I had a friend once that went down with the ship. He had put everything into his company and when things when south, he couldn't let go. It was hard to watch, and as an outsider it was easy to see the signs. But what about when you're the insider? What if you're that person holding onto the mast of your ship as the water level rises?
The goal today is to keep you from getting to that point. Experience has taught me that there are three things that signal death for a business. Let's take a look.
Low Barriers to Entry:
In business, barriers to entry are a great thing. A barrier to entry is exactly what it sounds like: an obstacle in the way of getting into the industry. For example, if you want to start a dog grooming business, there aren't very many barriers. You need to know about dogs and how to cut hair, but beyond that, it's pretty much fair game. Anyone with a love for pooches and some scissors could start this business and that's the problem. Because it's so easy to get in, a lot of people do. In that kind of industry, it's hard to make a difference and get noticed. There are simply too many competitors. On the other hand, if you wanted to start a tech company, the barriers are higher. You need to learn how to program software, or you at least need to entice a coding guru to work with you. That's a much bigger barrier. If you can achieve it though, you'll enter a business model with much less competition and higher upside.
When you're trying to break into an industry with high barriers to entry, it can be frustrating. That's the point. They are there to keep noobies out. If you have the moxie to get past them, you will be rewarded.
So what are some examples of barriers to entry? glad you asked. These aren't in any specific order, but here are 8 barriers that I feel make a business attractive:
- Upfront capital investment
- Software development / programming
- Building something technical
- Becoming a trust leader for a niche
- Building a working prototype
- Getting favorable manufacturing relationships
- Economies of scale
The Missing Life-Preserver
When an entrepreneur gets so wrapped up in his or her company that they go all in, that throws a red flag for me. I understand the passion and the belief needed to grow a company, but I will never put my trust in blind luck. Every company, no matter how successful, needs a life-preserver. This is almost always in the form of cash. If your company is operating at the edge 100% of the time and is not saving for a rainy day, you're business will bit the big one eventually. My suggestion, decide right now to set aside a specific % of your gross sales every month into a savings account. This should feel a little uncomfortable. That's normal. Once you get used to it and you're able to stash that cash without worry, increase the % a little bit. The goal here is to teach your company to operate without excess cash.
You shouldn't do this forever. Cash is a tool and should be used as an investment to grow your company. Once you get to 3-6 months of operation cash in your savings, you can stop making this payment to your savings account. At that point, you can pat yourself on the back because you'll have a life-preserver for when it rains.
Loss of Focus
Once a company starts moving away from its value proposition, it's time to worry. A company is designed to fix a problem and to do it better than anyone else. That's how it turns a profit. For example, Apple makes beautiful gadgets that allow us to connect, communicate, and create. Wow, that was pretty good. Apple, if you're reading this post, I demand some sort of payment for that little marketing high-five. Anyways, lets assume they started creating tires for cars. Hmmm.... They could do that but it would clearly be outside of their value proposition. This is an extreme example but I see it happening all of the time.
If your company is "wandering", drop the excess fat and get back on task. You have a problem to solve. Focus on that and your customers will love you.
A business is a living organism. It's in constant flux. If you ask me, they get stomach-aches, they have growth spurts, and they shout for joy and cry in pain. There's a lot of variables to growing your company. however, if you're in an industry with low barriers to entry, you don't have a life-preserver, or you lost focus along the way, you might want to make an adjustment before the water level gets too high.