, capturing and retaining her target market now. I hope her business will prosper and blossom. As for aspiring and current entrepreneurs out there, I hope you will draw lessons from her experience.
If experience is the best teacher, many entrepreneurs learnt their lessons the hard way. Reading their stories could help you avoid common pitfalls. Here’s one based on Mr Wow’s personal observations: Your Business is Not Your Hobby for Crying Out Loud.
Our first business venture was a failure, but we made a comeback. Have you experienced a business failure before? What did you learn from it? Do leave us a comment.