Starting a business is both exciting and terrifying. For entrepreneurs, it doesn’t get better than watching an idea come to life in the form of a new business; yet the statistics are grim—the U.S. Small Business Administration reports only a third of companies survive 10 years in business. How can you ensure that your business is one of them?
To keep your business growing and moving forward, avoid the following three fatal mistakes entrepreneurs make—at all costs.
1. Testing your idea out on family and friends—only. Having friends and family around when starting up a business is a wonderful asset, giving you much needed emotional and financial support. However, try to leave the love out of it when you test your product or idea. Evaluate how the product or idea is received based solely on those who don't know you or the business.
Not sure where to find total strangers to test your idea? Try tapping your social networks. Ryan Carson, CEO and founder of the technology education site Treehouse, recommends showing your Twitter followers a mockup of your new business' website.
Once they've seen the draft, ask them what it is, whether they would pay for it and how much, he says. "If the majority of people you ask understand what the product is, and say they'd pay for it, then you're on to a winner," Carson wrote in .net magazine.
For Eva Wong and Zi-Ninn Lee's children's accessories company Bumble of Joy, product testing was at the top of their to-do list. "We sent some of our products out for reviews and received positive feedback," Wong says. "So we know people like our products."
The company launched three months ago and is just beginning to market itself through social networks.
"One of the biggest challenges for us was to find a way to reach outside our circle of friends," she says. "It took some time, but we were able to do that. We’re still seeking other ways to market ourselves and expand our audience."
2. Not paying quarterly—or any—taxes on time. Companies are responsible for paying quarterly taxes, and if you skip paying them on time, you will have to pay a fine to the IRS. That money adds up quickly. It's good business practice to set aside money for taxes, including payroll, sales and other taxes required by the federal, state and local governments. If you’re not sure how much to set aside, work with your accountant to come up with an estimate.
3. Over-investing personal finances. There's a lot to be said for bootstrapping your startup. However, you should set a strict limit on your personal investment. It can be tempting to pour money into your business, but you don’t want to invest more than the business is worth. If you do, you risk bankruptcy and possible personal financial ruin.
Entrepreneurs are optimistic by nature, and it can be tough to accept when investors shy away from a deal because the business is valued lower than the amount the founder poured in to it.
Another investing issue that can hurt a startup is the over-valuation of the shares—where the price per share isn't justified by the company's earning outlook or price/earnings ratio. In short, the stock price is higher than it should be.
Over-valuation from an investor's viewpoint can only be rectified through reallocating the equity of the company, says angel investor Basil Peters. The reallocation is often a difficult process for the company to go through.
Read more articles on growing a business.
Linda is an award-winning journalist with more than more than 22 years' experience as a reporter, editor and blogger. Linda blogs via Contently.com.