Why most businesses fail

According to Clarify Capital, 90% of ecommerce businesses fail within the first year.

90%

So you and 9 friends all decided to start your dream ecommerce businesses at the start of last year. This year at your New Year’s Eve party, you’re now looking at 9 friends who all failed to realize their dreams and are now back in the corporate world? Assuming of course you made all of the right moves and already had all of the answers - and in that case you might as well skip this blog!

Now, sure, Amy’s idea was a bit out there and was bound to fail, and we all knew Tim would get bored within the first few months and go back to his old job. But the rest? Those friends are the hardest working people you know. It was like they couldn’t trip and not land in success at their old companies, what went wrong?

If you listen to VC companies, all new founders are lazy. The news will tell you it’s just impossible to start something in this economy. The guy on the corner will just show you his sign saying “This is the end”.

But you know none of those things are really true. Ecommerce is booming right now, and there’s not chance that only 1 in 10 people is willing to work hard and give everything they have to create a successful business.

But that’s just it, sometimes everything they have isn’t enough. Heck, most people take out huge loans and it still isn’t enough.

Would you believe me if I told you they all tend to fail for the same reason? And that it’s not an inherent flaw in new founders, but an issue that literally every company is bad at?

Projecting sales and cashflow forecasting might be every company’s absolute worst skill, but where it’s really a killer is with startup companies.

When you under or over project sales, there’s a razor thin margin for error when you’re a bootstrapped and growing company.

Let’s say you lay out your projections, had $50,000 to put into the company, and you launch your website. I’ve added in a few variables like a salary you wanted to pay yourself (you’re going to work your ass off - you’ve earned it), rent for a small office (or utilities, site fees, or anything else that stays static), and fulfillment costs for the 3PL you want to you (You don’t want to be sticking labels on boxes all day - you created this business to free yourself up!).

Your cashflow projections looked a little something like this:

Your cashflow projections - because you’re an awesome planner and you’re going to the moon!

Sure, things got a bit dicey around week 9, but that’s when you know sales are picking up so you had to place a larger inventory order. Things are turning around right there! You never hit $0 and it’s always going up after that - business is a cake walk!

You go through January and February, and it turns out your genius is unmatched, sales have been exactly what you thought they’d be! Your acquisition costs are staying right in line where you thought and this slow growth is starting to pickup speed!

March goes according to plan as well and you know you could start to get the hang of this. Sure you had your touch and go moment in week 9, but you planned for that!

Now the end of March is nearing and you made a few connections. The most incredible thing happens and your product is featured on Good Morning America! You see sales SPIKE in the first few days of April and go up 5x what you were expecting!

But, maybe this isn’t as good as we thought? We certainly didn’t order enough products to cover us.

QUICK - PLACE AN ORDER!

So you place another order, but that’s not going to be ready for you to ship out for another 30 days (if you’re lucky, a lot of companies see 45 to 60 days for products to be ready, and I’m being generous and saying get this shipped in FAST).

You’re a week into April and you’re already run out of products. Now you’ve got more than the ordering issue, you’ve got what is quickly turning into hundreds of support tickets asking where their order is and why you haven’t shipped it yet - we’ll leave this for another blog.

You realize 10 days into April sales aren’t slowing down, and you were definitely too conservative on your first panic order, so you order again.

And this time you quadruple your order. They may not be ready soon, but when they are you’re going to make sure you don’t run out!

But then the unthinkable happens. It’s like someone shut the faucet off. Whether it’s because GMA has run similar “You have to buy this!” segments for other companies since then, something unexpected happened to your advertising, a few negative reviews went up, or you simply just already reached all of your early adopters.

Sales slow.

But you just placed deposits on some huge orders. It doesn’t really matter what caused the slowdown, it happened.

Your current cashflow sheet now looks more like this at the end of April:

I cut the spreadsheet off not to end on a negative note, but point out where many founders find themselves. In this case, you didn’t even plan too aggressively, in fact you under projected!

And then you reacted to that under projection. And many times that becomes a vicious cycle, and you’re now in a spiral that’s tough to get out of.

And the struggle is this sales drop doesn’t happen in a vacuum. You know you need to keep sales high, so you increase ad spend and sacrifice some margin, you run a few extra sales on your website that do the same thing, or you just throw in the towel, cut your losses, and find something that’s less stressful.

Of course there will be ways you can turn this around - loans, withholding your salary, cutting costs, etc., but like Mike Tyson once said, “Everyone has a plan until they get punched in the face”.

I don’t mean to disparage planning - quite the opposite really - I mean to say that the more scenarios you can plan for, the better off you’ll be.

Well, that would be a pretty dark ending, Alex, how do I avoid this?

Having a “What if” strategy is vital, and not something everyone creates. Sometimes the hardest thing to do is say “no” to an opportunity, but sometimes that’s what it takes to make sure you DON’T get punched in the face!

I would implore founders to always have a “worst-case scenario” prepared for, and at the same time vet every opportunity with a “can I afford the outcome of this” strategy.

I would also implore you to work closely with your manufacturer. Always be searching for ways to reduce the lead time of your product. Reach out to them to work on financing options - especially if you can decrease the deposit amount or even get yourself terms with the manufacturer.

While reducing your cost of manufacturing is good, don’t do it at the detriment of your relationship with a good manufacturer - remember they’re a business too, and good business for you is good business for them in the end.

Understand all of your costs. Where else can you work on saving money in the business? Every dollar you can save on something is another dollar you can add to your marketing - the flywheel that makes your business run smoothly - without cutting into profits, which are the key to buying your next cycle of products.

WORK SMART. DON’T CHASE WHAT YOU CAN’T CATCH.

And most importantly.

(sheepish grin)

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