Every month, 540,000 people in the US start their new business to realize their dream of being their own boss or to pursue their passion. According to the US Small Business Administration, there are 28.8 million small businesses that account for 99.7 percent of US businesses. While 240,000 start-ups were established in 2016, 215,000 businesses exited in the same period. A Forbes article states that 90 percent of startups fail, and a Statistic Brain study shows the failure rate for US startups was 50 percent after five years, and more than 70 percent after ten years.
While there are many factors that determine the success or failure of startups, one of the most important factors relates to professional liability insurance.
If you are considering starting your own business that focuses on providing services or advice to customers, it is important to get insights into some of the most common mistakes new business owners make while protecting your financial health with the right professional liability insurance.
1. Not having a business Plan
While brilliant ideas and the excitement of starting a new venture are good starting points, they are not enough to ensure business success. Putting the plan on paper is the critical first step that many startups miss out on. Developing a detailed business plan enables you to preview all angles of the business idea, including value proposition, financial planning, marketing assumptions, market analysis, customer profiles, and growth plan.
A past study of 11046 companies showed a business plan improved business performance while another study found that startups with a business plan grew 30 percent faster as compared to those that did not have a plan in place.
While building a business plan, it is important to focus on the quality rather than on the volume or number of pages.
Research indicates entrepreneurs who began the process of business planning early were more likely to succeed.
2. Ignoring market research
In an analysis of 101 startup exits, 42 percent named lack of market need for the product or service as one of the key reasons for failure. Comprehensive market research is a crucial aspect that cannot be ignored before starting the business. Venturing into the business without understanding if there is a market for your offering is a colossal waste of time and energy. Misinterpreting the market in terms of the target demographic, overestimating or underestimating costs, launching too late or too early and targeting the wrong market are some of the costly mistakes startups can make.
While there are professional market research agencies, some of the questions that you can start with to understand the market are:
- Is there a real need for your product or service?
- What real-world problems of your target audience does your product or service solve?
- Who are the primary competitors, and how well are they doing?
- Where are the key prospects for your product or service?
- What are the price points for similar service or products in the market?
3. Putting the product or service above the customer
A great business idea by itself may not be enough to ensure the success of a startup. It is equally important that your business idea appeals to your target customers. The story of Los Angeles-based ‘Shoes of Prey’ is a case in point. Michael Fox, the co-founder of the shoe retailer that offered customized footwear, cited lack of demand as the reason for the failure of the business. The founders learned ‘the hard way’ that while there was a niche segment of people who liked the customization idea, the mass market only wanted to be shown what trends to follow and what to wear.
To ensure the success of a new business, it is essential to understand the target audience as thoroughly as your market. A product that is not user-friendly or one that has pricing issues is doomed for failure in the market. User-unfriendly product is fourth among the top twenty startup failure reasons. Discounting your customers’ desires can fast-track failure. Investing in getting insights into what your customers are looking for will enable you to tailor your offering to match their needs.
4. Not securing enough funding
San Francisco-based ‘Anki,’ a robot maker, closed down after its funding dried up while ‘Wow Air,’ an Iceland-based airline, ceased operations abruptly after they failed to secure new funds.
A recent survey that had 600 participants found that one-third of startups have less than $5,000 as initial capital, while 58 percent had less than $25,000. Close to 65 percent of participants admitted that they were not confident of having enough funding for the business. An alarming 82 percent of businesses fail because of cash flow issues as per a US-based bank study.
Funding is a key factor that can determine the failure or success of a startup and is one of the top three reasons for startup failure. The business plan needs to include the details on the volume of funding required in terms of initial investment and operating capital and the possible sources of funding. A major mistake many entrepreneurs make is to underestimate the amount of money required to fund initial costs and to run the business for the first two to three years.
Consulting a financial adviser is the first step to understand the different sources of funding that are available, including personal investment, money loaned by friends or family, crowdfunding, venture capital, equity financing, government grants or bank loans. Traditional business lenders may require loan applicants to have been running the business for six months to qualify for the loan. Some startups have had to close, as they found it difficult to raise enough capital to match the increasing manufacturing costs. Professional financial consultants can also help you understand how to plan for inflation and unexpected costs.
5. Not having a marketing strategy
One of the key mistakes new business owners make is to overlook the critical importance of marketing and branding. Successful entrepreneurs believe 90 percent of a startup is about marketing. The primary goal of a startup is to scale up the market and find more customers for the service or product. Strong branding and marketing help the startup establish brand identity and are integral to business development.
The marketing plan should include details of the objectives, product or service definition, customer profile, competitors’ analysis, and the action plan that incorporates pricing, marketing budgets, resources, metrics, and tracking. In terms of setting a budget, experts recommend setting aside 3 to 5 percent of the sales revenue for marketing. A report that analyzed marketing trends from a research company shows that marketing budget on an average was 11.1 percent of a firm’s total budget in 2018. What percentage of marketing budget you allot will depend on the nature of your business, your business goals, competitor analysis, and on your target customers.
Strategies for both offline and online marketing need to be developed. While 87 percent of purchasing processes start with an online search, the top three digital marketing tools are the website, email marketing, and social media. Given the power and reach of social media, it is not surprising that 96 percent of small business owners have a social media marketing strategy.
5. Not having a mentor
One of the most overlooked factors is that of having a business mentor. It is well-known that some of the most successful entrepreneurs like Bill Gates, Mark Zuckerberg, and Steve Jobs had mentors. While Steve Jobs mentored Zuckerberg, Jobs himself was mentored by Apple executive Mike Markkula. Google’s Sergey Brin and Larry Page were mentored by Eric Schmidt.
While not every entrepreneur has a world-renowned business mentor, the concept has been shown to be an important element of business success. A non-profit organization conducted an analysis that showed that the chances of success of founders who have top-performing entrepreneur as a mentor were three times higher.
A Kabbage survey of 200 or more small business owners in the US highlighted the importance of business mentors. The survey found that 92 percent of entrepreneurs believe mentors have a positive impact on their business growth. A previous report revealed that 84 percent of small businesses achieve profitability in the first four years, and having a mentor in the early stages of a business is crucial for success.
Mentors have rich experience in the field, which can be valuable for the new business owner. Apart from experience, mentors help provide networking opportunities while boosting the emotional intelligence quotient of the entrepreneur. Research shows mentors help boost self-confidence and motivation levels of the new business owner, which are crucial to startup success.
6. Not having professional liability insurance
Business owners have to deal with a host of decisions every day. When it comes to deciding on the right course of action, there are equal chances of making both bad and good decisions. From the moment you plan on starting a business, and while running the business’s day-to-day operations, it’s crucial to know what kind of mistakes have occurred in the particular field. While no entrepreneur starts with the intention of making a professional mistake, they do tend to happen. As per the Court Statistics Project, a contract dispute has a median legal cost of $91,000. Many times, legal defense of frivolous claims from clients can be anywhere up to $5000.
Also called the E & O (Errors and Omissions) insurance, professional liability insurance provides financial protection for lawsuits for a range of alleged or actual claims related to negligence, delays, budget overestimation, miscalculation, data entry errors, technical errors, data breach, project mismanagement, and malpractice. In the increasingly litigious culture, professional liability insurance is the most crucial risk management tool that protects your financial health in the face of a claim.
In conclusion, while it is true that mistakes cannot be avoided at all times, knowing some of the common pitfalls can help business owners get a head start. The key elements of business success are planning, organization, focus, confidence, and flexibility. As important as it is to build a detailed business plan, it is equally important to pay attention to hiring and retaining the right talent, delegating, and focusing on customer service excellence.