Hey what's going on everyone? Sam Evans here, and today I wanted to make a video for you to talk about the top three reasons why most businesses fail. This is going to be a slightly different tone and a slightly different video today. Instead of talking about success we're going to talk about failure because a lot of businesses do fail and a lot of entrepreneurs they're too afraid to talk about failure. It's like it's a taboo word that we shouldn't talk about, or something like that, and they don't want to look at the dark side. They just want to stay in their little delusion.
You really do have to look at the dark side and look at why businesses die, and to study this, so that you know not to do those things. I think it was Charlie [inaudible 00:00:49] or Warren Buffett, one of them said, "I want to know the place where I'm going to die, so that I'll never go there," and that makes a lot of sense, if you can avoid that, if you know the place where it's going to happen and you don't even go there then you never will. Really, what he meant by that is, knowing the mistakes and the pitfalls to watch out for can be extremely helpful.
In most cases, studying why businesses fail and really learning the dark side well can help you more than studying why businesses succeed. It doesn't matter how many times you add new successful strategies if you forget one of the critical things that makes your company fail then all that's gone, so really you want to make sure, first and foremost, that you don't do any of the absolute main reasons that companies fail. You want to avoid these at all costs, you want to know what they are, and you want to know what they are in order.
In this video, I'm going to walk you through the three main reasons, tell you what they are, what they look like when they show up and occur in the real world, and most importantly how you can spot the symptoms of these things coming and avoid them, and how to make sure that you never fall for these treacherous paths.
The first one, is the main reason why most companies fail, this is in any industry, in any niche, anywhere in the world, the number one reason by a landslide is that they don't solve a market need. This is huge. If there's only one thing that you learn and remember in your entire business life it should be this, this is the best thing that I know, and this is really responsible for most of the results have been able to get. Most businesses fail because they don't solve a market need. What does that mean? I can explain it pretty simple. A lot of people, they go into business because they're copying someone else, they see a business and they're like, "Oh, this looks cool" or, "I think I can do that," and so they go to business and copy them. Then, they might find out that then that business was built on the wrong assumptions, and everything then that business ends up in trouble, and then so does this business it ends up in trouble because you shouldn't get into business just to copy someone else.
You also shouldn't get into business because you really like a technology. I see a lot of people these days they see Bitcoin, or they see Facebook ads, or funnels, or webinars, or chat bots, or any one of these little widget things. They see the technology and they're intoxicated by the technology to a point that is so intense that they decide that they must start a business doing something with this technology. This is another reason why businesses fail.
You shouldn't start a business based purely on what you want, you shouldn't start a business based purely on what other people are doing, and you should never start a business based on what the technology is. These are the big no-noes: you, technology, or competition or what the market is doing. Don't do those things. This is probably going to upset a lot of people because that's pretty much like 99% of most businesses they've been started to do one of those things.
If that's not it, then what do you do? Remember, the number one reason why businesses fail is because they don't solve a market need. In order for our business to not fail then we need to solve a market need. How do we solve a market need? First of all, we need a market, so this is where most people go wrong. What is your market? Most people will be like, "Um, everyone, or humans," or something like that. That's not a market and you need to know specifically what is the group, the cluster of the people that you're helping. It could be a niche like yoga instructors, it could be female that suffer from binge eating issues, it could be men who are doing karate, it could be accountants who want to grow their business, it could be any one of those things it doesn't matter, but you need to know first and foremost who is your market? Who are they, that's step one.
Then, the second piece is you need to solve a market need. The first thing that comes in market need is market, we've got that, now, need. What is a need? It's something that people need. What makes people need things? Typically, what human beings have inside them, and in their brain, and everything is that they've got their life right now and that's their current situation, where they are in life right now. If you want to know what that is it's just your life right now frozen in a snapshot, that's it, that's your current situation. The thing about humans is we've got advanced brains and we're able to think out into the future, and were able to plot different things about what we could do, and what we could come. Then, we have what's called a desired situation, so where we want to be. Maybe it's in a couple of hours, maybe it's in a couple of days, and a couple of weeks, months, years, whatever it is. The timeframe can be anything.
Then, you want to talk to the market, so let's say we pick accountants, that's the market, then we talk to accountants because we need to find out what their needs are. The way we do this is we talk to them and understand their problems. If they don't know what their problems are, which a lot of people don't, they're not aware enough to actually articulate and state exactly what their problems are that's where a lot of people trip up. They might pick a market, then they talk to the market, but the market doesn't really know what their problems are. The reason why they don't know is because when people really know clearly what their problems are their problems become very easy to solve. Most of problem-solving is just clearly defining the problem, and quite often once you define the problem the solution comes pretty easily.
