In over 15 years, Kona Impact has worked with thousands of new businesses. Many become highly successful, but an equal number—probably half don’t make it five years. The odds of a new business making it five years is about fifty percent, and twenty percent of new companies don’t even make it two years.
Entrepreneurs, by nature, are some of the most optimistic people you’ll ever meet. After all, why would someone risk their capital, time, and hopes for the future if they thought they would fail?
Based on our experiences at Kona Impact, with over 2,000 clients over the years, we see unbridled optimism, wildly Pollyannish expectations of success, and a strong belief that willpower—the “eye of the tiger”—is sufficient to make things work from many people starting a new business. This enthusiasm and optimism, though, only goes so far.
Here’s an approach that I like to take with new business ideas: start with failure. What are things that will cause the business to fail?
When you have this list—it should be significant—compare it to your list of things that you think will bring your business success. Then, make a formal business plan and see if what you have in mind makes sense.
You might be looking at a lousy business idea if…
There’s no market for your product or service. If you can’t find anyone doing what you want to do, there’s probably a good reason. Has it been tried and failed? Is the market so small that it wouldn’t support a viable business? Will you have to spend a considerable amount of money educating others about your business and its features and benefits?
You can’t get a good team together. Very few businesses can grow without a team of employees. If your business will require highly skilled employees, do they exist in excess in the local market? If you need many people to do physical work at relatively low pay, how are you going to find and keep them? If you’re counting on family and friends, be very wary that you might not be getting the most qualified and motivated people to do the work.
Your costs are just way too high. We see this in Hawaii all the time. With the highest electricity costs in the county, very high costs for rent, taxes, supplies, and labor, many businesses that might make sense elsewhere are just not possible here. I know of a cake shop that had to make at least twenty custom cakes a day to make expenses. It failed within a year.
Somebody is already doing what you want to do very well. We probably don’t need another oil change shop or another Thai Restaurant here because we already have several that do a good job of serving the market. When Kona Impact began, we learned a few hard lessons right away: our initial product offering was for things that others in the market were already doing at a very high level.
The numbers just don’t add up. One of our clients—a local restaurant owner—lamented to me that he was losing $2-3,000/month, despite being open for a few years. Surprised, I asked him what his food costs are: they should be about 30% or less. He didn’t know. I asked him about labor costs. Again, he didn’t know. He had just not bothered to run the numbers to see if he could make a sustainable business. He probably needs a combination of lower expenses and higher revenue if he is going to make it. One of the others is unlikely to cover his losses.
Sometimes the best decision about a business idea is NOT to follow through with it. It’s all great and wonderful to come up with reasons for success—this is fundamental to any business, but it’s also a great exercise to look at how the business is likely to fail.