4 things that scare start-up founders most in their first year
You wouldn’t be starting a business if you didn’t like the idea of a challenge, but what are the biggest fears founders have to overcome?
Businesses are launched on the expectation of success. After all, no one commits the time, energy and money required unless they truly believe their venture has the potential to thrive.
But amid the optimism and excitement of those first days and months of trading, there’s also fear and trepidation. There’s a high chance of failure. And the first 12 months are critical.
Perhaps that’s not surprising. No matter how much market research has been done, the real test of whether a business idea has legs only occurs when the job of selling goods or services begins.
Added to that, anyone who has never run a business faces a raft of unfamiliar challenges and a dauntingly steep learning curve.
So what are the challenges of the first year in business, and more importantly, how do you overcome them?
The fear of not knowing if customers will come
In the classic film Field of Dreams, a farmer builds a baseball stadium on his land and before long legendary figures from the sport’s past are queuing up at his door, seeking a chance to play. Hence the movie’s slogan: “If you build it they will come.”
In real life, however, simply pulling up the shutters or telling your web host to make your site live isn’t enough. Arguably the biggest cause of sleepless nights immediately before and after the launch of a new venture is the fear that not enough customers will walk through the door, pick up the phone or browse the website – and ultimately part with their hard cash.
And as Steve Johnson, owner of conversion-focused web design agency Graphite Web Solutions confirms, finding customers is the fundamental hurdle. “In the first year of business (and this continues to be) the biggest challenge was to get customers, as without them, you will not be in business for long,” he says.
Some businesses – say a shop on the high street – may attract large numbers of new customers simply because they are visible. Others have to work much harder to get onto the radar screens of potential buyers. But here’s the problem. As Amanda Alexander, director of coaching service for women, Coaching Mums, observes, it’s not always obvious how to market a start-up effectively.
“I had no idea how to market myself! I thought if I built a website, the phone would start ringing. It didn’t” she says. “I also spent money on advertising which was money down the drain – never again and I’d certainly advise against advertising in print media for any service business where people are engaging with you personally!”
So it’s vital to find an effective marketing strategy. Alexander’s solution was to seek help from a mentor who showed her how to market to the niche audience she was seeking to address. She also stresses the value of networking. “I wish I had done more networking at the beginning,” she says. “There are some excellent networking groups and if I’d known then what I know now, I’d have spent more time talking to people and less time behind a computer screen. A business like mine is built on one customer or client at a time, which means having one conversation at a time – and it really can be that simple!
Marketing doesn’t have to be expensive, but it is a hugely important in the first year. Simply wait for customers to come through the door and they probably won’t.
The fear of making sales but running out of cash
All new business owners understand the importance of making sales. What is less well understood is the challenge of ensuring that money coming into the business at least matches the cash flowing out to pay bills and wages.
This may not be a pain point on day one but it can quickly become one. Let’s take a typical example. You or one of your sales team win a major order and all seems well. But as you allow your customer 30 or 60 days to pay, the money doesn’t arrive for at least a couple of months and in the meantime you’re paying up front to buy the stock to fulfil the sale.
The result is a cashflow black hole. More fundamentally, if sales rise and fall through the year, your available cash can dry up in the leaner times. Or if sales don’t meet expectations, it may simply be the case that revenues fall short of costs.
These problems can be particularly acute in the first year when it is often difficult to predict revenues. Graphite Web Solutions’ Steve Johnson says caution should be the watchword. “In your first year you need to be realistic with your budget/expectations and cashflow,” he says. “Base them on fact not what you think. Identify the products and services you provide then identify who needs your products and services and focus your marketing rather than trying to reach everyone.”
Simon Shaw, director at accountancy firm Duncan and Toplis agrees. “Many businesses can overestimate the amount of income they will generate in the early months of trading, and if providing credit terms to their customers underestimate the time it will take for these payments to be received,” he says. “It is therefore important that the cash forecasts are realistic and include ‘what ifs’ so that the need for additional funding can be evaluated.”
Shaw also advises that new businesses should ensure they focus on taking care of the administrative side – keeping tax, VAT, payroll records, etc. For a small business this is something that can all too easily be sidelined, causing the administrative workload to become a problem further down the line. HMRC is seldom sympathetic.
The fear of not making enough money to provide an income
But it’s equally important to focus on growth. Ultimately the business has to generate an income for the owners and that means building sales to a level where you’re more than breaking even. For instance, ceramic greetings card designer Blue Eyed Sun initially struggled to sell enough to generate a workable profit.
“We knew we had good products and had a high success rate when we approached retailers,” says managing director Jeremy Corner. “We just couldn’t sell quickly enough to grow to a point where we were making enough of a living from our business.”
It’s a problem that takes us full circle back to the importance of marketing. In the case of Blue Eyed Sun, the solution was hiring a team of freelance sales people across the country. That in itself increased the base of potential customers, allowing the company to ramp up sales.
The fear of hiring someone to grow your business
By definition, most start-ups begin life with just a few people and many are a one man/women band, marketing, selling and delivering services from a home office.
The temptation for business owners is to be a jack of all trades, perhaps wearing the hat of a product designer, salesman, administrator and web marketing coordinator.
This can be a real trap. First and foremost, you quickly find that even with a little bit of sales growth, there aren’t enough hours in the day to complete all the necessary tasks and do them well. You may even find that you’re turning business away. Equally important, few of us are equally good at everything. As a business grows, it becomes necessary to build a balanced team.
Employing staff can be a daunting prospect. First and foremost you have to be absolutely sure you can afford to pay the wages and that your new staff members will help you raise revenues to a level where the hire is financially justified. Then there is the admin to think of. But there may also be a concern about hiring someone who will fit in.
So when should you hire and why? “For me the essential skills to look for in a first hire, is somebody that can free you up from the tasks that take you away from growing the business. It’s as simple as that,” says Michelle Wright of Cause4, which provides mentoring and advice to start-ups, charities and social enterprises.
After that it’s a case of making the right hire. Wright advises that employers look for attitude rather than skills in new hires and she stresses the importance of selecting those who want to work in a small business. The cultural fit, she says, is hugely important.
New businesses face many challenges, but the most fundamental are funding and retaining customers, securing sufficient orders to live on, managing cash and managing time. These are challenges that must be addressed in the first year.
This article was produced in association with Sage One. For more business insight and tips to keep on top of cashflow and small business tax visit the Sage business blog http://uk.sageone.com/blog/.
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