People get tons of bad advice when they first start a business. Here are three common suggestions that others give, and why you shouldn’t follow them.
Competition or No Competition?
You often hear that you should pick a business with the least competition possible. You’re better off having a market all to yourself, right?
Not really.
It’s better to do the exact opposite. In other words, think twice about being first in the market, and look for an industry with tons of competitors.
The more people who are already making money in a business, the better you should feel. So when evaluating a potential business, make sure it’s an established concept. New and revolutionary isn’t necessarily good.
Why?
Because it’s expensive to educate the market.
Of course, to compete, you must differentiate yourself with your customers. So find an industry where companies are out of touch with their customers. Perhaps customers’ needs have changed, and suppliers haven’t noticed. Or maybe the suppliers don’t have the latest technology.
After discovering this antiquated industry, distinguish yourself from competitors by finding a niche. This is especially important for start-ups.
When you’re new, you need high gross margins. This will ensure that your capital lasts long enough for your business to achieve viability.
Don’t compete on price, because you’ll go out of business. To get customers, give more value, while charging the going rate.
How do you offer more value without increasing your costs or cutting your margins? By narrowing your niche.
Buy or Start From Scratch?
Sometimes people will tell you that you’re better off buying a business than starting one from scratch. They think you can reduce your risk, save money, and achieve your goals faster this way.
But the truth is that for most first-time entrepreneurs, the chances of succeeding are better if you build the business yourself. From the ground up.
Why?
Because it’s harder to learn a business if you haven’t been with it from the start. You miss out on the trial-and-error education that occurs in the beginning. You make mistakes that are costlier than they would’ve been back when the business was smaller.
Also, acquisitions can be tricky. You can do as much due diligence as possible, yet you still won’t know exactly what you’re getting into until you’ve actually paid for it. But by then, it’s probably too late to go back.
And if you’re an inexperienced buyer, you might be at the mercy of the seller or the business broker. Both are likely have one thing in mind – getting the deal done. If you’re not careful, you could get burned.
Fancy or Simple Business Plan?
Most people think they need a business plan to raise money. Yes, it’s true that you may need money to start a business, and you may need a business plan to raise it.
But money isn’t the first thing you need. And you’re making a big mistake if you try to raise it before you know how to spend it wisely.
Most people, with a strong desire to be in business for themselves, buy fancy business software and put in unrealistic projections. They think about the amount of money they need, and tweak the numbers with the software until they have a plan that shows the business achieving its goals with the amount of capital they think they can raise.
In other words, they’re working backwards, and the plan is unrealistic.
Here’s a better way.
The first business plan you write should be for nobody but yourself. You don’t need special software to do it. All you need to do is answer these seven questions as honestly as possible.
- What are you selling?
- How much do you think it’ll cost to produce and deliver what you’re selling?
- How much are you going to charge?
- Who will your customers be?
- How are you going to reach them?
- What do you think will happen when you actually go out and start making sales?
- How long will it take to close a sale?
When answering these questions, don’t let your concerns about earning a living and raising capital cloud your thinking. It’s important to get your assumptions down on paper.
Why?
Because you need to test them before you try to raise money, not afterward. You need to identify as many mistakes as possible while you can still fix them.
Maybe it’ll take longer than you thought to collect your accounts receivable. Maybe you’ll need to pay your suppliers sooner than you hoped. Give yourself time to discover these mistakes.
Better yet, do research beforehand to reduce your mistakes to a minimum. Find out how your competitors do things. Be as prepared as you can be. It’ll be the best investment you make in your business.
Why?
Because having done your homework, you’re much more likely to raise the capital you’re looking for. On top of that, you’ll be able to make wiser decisions about how to spend it.
But most importantly, you’ll increase the odds of making the capital last until the business can support itself with its own cash flow. And that is your goal after all.
To learn more about bad advice to ignore, check out The Knack by Norm Brodsky and Bo Burlingham.
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