That Crucial First Year
Barry Thomsen began his entrepreneurial career as a 10-year-old running a paper route and selling lemonade to workers at construction sites. From there, he sold Amway and Avon (AVP), delivered pizza, and started and owned a number of businesses that ranged from a small manufacturer to a business forms supplier. During the course of some 30 years as an entrepreneur, Thomsen has observed and experienced many of the problems that occur in the all-important first year of business—a period when the majority of new businesses fail.
The publisher of the Colorado-based Idea-Letter, a monthly compilation of advice targeted at small business owners in newsletter form, Thomsen recently published When the Shit Hits the Fan! How to Keep Your Business Afloat for More Than a Year (Career Press; November, 2007), a catalog of his observations about what can go wrong after opening for business, paired with his solutions.
Recently, BusinessWeek.com's Stacy Perman spoke with Thomsen about surviving those crucial first 12 months. Edited excerpts of their conversation follow.
What happens in a year that makes it the make-or-break-period for a small business?
People spend most of their startup money. They don't have as many orders as they need to pay their bills. And people don't anticipate the expenses that come up. Also, most entrepreneurs need to build up their markets and loyalty slowly. Maybe 1% of people have an unbelievable product, but most have to build up their customer base and they end up running out of money before they get there.
What are the three key things that have to happen within the first year so a business doesn't fail?
Get to know your product, get to know your market, and get good employees. You have to have good people to back you up, and you have to know your target market or you are wasting your time. If you have the wrong market, you have to keep testing to find out what that market is.
What is crucial for an entrepreneur to know when starting his or her business that might help it survive?
They should know what their goals are and what they want out of the business. Do they want to simply make a living? Do they want to end up being a big company like Google (GOOG)? Do they want to stay local or sell nationally? They have to have some goals to know what they are going to be and what they are going for.
What is something that often happens during that first year that can overrun a business if it is not dealt with?
One of the easiest things to get behind on is payroll taxes. And once you get behind it starts to mushroom. The IRS won't come after you right away, but they will get you in six months. Another thing: You almost have to go into business thinking that you are not going to make a fortune initially. In the first year, you need to make a foundation first. And in the beginning you have more bills than you know what to do with.
You say that an owner's attitude can affect the entire business. How so?
Sometimes owners go into a business thinking, "I'm king. I can do what I want." It turns out to be the opposite. The people working for you pick up on that attitude, and if you are vague or indifferent with customers they will be, too, and your customers will not come back. It can ruin a whole business.
You also say that losing a big account is not the end of the world—explain.
First, you should never take an account that would ruin your company if you were to lose it. You can lose an account for any number of reasons. A larger account has a lot of expenses. You need to think about what you would do if you lose that account, so that your business will not go down. You can't let it shut you down. You should have backup sources and not give that big account everything. That way they can't take everything if you lose that account.
How would you advise someone to deal with competition?
Know what your competition is doing. You can't run a business and ignore it. If you are a retailer, shop your competitor's store or send in mystery shoppers to see how they treat customers. Check their Web site to see what they are doing. They might be announcing something new, and you don't want to be caught off guard. Hopefully, you have something that you are working on and it is better. That way you don't have to get into a price war (BusinessWeek.com, 7/19/06), because that's when everyone loses. You need to be aware of your competitors or they will eventually pass you by.