Starting a new business can feel like a roll of the dice. Most small-business owners, even many whose ventures have failed, will tell you the potential rewards are worth the risk — but cautionary tales abound.
No matter the preparation that goes into your new small business, you’ll learn many hard lessons along the way.
Here are five common — and expensive — pitfalls newbie entrepreneurs should watch out for.
1. Underestimating cash needed
Costs to start a new business can vary wide -- from a few thousand dollars to $1 million or more -- and will depend on the type of business you launch. Part of figuring out how much money you’ll need to get started involves projecting how much revenue your new business will generate to offset startup costs. That can be a tricky calculation that depends on a lot of shifting variables. One thing to keep in mind: Most first-year businesses generate modest returns, with more than 75 percent of new businesses having annual revenue below $50,000, according to a Kauffman Foundation report.
No matter the business, a good rule of thumb is to budget for more than you think you’ll need. Eric van Merkensteijn, a University of Pennsylvania business professor who left academia to run his own restaurant from 1999 to 2004, offered this advice to SmartMoney: "Take what you believe will be your upfront investment cost, then double that number, then double it again."
There are plenty of online tools to help gauge the cost of bringing your business to life. But the simple advice from seasoned entrepreneurs? Whatever you think you’ll need, you’re probably underestimating.
Related: Starting Costs Calculator
2. Confusing a good ‘idea’ with a good ‘opportunity’
The “eureka” moment that forms the idea of a new product or service inflames a lot of the entrepreneurial mystique and can give the creator the passion that leads to perseverance. But if that great idea doesn’t have a great market fit, your business won't succeed.
Just because you build it doesn’t mean customers will come. “By focusing your startup on an idea — the product or service you offer — rather than an opportunity, you risk becoming boxed in,” writes Sandy Richardson, a business strategist and author of Business Results Revolution.
“Opportunity exists at the intersection of a deep customer need or problem, the ability to actually meet that need, and the surrounding environment,” she says. “When conditions are right, leveraging an opportunity should translate into value creation.”
3. Not knowing when to pivot
Some of the greatest success stories in recent years came from businesses that started as something else. Flickr started as a photo-sharing tool for the online game Game Neverending. Similar story with Instagram, which began life as a gaming and photo app. Twitter started as a side project at a podcasting company as a way to send SMS messages. Groupon began as a social-fundraising site.
It takes courage to walk away from your main project for a potentially bigger moneymaker. “It was hard to let it go,” Flickr co-founder Caterina Fake says of the game her company developed that spawned the photo-sharing app.
“We were sad to do that because we all really loved the game,” she told the authors of Founders at Work. “But you couldn’t argue with the momentum and growth we were seeing with Flickr.”
4. Thinking the world is your oyster
Although the Internet has become an indispensable tool for companies, the idea that your marketplace now includes a borderless world is more of a fancy than a reality for most small businesses.
Tech companies with a handful of employees that rake in billions of dollars may dominate news coverage but Internet companies made up less than 6 percent of new companies in 2013, according to the Kauffman Foundation.
Most new businesses don’t harvest cash around the planet — they make their money around the corner.
5. Choosing the wrong partner
A business partnership is a lot like a marriage. And like a marriage that ends in divorce, a business partnership that comes apart can leave a trail of wreckage in its wake. Some entrepreneurs even say breaking up a business is worse than a divorce.
“If you make a mistake in marriage you can divide up the asset pool, learn from the experience, and go your separate ways,” writes entrepreneur Frank Farwell.
“A business partner, on the other hand, may be harder to shake and more of a drain. For many years it's quite likely neither of you will have the cash to buy out the other, since any cash you have will be soaked up by your business. So you may be stuck with a business ‘spouse’ with few ways for either of you to exit.”
The alchemy required for a good partnership, ironically, doesn’t call for a twin image of yourself but rather someone who complements your strengths and weaknesses while maintaining a shared vision for your enterprise.
Breaking up is hard to do in relationships but dissolving a business relationship can leave you well and truly busted.