Depending on whose statistics you believe - the odds are stacked against entrepreneurs. Folk wisdom says that only 1 in 10 business survive the first year. And of those, only 1 in 10 make it to the 5th year. I doubt these statistics are accurate but I know for a fact that most start up companies won't make it past their first year.
Why do these businesses fail? Many books have been written about this subject. However, I'd like to pitch in my 2 cents.
Being in the front lines of the purchase order finance industry gives me a front row seat into this phenomenon. I speak to entrepreneurs every day of the week. Many of these fail to realize their dreams. Now, I can usually tell whether the start ups will take off or not by asking four questions. I believe these questions also provide an answer as to why many start ups fail.
1. What led you to start this company?
This question always gets interesting responses. Answers range from "I want to get rich",to "I saw an opportunity" to "I want to be free". The latter one is good for laughs since most entrepreneurs work harder than most folks.
I ask this question because it gives me a good glimpse about the person running the company.
2. Where did you learn the industry?
Many people learned their industry from their current jobs and are branching out on their own. Other learned a brand new industry by speaking to experts. Some, even learned it by reading a book - or many books. Regardless, I always prod them by asking technical questions about their business. How they answer those are a very good predictor of their knowledge and critical to their initial success.
I ask this question because it gives me a good idea of the depth of their experience.
3. How long have you been at it and have you made your first sale?
This one is obvious, companies without sales don't last. But there is a hidden undertone here, I know of successful company that went on for 9 months before closing their first client. I this this shows stamina and determination. Starting a business is a marathon and requires a certain single mindedness. By the way, that company owner that took 9 months to close their first client was none other than me!
I ask this because it gives me a good idea of their current level of sales and their stamina.
4. How much money did you put into the business?
Business books are full of stories of millionaires and billionaires that started their company with $100 or $1000 dollars..... These are the exception and not the rule. Most businesses, even single person companies, require a substantial investment. A few thousand dollars minimum. Many times, tens of thousands of dollars. Sometimes even hundreds of thousands. The easiest way to get your company disqualified is to tell a prospective business financing company that you only put $1,000 into your business. If you are not committed, why should they? I also wrote about this on this post.
I ask this because I want to know if they (figuratively) put their money where their mouth is!
Although my method is not very scientific it works very well, at least for me. It's a good predictor of who to focus on. I suspect that on some level, many business finance professionals use these or similar questions themselves.
In summary, small business owners fail when they have:
1. Unrealistic expectations
2. Little experience
3. Little or no income
4. No/Minimal investment
Sounds obvious, doesn't it? That's because it is.
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Looking for information on purchase order financing? Read the purchase order finance blog
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