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It’s hard to avoid certain mistakes, especially when you’re dealing with a situation for the first time. In fact, many of the following mistakes are hard to avoid even if you have an old hand. Of course, these are not the only mistakes CEOs make, but they are common enough. Do the following self-assessment: Give yourself ten points for each of these entrepreneurial mistakes you make. Deduct five points for those you avoid. Your score will of course be kept confidential, but ask for help. Fast!
1. Big consumer syndrome
If more than 50 percent of your revenue comes from any one customer, you may be headed for a recession. Although it is easier and more profitable to deal with slightly larger customers, you become very vulnerable when one of them takes the lion’s share of your cash flow. You make stupid concessions to keep their business. You make special investments to address their special needs. And you’re so busy servicing that one big account that you fail to develop additional customers and revenue streams. Then suddenly, for one reason or another, that customer leaves and your business collapses.
Use that growing account as both a cause for celebration and a signal of danger. Always look for new businesses. And always try to diversify your sources of income.
2. Forming products in vacuum.
You and your team have a great idea. A brilliant idea. You spend months, even years, implementing that idea. When you finally market, no one is interested. Unfortunately you are so in love with your idea that you never take the time to find out if anyone else cares enough to pay for it. You have created a classic mousetrap.
Don’t be a product marketer. Do “market research” up front. Test the idea. Talk to potential customers, at least a dozen of them. Find out if anyone wants to buy it. Do this before anything else. If enough people say “yes”, go ahead and build it. Better yet, sell the product at pre-release prices. Fund upfront. If you don’t get a good response, move on to the next idea.
3. Equal Partnership
Let’s say you’re the greatest salesman in the world, but you need an operations guy to get things back in the office. Or you’re a technical genius, but you need someone to find customers. Or maybe you and a friend start a company together. In each case, you and your new partner split the company 50/50. This sounds good and fair right now, but since your personal and professional interests diverge, it’s a sure recipe for disaster. Any party’s veto power can prevent the growth and development of your company and not hold enough votes to change the situation. Almost as bad is dividing the ownership equally among a large number of partners or, worse, friends. Everyone has an equal say and decisions are made by consensus. Or, worse, unanimous. Alas! No one has the final say, every little decision becomes an argument, and things quickly deteriorate.
To paraphrase Harry Truman, the buck has to stop somewhere. Someone has to be in charge. Make that person the CEO and give them the largest share of ownership, even if it’s a little higher. 51/49 works much better than 50/50. Should you and your partner have total equality, give a percentage share to an outside consultant who will be your tiebreaker.
4. Low prices
Some entrepreneurs think they can be a low-cost player in their market and make huge profits on volume. Would you work for less? Why do you want to sell for less? Remember, gross margins pay for things like marketing and product development (and great vacation trips), remember, low margins = no profit = no future. So the grosser the better.
Set your prices according to your market price. Even if you can sell more units and generate more dollar volume at a lower cost (which isn’t always the case), you won’t be better off. Make sure you do all the math before deciding on a low-cost strategy. Imagine all your incremental costs. Additional stress as well as Fig. For service companies, low cost is almost never a good idea. How high do we set? Increase the price. Then raise them again. When customers or clients stop buying, you’ve gone too far.
5. Not enough capital
Check your business assumptions. The ideal is an optimistic sales forecast, a very short product development period and an unrealistically low cost forecast. And don’t forget weaker opponents. Whatever the reason, many businesses are simply undercapitalized. Even mature companies often lack the cash reserves to weather a downturn.
Be conservative in all your estimates. Make sure you have at least that much capital through the sales cycle or until the next planned round of funding. Or lower your burn rate so you do.
6. Out of focus
If your company is like most companies, you don’t have the time or the people to pursue every interesting opportunity. But many entrepreneurs – hungry for cash and always better to think bigger – feel the need to take over every part of the business that dangles in front of them instead of focusing on their core product, service, market, distribution channel. Spreading yourself too thin results in sub-par performance.
Focusing your attention on a limited area produces better-than-average results, almost always outweighing the gains from diversification. Al Race of positioning fame wrote a book on the subject. It is called focus.
There are so many good ideas in the world, your task is to choose only those that give the best returns in your focus area. Don’t spread yourself thin. Identify what you do best in your niche and do it very well.
7. Crazy about first class and infrastructure
Many startups die prematurely due to excessive overhead. Keep your digs humble and your furniture cheap. Your management team should earn the bulk of their compensation when profits grow, not before. The best entrepreneurs know how to maximize their cash and use it for key business-building processes like product development, sales and marketing. Skip that fancy phone system unless it actually saves time and helps you make more sales. Spend all the money you really need to achieve your goals. Ask the question, will there be sufficient return on this cost? Everything else is overhead.
This disease is often found in engineers who do not release products until they are absolutely perfect. Remember the 80/20 rule? Following this rule to its logical conclusion, completing the last 20 percent of the last 20 percent can cost you more than you spend on the rest of the project. Zeno’s Law of Paradoxes when it comes to product development. Perfection is unattainable and too expensive for it. Plus, while you’re getting it right, the market is changing under you. On top of that, your customers stop buying your existing products while waiting for the next new thing to open your doors.
extract? Focus on getting the product to market within the given time frame. Set a deadline and create a product development plan to match. Know when you need to stop development to make a delivery date. It’s over when your time is up. Release your product.
9. No clear return on investment
Can you explain the returns on purchasing your product or service? How much additional business will it generate for your client? How much money will they save? what You say this is too difficult to quantify? Are too abstract? If it’s too difficult for you to figure out, what do you expect your prospect to do? Analyze. Talk to your customers, create case studies. Find ways to quantify the benefits. If you can’t justify the purchase, don’t expect your customer to. If your product can provide a great return on investment, sales are a slam dunk.
10. Not admitting your mistakes.
This may be the biggest mistake of all. At some point you realize the terrible truth: you’ve made a mistake. Acknowledge quickly. Remedy the situation. Otherwise, that mistake will get bigger and bigger, and… sometimes it’s hard, but, trust me, bankruptcy is hard.
Let’s say your expenses are sunk. Your money is gone. The good news is: your base is zero. From this point of view, would you invest new money in this idea? If the answer is no, walk away. Change course. whatever But don’t throw good money after bad.
Well, everyone makes mistakes. Try to catch them quickly before they kill your company.
Sometimes it helps to ask good questions ahead of time to avoid mistakes in the future. Click the link if you would like a copy of my Fractal Strategic Planning Questionnaire.
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