Business Is More Than a Crap Shoot

Those who haven’t owned a business tend to think businesses are built on mystical gut feelings that readily morph into bulging bank accounts, hot cars and holidays. Sure, Mark Zuckerberg and Bill Gates did just fine by following their hunches, but the hype overshadows the massive amount of work it took to make Facebook and Microsoft successful.

Statistics on the failure rate of small businesses can be sobering. Conventional wisdom suggests that about half of small businesses (those with revenues under $30,000) survive after three years, while approximately a third survive after five years. To be sure, this category of business activity, also referred to as micro-enterprise, includes a lot of businesses that are simple to start and easy to jettison when something better comes up. The statistics deal with the most developmental business arena, where a lot of newbies cut their entrepreneurial teeth. It also includes a lot of drive-bys who jump in long enough to check out the self-employment scene, and bail out once they realize they’re earning less than minimum wage.

Whatever else the high failure rate of new business tells us, it hints that success is more than blind luck. Some would characterize entrepreneurs as risk takers. While there’s a bit of truth to this, successful business owners are not so much gamblers as they are effective risk managers.

One of the cornerstones to becoming an effective risk manager is to find a healthy balance between intuition and due diligence. Due diligence is the research needed to validate your hunches and clarify your business case. A business case is built on more than notions and dreams; it has to have a solid indication of demand for your goods, customers that are willing to pay the right prices, and a bulletproof plan for getting in front of customers.

New business owners can increase their chances of survival by doing due diligence in the following three ways.

1. Validate the Demand. To confirm demand for products or services, business owners will learn all they can about their customer’s wants and needs. This education can come through a combination of reading, working in the target industry, conducting surveys, and most importantly, talking to customers.

2. Validate the Prices. When it comes to setting prices, there’s no confidence builder quite as convincing as making sales. However, prior to making sales, entrepreneurs can learn about pricing by knowing what it costs to produce their goods, and by learning everything they can about the industry and in particular, the competitors. The Internet is by far the easiest source of information on prices.

3. Develop a Marketing Plan. Think of marketing as everything you will do to communicate to potential customers. Your marketing plan will detail how you’ll get your goods in front of customers, including costs each marketing campaign or activity.

Business success is much more than a crap shoot, and much riskier than buying a lottery ticket. It’s also true that business, managed effectively, is a surer path to success than gambling. And if you enjoy the work you do, it can also be fun getting there.

Gates and Zuckerberg are inspirations for us all, but don’t be blinded by the hype. If you’re feeling intuitive and lucky, buy a lottery ticket. If you want to build a successful business, by all means follow your instincts, but do your homework by validating your hunches before putting any significant investment on the line.