The opening of a new business is often an exciting time. Yet, entrepreneurs need to be wary. Investopedia notes that only 25% of businesses will last 15 years, with 20% of businesses failing within their first two years. The reasons that this can happen are varied, but three key factors perhaps aren’t as thoroughly considered as they should be during the formation of a business; a poor-quality business plan, inflexibility within the market, and poor-quality financing. Tackling these problems comes in the early days of a business and will set the tone for the future expansion and growth of the enterprise.
At the core of any business is its business plan. A properly written, detailed, and comprehensive business plan will provide the route to growth for a business. It will also help to outline necessary legal and compliance measures to ensure the business stays on the right side of the government. As Forbes notes, in addition to Investopedia, a bad business plan is a key reason for failure, and if there isn’t a clear log of your administrative actions in setting up a business, investors can be spooked.
What does this mean in practice? Properly incorporating your business comes first, and you’ll likely need help to do that in the form of a registered agent. The choice can be staggering. Take setting up an LLC, for instance; is LegalZoom good for LLC? Would ZenBusiness be better suited for my needs? What’s the best option in terms of pricing? These questions can only be answered with a proper business plan already in hand. LegalZoom is often touted as a good option for a simple and fast setup but will charge for add-ons. ZenBusiness, by comparison, has a higher initial setup cost but more comprehensive initial services. The only way to make a good decision is by knowing how your business will operate and what level of cover it will require.
Just as you should closely consider the structure of your business, you should also be flexible in how it operates. The IRS outlines the various common types of businesses, how they operate, and how they can benefit different types of enterprises. For instance, partnerships and sole proprietorships may be suitable for businesses that grow in a certain way and don’t benefit from LLC denomination.
This focus on flexibility can and should extend to the rest of your business operations. How you decide to manage and source your business’s finances has to move with the times. Whereas businesses would perhaps once look for venture capital only, they must now explore many options, including crowdfunding and the potential to attract angel investors. With the startup environment as congested as it is – StartupBlink estimates there are almost 40,000 businesses founded within the past year, vying for investment – it pays to be smart.
Financing is a primary cause of startup failure. The thrill of securing venture capital or some other form of large equity stake in the business and the growth that can provide is exciting. What can be a terminal error for many businesses is to rest on those laurels and stop searching for new cash flow. A business can often not succeed on sales alone and will need independent or third-party financing to grow. Indeed, many businesses should expect to run at a loss in the short term – and that’s something the business plan will account for.
Startup funding has shrunk, too, as CrunchBase highlights. North American funding weakened further in Q1 2023, meaning there’s less opportunity out there. As such, businesses need to think about how to continue to source funding. This can be a useful exercise in helping also to critically assess your product. Does it have a niche into which it can grow? Is there a need for the product? Recent years have seen a funding frenzy as investors look for the next unicorn startup to stake their claim to. That resulted in an oversaturated market where startups that perhaps didn’t have a specific role to fill would have nevertheless received funding – not a sustainable situation. Businesses need to have a more solid plan today to attract more scant funding.
All of this comes back to the business plan and the fundamental founding principles of the business. Ensuring that you have a tightly run ship will do a lot of groundwork in attracting sensible investors. Furthermore, this will give you a head start on the matter of actually running the business. Rather than letting the thrill of setting up a business and providing a product run away with itself, you will work with a level head and show the market what you have to offer.