Darien Dash is a firm believer that America is known for its entrepreneurial spirit. Around 600,000 businesses are started in the country every year, although 30% of new businesses fail within their first year of operations, per the Small Business Administration (SBA). This tail becomes longer as time goes on, with 50% closing within five years and 66% within a decade.
The COVID-19 pandemic that has ravaged the world has led to millions of small business closures, and jobs lost, throughout the United States. But in the midst of this devastation, there are also people using this time to hit the reset button on their lives. For many, this entails shifting to entrepreneurship. The boom in COVID-induced entrepreneurship is proven by the 3.2 million new employer identification numbers that were registered with the IRS in 2020, up from 2.7 million around the same time in 2019. Despite the risk of failure, in the long run, the world being on pause is proving to be no better time than trying out new business ideas and excitedly taking risks when job prospects seem grim anyhow.
We’ll revisit these business failure statistics later, but there are many reasons why these initial numbers exist. Lacking business knowledge and how to properly grow and maintain a business in your chosen industry and type is often the most common reason, in addition to lacking sufficient startup capital and inability to acquire more down the line. As someone with entrepreneurial experience, Darien Dash is in a unique position to be able to speak about these issues for businesses.
This can cause new business owners to focus on the wrong aspects of building and running a company at the wrong time. In order to parse these reasons and stages of starting a business, here’s what you need to examine when you’ve achieved certain goals and milestones with your entrepreneurship objectives.
Stage 1: Going From Idea to Business Plan
Everyone’s got a great idea at some point. You write it down, mull it over, and wonder if it’ll be a good business idea. But what is your end goal?
Is it to start a little side hustle and see where it goes? Or do you envision this business becoming your chief source of income? What is your personal risk tolerance and ability to commit to this idea?
No matter what your end goal is and what you’re open to, you need to determine which of your ideas is the most likely to become a solid and sustainable business. Transforming your ideas into reality takes time and strategic planning, with a great deal of thought about your short-term and long-term objectives.
Your idea and these objectives serve as the foundation for your business plan, which you will need to convince others that you are serious about this idea and need their skills and/or funding to execute it.
Focusing on your target market and the type of business model you have in mind is a start. Then you need to ask the following questions:
- How will my idea be perceived in the market?
- How do I validate the demand for this kind of business?
- What sort of business structure do I form, and how do I strengthen it?
- Who are my competitors and what differentiates them? How will I differentiate my business from theirs?
- Is this idea going to be profitable?
Your business plan should cover these concerns and gather key data points on your target market and validating the demand for it. Most importantly, your executive summary needs to succinctly outline the type of problem you are solving and why you are poised to position yourself in this particular market.
How much funding do you need, and what are your revenue projects for the next five years? How do you plan on using these funds?
After you’ve covered these key points in your business plan, then it’s time to go from dream to delivery!
Stage 2: The Startup Stage, or Going From Business Plan to Execution
The startup phase, or launching your company, is when things start to go from exciting to scary real fast. Even if it takes a while to earn that first dollar in revenue, you’re still officially in the startup phase once you’ve made your products and/or services available to the market.
Every company and business model works differently and faces different challenges and advantages with respect to the market, timing, and key players in your company. There’s no true “one size fits all” approach to smoothly navigating the startup phase, as some types of companies are pre-revenue for an extremely long time while others immediately get customers.
Your focal point is likely to be different from other businesses that just launched. This could be the time to focus on raising capital, trying to increase and improve cash flows, building your brand and overall marketing presence, or getting new accounts. Sometimes, the area you focus on can be the right or wrong priority.
Regardless of how you’re going to do it since there are so many variations in how the startup phase can go, once you’ve hit the ground running you need to establish your company in terms of both branding and your overall financial model. It can feel frustrating and even disappointing to put more time and money into your business and not see the kind of traction you were hoping for: but you’re building the foundation of your company, and cracks in that foundation will lead to structural issues in the future. Business goes through rough patches and starting up is the hardest part to do, so you want to be careful in how you’re securing your company’s future– including being prepared for scale and growth, which can lead to diminishing returns if you go about this too hastily.
Stage 3: Current Growth and Future Planning
When you’re out of the harrowing startup phase, you’ve attained the growth phase when you’re not just attracting clients, but also retaining them and making plenty of money.
This is when you breathe a sigh of relief, especially if poor cash flow was straining your personal life. Maybe you’re even celebratory over your good fortune, as you should be. But once you’ve gotten over the novelty of your business wildly succeeding and watching the numbers mount, now is an excellent time to take stock of your business goals and the current situation so you can address ongoing issues and future plans.
For instance, are you having trouble reaching new markets? Roadblocks with running your business, like tax and copyright laws that make it more difficult to operate so you want a way to streamline these processes so you can focus your resources on other aspects?
Think about how you can improve your business and expand it further with that positive cash flow. Your most bothersome challenges that make it difficult to generate or collect cash should be your top priority where how you’ll prioritize reinvestment of your business profits.
Earnestly assessing your business challenges and making an action plan to tackle them is the only way that you’ll be able to keep the momentum up and not fall victim to the law of diminishing returns.
Stage 4: Expansion
Expansion is when you go from simply making profits to powering up the machine and attaining serious growth now that you’ve addressed most of the key challenges that were holding you back before.
Your operations have become more optimized, you have a solid customer base, a well-positioned and differentiated brand in the market, and an established team. This leaves you freer to focus on increasing revenue, expanding your customer base, and considering new markets to tap.
Expansion can take on a variety of forms. You can work on the inbound marketing side of increasing revenue by fine-tuning your targeting of your existing customers, or on the outbound side by trying new avenues to gain more customers. Creating new product lines is also a robust form of expansion, whether you are buying finished inventory or investing in your own research, development, and manufacturing. Expansion is the phase where you focus on how you’re going to diversify your product mix.
