7 biggest mistakes of business startups

By Joanna L. Krotz 

Your first year of running a new business will chart a steep learning curve. No matter how careful or knowledgeable you try to be, mistakes will happen. Get used to the idea.

Still, if you keep an open mind and heed voices of experience, you can dodge many of the more common missteps. Here are the seven most frequent mistakes that newbies make with business startups, and some advice about how to jump the potholes.

Mistake 1: Driving a fire engine without a route. 

You always hear how entrepreneurs need "passion" to succeed, the so-called fire in the belly. Well, enthusiasm can be overrated. To fan startup flames, you need more than high energy. You need a plan.

Take the time to thoroughly investigate your market and target customers, the competition and other basics, with a sound business model. Focus on answering one deceptively simple question: How will you make money?

As a case study in errors, Tim Berry, president of Palo Alto Software, points to the ubiquitous DVD and video rental store on the corner, the one we've all seen open and shutter in record time. Typically, some starry-eyed owner rents the space upfront. Now he's got fixed monthly overhead well before opening. He then spends his capital on snazzy design, forgetting about the cost of cash registers, business software and store signage.

When it's time to stock the shop, the owner is tapped out. The shop opens with trendy decor and lousy inventory. There's not one penny for marketing.

Before the year is out, the store "is picked up by a chain that knows what it's doing," says Berry.

Lesson: Don't quit your day job without a plan.

Mistake 2: Selling way too cheap.

 Ask a child to choose between 12 rhinestones and one diamond and she'll go for the rhinestones every time. Startup owners are just like that. They fall for the fallacy of quantity over quality. They figure rock bottom prices will fuel skyrocketing sales and they'll become millionaires. But it doesn't work that way.

"New entrepreneurs are notorious for pricing their goods and services too low," says Linda Hollander, author of Bags to Riches, a small-business handbook for women. "This dooms them to a life of always worrying about money. Heck, even when they get orders, they aren't happy because they aren't making enough profit on their sales."

Before pricing products, do the math. Calculate fixed and variable costs. Research market and competitive price points. Develop your distinct marketing edge (some call it "USP," for unique selling proposition). Figure the margin you need to walk away with dollars in your pocket.

Lesson: Don't sell diamonds for the price of a rhinestone.

Mistake 3: Starting a business just for the thrill of it. 

Entrepreneurs tend to be big-picture types — visionaries, risk-takers, thrill seekers. The longer they must sweat the details, the jumpier they get. So they often engineer a crisis, just to get back in the game and feel the rush of adventure.

"Entrepreneurial boredom is the stealthy killer of seemingly healthy small businesses," says Ralph Warner, author of How to Run a Thriving Business. The purpose of a business is to make money. If you come alive only by jumping off a cliff, take up bungee jumping.

Lesson: Don't start a business to find life on the edge.

Mistake 4: Clueless about marketing.

Startups rarely plan or budget for marketing because new owners think marketing is an unnecessary expense. Or, compounding the error, they confuse marketing with sales.

"Marketing worries about sales tomorrow. Sales closes sales today," explains Rob Gelphman, who runs a marketing communications company in San Jose, Calif. "You cannot go from engineering to sales and skip the marketing step."

Underlying this mistake is a lack of experience about the drawn-out process of a typical sales cycle. Entrepreneurs usually hire salespeople first. But the initial hire, whether contracted or project help, should be a marketing expert to get out the word. Then it's time to send out the sales force.

Lesson: Don't try to close deals before getting out your message.

Mistake 5: Being a pal instead of a boss.

At the opening of a new business, everyone works three or four jobs, seven days a week. There seems little reason to pull rank or worry greatly over management procedures.

"When people first start a business, processes are created by accident or in an ad hoc manner," says Jay Arthur, author of Six Sigma Simplified Training. "Problems are fixed by using common sense and trial-and-error as the business grows. But at some point, the ability of these two methods to solve more mysterious and complex problems begins to fall off. Eventually, they stop working altogether."

You're the one in charge. It's up to you to set expectations and develop procedures or appoint someone to do it.

Without defined policies for job performance, hiring and firing, vacations, sick leave, benefits, compensation, promotions and the rest, your fledging company is vulnerable to legal problems and low morale. Ultimately, business will suffer. A company handbook can be as simple as a one-page memo.

Lesson: Don't abdicate authority.

Mistake 6: Blowing through your capital.

"New business owners grossly underestimate their financial needs," says Isidore Kharasch, president of Hospitality Works, a food-service consulting firm based in Deerfield, Ill. Typically, inexperienced owners overspend at the outset, buying more furniture, technology and office supplies or hiring way too many executives or experts than they really need to get up and going.

New owners also don't realize that few customers pay promptly. So even when sales are immediate, cash is often

tight. When managing cash flow, it helps to have an analytic accounting program.

After developing personal and business budgets that can sustain the company for the time you think it'll take to get to break even, add at least 50%, suggests John Reddish, a management consultant who specializes in growth. "That's managing your risk."

That commitment isn't yours alone. You need ongoing buy-in from family and friends. Make sure your time and money also is spent on family or a significant other.

Lesson: Don't let a launch cause lifelong regrets.

In the end, many missteps occur because new owners insist on doing everything themselves. Instead, review what you do best and try to delegate or outsource the expertise you lack. And when the inevitable errors do arise, remember the old adage: Learn from your mistakes.

Mastermind Strategist Moe Nawaz