How To Start A New Business

This year over one million new businesses started in the UK and over ten million new businesses started in the USA will fail. Why? Well various government departments, consultants and the press will no doubt produce reports and stories explaining that it’s down to lack of capital, the recession, the credit crunch, red tape or whatever the excuse of the day is. Personally I think it’s far simpler:

They are bad businesses.

Why are they bad businesses? Usually for one or more of the following reasons:

• there is no demand for the product;
• the business cannot service the demand profitably;
• the business cannot communicate its offering to its target customers;
• insufficient capital;
• the entrepreneur or team does not have the right skills.

In short starting the business was a bad idea. Instead the entrepreneur should have started a business that had a chance of working.

How To Start A New Business (That Can Succeed)

Like John Mullins, the author of The New Business Road Test, I believe that entrepreneurs should road test their business idea as early as possible. The traditional way to start a business is to spend days, weeks, months or even years on a detailed business plan and product specification trying to get everything 100% (or as close to as possible) before starting the business. I think that’s sheer lunacy. The reality is that until you start trading with your customers you won’t really know what they want or whether your product satisfies their needs.

Having learned through experience that this approach doesn’t work, I now start and run my own businesses on the principle of “fail fast, fail cheap“. I strongly advice other entrepreneurs to do so to.

So what does “fail fast, fail cheap” mean?

To me the principle of fail fast, fail cheap means that I don’t worry about creating the perfect product/business instead I focus on creating a sample/prototype as cheaply as possible which can then be used to test the market. Get this prototype in front of paying customers and let them tell you what’s right, what’s wrong and what’s irrelevant. Then using their feedback adapt the business/product. Keep repeating this cycle until your customers tell you the business/product is perfect.

Starting a new business this way acknowledges that you will make mistakes (fail) along the way, but by expecting these failures and minimising the cost of them you stand the best chance of correcting the mistakes before your start-up capital runs out – allowing you to create a successful business.

And if your business idea turns out to be a bad idea, by failing cheaply you’ll avoid losing all your money and might even have enough left to pursue another (hopefully better) business idea.

But what about registering a company, building a website, getting business cards etc?

Prove the business idea works first. Only once that’s done should you about getting all the “trappings” of a business. Otherwise you’re just wasting your money.

Useful books:

• The New Business Road Test: What Entrepreneurs and Executives Should Do Before Writing a Business Plan – focuses on testing the business idea before diving right in.
• Start Your Business: Week by Week – a introduction to the basics of starting a business.
• The Small Business Start-up Workbook: A Step-by-step Guide to Starting the Business You’ve Dreamed of
• Spare Room Start Up: How to Start a Business from Home

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• 1

  You have just proved me wrong!

  http://smarthomeworker.com/2009/06/21/are-you-a-business-black-belt-how-to-create-a-small-business-right-now/

  Don’t know how to hyperlink this, but I think you might want to take a look.

  Thanks, good to see some white hats out there…

  Sahail Ashraf on June 22nd, 2009
• 2

  Hi John,

  I’m not so sure this is a viable solution for some business types, specifically new bars/nightclubs or restaurants. It seems like more of a product based approach.

  I suppose one could negotiate hiring a venue for a few weeks, hire all the equipment and so on to try the new bar/restaurant idea but I think that would still cost quite a lot of money and require almost as much work as just opening the business the ‘traditional’ way.

  What are your thoughts on this?

  Jamie on June 26th, 2009
• 3

  Jamie,

  I’d have to disagree it’s possible to test the idea for nightclub, bar or restaurant. Sure it’ll take more creative thinking than a product based business, but here’s some quick thoughts:

  – restaurant – find a local pub and offer to sell your food from their kitchen for one night a week. Or offer then a few dishes to add to their menu as specials.

  – restaurant – run a takeaway service for local businesses over lunch.

  – bar – test the location at the time of day when you’ll be trading, count passing trade and speak to them about the idea.

  – nightclub – hire somewhere and run a special event test your ability to market the event and attract customers.

  I’m sure there are many more ways to test the idea and “fail fast” perhaps I’ll explore more in a future article.

  John on June 26th, 2009
• 4

  Great practical advice John and I particularly like the way you answer the first comment.

  This “prove it in the real world” is one of the big reasons why I prefer working with businesses that are already established when they want advice to increase profit.

  I believe in planning and checking that you are not going to lose money on paper but it is so easy to be over-optimistic about the assumptions.

  Of course 5 people in the networking group are going to try your products? No they’ve probably already got a supplier or don’t need what you sell.

  Of course each member of the group are going to recommend you to five people in the year. No most of them are far too worried about their businesses and getting more sales.

  Etc

  The real world is very much where the rubber meets the road and most start-up business owners are too optimistic about how quickly customers can be created.

  Paul Simister on July 6th, 2009
• 5

  [...] http://www.businessopportunitiesandideas.com/999/how-to-start-a-new-business [...]

  Small Business Success Interview - John Crickett | The Smart Homeworker on February 20th, 2010
• 6

  Hi Everyone,

  I really like this post as I am currently working on a business idea. I would like to create a product that I will be selling to Gyms in the UK, so far I did managed to get a professional design of the product + Logo for free. Right now I would like to take my 3D product version to a real prototype under the principle “Fail fast, Fail Cheap”.

  Now I’m calling for your expertise regarding the prototype of the product, shall I contact some British manufacturers (BM) or one of these low cost manufacturers (LCM) in China or India…

  BM = Higher price, High quality and better control
  LCM = Low price, Medium quality. no control
  Every would-be entrepreneur who wish to create a new product target the low cost countries (depending on the type of product and strategy) ….

  Advices, British manufacturers information, ect are more than welcome.

  I thank you all in advance for your comments.

  Cassidy on May 18th, 2010
• 7

  Cassidy,

  You’d be better off asking that question in the forums.

  I would suggest making the prototype with a manufacturer that you can actually meet in person then you can communicate far better with them and enjoy the benefit of their manufacturing expertise.

  John on May 18th, 2010