Expanding into new markets is another way to gain velocity. New markets can be segmented by demographics or psychographics you might not have considered before, or purely by location (such as an app that only serviced one state but can now operate in multiple states).
Hiring more talent is also how you smartly expand. You can’t overload your current team, and this can be the ideal time to redefine various roles and determine who can best fulfill your expansion goals.
No matter how you do it, the startup phase is more volatile and the growth phase has more stasis. The expansion stage flips that stasis around and comes up with new ways to increase your reach and in due time, revenue.
Stage 5: Business Maturity, Maintaining Profit
While growth and expansion are overall good things, there is such a thing as too much.
There comes a point when it’s simply unsustainable to keep aiming for higher growth without potentially compromising your outlook and how you want to run your business.
In this stage, your company is now established in the industry and has become well-known to a degree. You can dedicate your energy and focus on maintaining a healthy profit and considering expansion goals but are not expanding at the rapid rate you once were. This is more of a stasis phase where you now have to decide if you’re going to maintain that, seek further expansion, or even contract to a certain point.
Regardless of whether more expansion is on the horizon, this stage of business maturity is when you realign your goals to maintain your market share and focus on advancements being made in your field and market. Your products and services might be unsafe or obsolete in less than a year, so it’s crucial to stay attuned to these developments, or even consider how your company can be an innovator in the field.
Maturity is also a prime time for experimentation and seeking new ways to grow, new markets to tap, and manage your investors’ and customers’ expectations. While your expansion goals may not be as urgent at this stage, it’s important to see how they align with these other priorities.
Why It’s Crucial to Understand Which Stage Your Business Is At
Aside from your very first days as a new business owner, it can feel fairly nebulous and open-ended as to determining which stage your business is in. It could take six days or six hundred days from your incorporation date before you get a paying customer. Some entrepreneurs are able to make a stable living from their operations within a year, while others struggle for four or five years before their ventures and experimentation are fruitful.
In addition to your business acumen itself, this makes it all the more confusing as to which stage you are actually in. Even if operations seem stable, they may not be. Goals and objectives can also change over time, or your business or entire industry gets disrupted by events beyond your control like new technological innovations, legislative outcomes, and social change.
No matter the cause, entrepreneurs will always have to overcome challenges. In trying to do so, this can also inadvertently cause them to try to force progress and growth when your company actually isn’t ready to move to that stage yet. For instance, you’d like to take an app you developed that is operating in your home city and take it to other major cities. In addition to the massive regulatory hurdles where you could underestimate the time and money it would take to clear them, you might not have solid enough branding and digital marketing to make this significant fixed cost worth it. You’d be forcing a rapid expansion when you’re still in the growth stage and should reinvest your profits into robust marketing campaigns and testing both the potential customer base and the regulatory challenges.
Inversely, you could be poised for more growth but aren’t making the proper investments to scale with that growth and face losing money.
If growth is happening but you’re not focused on making the corresponding investments to foster that growth, like upgrading your equipment and hiring more employees, the law of diminishing returns kicks in. You may have heard this business term before, it’s one of the hidden causes of business failure that is less discussed than the more obvious causes like lack of capital and business acumen.
Returns don’t start diminishing overnight, but they come apart over time when investments aren’t made in the areas that need them. It may seem cost-prohibitive to upgrade your e-commerce infrastructure and get a specialized consultant to help you address issues with order fulfillment and abandoned shopping carts, but then you lose customers over time when they’re frustrated with not receiving orders. Overworked employees, who are doing the jobs of two or more people because you won’t hire more staff? They’ll go elsewhere or start businesses of their own.
This stasis, or maintenance of profits, gets confused with being another growth stage. You don’t have to revisit growth and expansion right away!
Knowing where you stand increases your chance of success because it helps you narrow down your long-term goals and current objectives, so you can properly narrow your focus. Entrepreneurs are always busy and having to keep all the plates spinning, but being able to pinpoint where exactly your business is will go a long way towards demystifying where you truly need to prioritize your resources.
Preparing for Growth in 2021
2020 has been a harsh year with millions of people grieving lost time, income, and loved ones. While many entrepreneurs are using this time to start businesses, there are also important considerations to factor in.
Remember the failure rates posted by the SBA? Those numbers only pertain to closure so they don’t actually always dictate real actual failure. Many entrepreneurs shut down their current companies and form new ones to accommodate expansion goals, such as needing more tax-favored business structures or taking on new owners and investors. That isn’t a failure, but rather a marker that you did something right.
To better prepare for growth in 2021, when we hopefully move towards a post-COVID society, being able to read between the lines on these statistics and how they’re presented will better position your company’s leadership to rise above future challenges.
The SBA may also be a valuable resource for your new or existing venture in 2021 if another stimulus bill is passed and it includes aid to small businesses. While the funds from many SBA programs have restricted usage, regardless of their connection to COVID economic recovery, they can prove to be an excellent source of startup or expansion capital.
These historically trying times have accidentally forged a new generation of entrepreneurs who are able to rise above a deadly disease. It is also a time in which many people are taking stock of both their professional and personal lives. In taking that determination with you to 2021, now is an excellent time to not only visit your business ideas in the context of the social challenges we are still facing, but also to try new methods to validate demand from prospective or existing customers. The Internet is a vast place and everyone is logged in right now since they can’t go anywhere: you have terabytes of invaluable market research at your fingertips that may not even cost you a thing.
Darien Dash recently lent his unique expertise to the Licensing Leadership Summit, for more on his speaking engagement be sure to check them out here: https://www.licensingleadershipsummit.com/en/agenda/speakers/darien-dash.html