Entrepreneurship 101: Don't Believe These Three Myths About Starting Your Own Business
Scaling your business will depend on your financial awareness as an entrepreneur.
I have watched this doomed startup fairy tale unfold way too many times: a brilliant idea, a passionate founder, a partner (or not), a market study, the initial euphoria of starting something on your own, a marketing plan, the search for investors, the dreams of making it big, the first client, the media blitz, the honeymoon phase, and then slowly, investors turn their backs, and the money dries out. End of story.
But this is usually where the real story should start. What really happened?
According to several published reports, an estimated 90% of startups fail globally within the first three years of launching. While I am a big proponent of learning from your own mistakes, especially through the course of an entrepreneurial journey, it is safe to say that some mistakes are easily avoidable. Here are the top three myths I can think of that could avert a few early disasters for any entrepreneur:
1. You need massive funding to launch your business
We've heard this saying repeatedly, "You need money to make money, right?" The truth is that very few investors would bet their money on an idea or a product that has not yet launched and generated some form of profit. In fact, according to TechCrunch, 67% of Series A funded startups, which were surveyed in 2017, had generated revenue before getting funds.
Almost every giant business we know today has started small, and by small, I mean from home. Both Apple and Google started in a garage. YouTube started in a cubicle when Steven Chen and Chad Hurley were discussing easier ways to share videos! And to use one regional example, Brands For Less co-founder Toufic Kreidieh recently explained in a interview how he and his partner started their business venture with a modest capital. "Our start was very hard, we only had about US$10,000, and we couldn't afford to rent a large warehouse, so we started our operations in a small underground parking," he said. Years later, the founders would take Brands For Less to Dubai, and the company has since recorded more than $21 million in net sales in 2021, according to ecommerceDB.
Bottom line: Start small so you can prove the concept with the minimum capital possible.
2. Outsourcing your finances is the best option
Do you recall the last time you picked up your sunshades on a really hot day while you were driving, only to find a massive smudge on one of the lenses? Good. Now hold on to that thought as I explain myth number two.
Most entrepreneurs I have met are very passionate about their idea to the point where the commercial model is not their top priority. They are intimidated by the financial part of the business, so they hire accountants, and, many times, hand over the financial decisions of the company, thinking that the accountant or advisor will alert them whenever they are taking a risky decision.
The problem here is that while the accountant keeps the books and has the ability to make sense of your balance sheet, in many cases, they may lack the market knowledge of the product/service you are selling. Neither the accountant nor the financial advisor can know more about the nature of the service that you are offering with respect to your own market demands. So, when your financial advisor is suggesting that you raise your price, he may be looking only from the perspective of raising your revenue, without weighing in the market condition and demand for your service. And if you feel intimidated by numbers, you will, like many entrepreneurs, avoid standing up for your service or your cost.
Now, back to your glasses- for it to function properly, you need both lenses to work together, equally. The right lens is the financial advisor who can guide and help you, but the left side is you, the decision-maker, the entrepreneur.
Bottom line: no advisor knows your product more than you do. Though you don't have to be a finance expert, you will find great rewards in familiarizing yourself with the basics of finance, so you can be an integral part of the decision-making process, and have a seat at the table.
3. Revenue growth is the only important metric
Remember WeWork? If not, you can now catch the spectacular rise and what analysts describe as the fall of the unicorn startup, in a newly released series starring Anne Hathaway and titled WeCrashed. The company's executives were focusing on growth and only growth, and not any growth, but blitzscaling, which is rapidly building a company, and especially globally, in order to become a first-mover. Companies use this strategy to scare away competitors and maintain market share. "Profits will come later," they think.
While this worked for some companies like LinkedIn and PayPal, this is not a lottery ticket for every entrepreneur. We saw that in delivery apps, kids e-commerce businesses, and many more. Growing at all or any cost is no longer something that investors want to hear. Don't get me wrong- growing revenue is necessary, because it reflects product-market fit, but healthy profits will keep your investors happy.
Last year, MarketWatch reported how both ride sharing companies Uber and Lyft were using alternative metrics along with creative earnings before interest, taxes, depreciation, and amortization (EBITDA) to paint a promising image about their growth and promised profits to investors. This was done despite analysts' warnings that the new post-COVID-19 driving regulation and the upcoming requirements for electric cars would cause making profits for these companies highly unlikely.
Bottom line: your startup's revenue growth is important, but if viewed independently of other crucial data, it will give an unreal projection of your growth which will only lead to disaster.
At the end of the day, it is important to remember that we all make mistakes, and that is an integral part of our learning journey. However, the wisest decision you can do as an entrepreneur is to always move forward, with those crystal-clear eyeglasses on!