These people are in pain because they've got a problem, or they don't know what it is, and they don't even know how to articulate it. It's your job, as the entrepreneur, to explore this with them. You might pick a niche, accountants, you might start you might start talking to them, asking them about their problems. They might not know what those are, so how do we explore these things? You can ask them where they are right now, they'll know that. Then you can ask them where they want to be in a year, they'll be able to think about that. Then, you can draw a picture, where they want to be, where they are right now, and now there's a gap in between the things. Then, you want to ask the accountant, "Okay, you're currently here, you want to get here, let's say, you're currently making $20,000 a month and you've got two employees, and you want to be at 100 grand a month, and have 20 employees. Well, what's stopping you from getting there on your own right now," that's a good question. You want to find out what really is blocking them.
Then, once you've found that, once you've found what someone's problem is then you want to talk to other people in that market, so you want to talk to other accountants, and you want to explore their problems with them, and see if they have similar current situations and desired situations, and similar blockages stopping them from getting where they want to go. Once you've identified a common, widespread, problem that exists among most accountants or most of the market then congratulations, you have found yourself a market need. You've found a widespread market problem. This is what all good companies do, they address and they solve a market problem. If your business doesn't do this then you may as well just already order its tombstone because it's going to be dead. I'm surprised it isn't that already, it doesn't have long left, and you ought to do something about it.
No businesses live unless they solve a market problem, that first and foremost the most important thing that you could possibly learn in business right there. That's the main reason why businesses fail is because they don't do that, they invent something based on a technology, but people don't want the technology, they want the job that the technology does. People want outcomes, they don't want technology. A perfect way to describe this is people don't buy drills because they want drills. A person might want a quarter inch hole in their wall to put a pipe through it, what they really want is a quarter inch hole, and what a drill does is it makes a quarter inch hole. Sellers of drills should talk about making holes not the drill itself. Focus on how the technology is used to achieve an objective, and that objective that it helps the person involved should be the place where they want to be in their desired situation in the future. If you get this stuff correct most of the other things in your business will just be a breeze.
A lot of people ask me, "Sam, how do you make good webinars? How do you make good ads? How are you able to spend so much money on Facebook ads and make this much," or whatever and it's got really not that much to do with the technology. Sure, I've got to learn the Facebook interface, pretty easy, just click around on it, figure it out. Then sure, I've got to learn how the system works, but it's the same as learning any system. What is the budget, what is this, what are the parameters of all of these different things, it's pretty easy. It's technical stuff, you're just learning a system and an interface.
Where the crux of it comes in is what you get to say in those ads, and what you say in those ads isn't a function of being a good copywriter, I didn't get to become a good copywriter by learning copywriting. I got to write good ads and write good copy because I solved a good problem, and I solved it in a good way. All of this stems back, from the very beginning, it comes back to the first principles. What is the market, how do you define them, what is their problem, and then what is their desired situation and what are the things they believe are blocking them from getting there on their own?
If you understand that you can write better copy than most copywriters out there that call themselves copywriters. Not even a copywriter can write good copy for a product that doesn't really solve a need unless they just outright lie, which isn't really good copy and it's not good for your business at all because eventually that sort of behavior will kill your business. My point here is that, it all comes back to knowing your market, finding a problem, and your business is the solution to that problem. Simple.
Now, let's talk about the second reason why businesses fail. This one's a big one, but nowhere near as big as the first. The second one is lack of cash flow. Cash in a business especially in its early days is everything, and why use the word cash? Why am I talking about money? Money is vague. In businesses you've got cash, and then you've got revenue accrual, and there's a difference between these things because cash is how much money you've got in your bank account that's available, and revenue might be how much money you've got in contracts, or how much money you've got in subscriptions that is that you expect to continue for the future, or whatever.
The only thing you can really pay bills on, pay employees with, and really do anything with is cash. Cash is the only tool that actually does stuff, and if you don't believe me go try pay Facebook with some of your accounts receivable, see how that works. They probably won't accept it. You need cash, cash is so important. You know why it's important, but how do you get it? You want to really focus your business on cash. Don't become one of the things that focuses on a vanity metric like revenue because you can have awesome revenue, but be horrible on cash and it will cripple your business. At my business, consulting.com, we measure both. We do everything on accrual and then we do everything on cash, and I really like to look at both, but the main one I'm looking at every day is cash, and you should do the same too.
How do you really engineer your business so that it's sufficient with cash? You want to think how you can create your business or change it, or engineer it so that it's cash forward or capital efficient. Cash forward and capital efficient, those are the two things you want to strive for. Cash forward means that you, basically, receive money and you receive value before you have to pay for it. A perfect example of this would be Amazon. One of the main reasons why they've been able to scale to the levels that they're at, which is the most valuable company in the world ever, is because of their really cash forward business model. What Amazon does is they can get products from suppliers, and hold them in inventory, and then sell them, and then they can collect the money from customers, and then they don't owe the suppliers of that product until two, three months after they've even sold it. They're receiving that money, and then they don't even have to pay for the thing that they sold for like three months.
You compare this to a business, let's say, like, I don't know, like a restaurant business or something. A restaurant business probably has to pay for rent at the start of the month, it has to pay probably its employees weekly, and then it has to pay for all of these grocery items and food, and it has to pay for those up front immediately. All of the resources have to be paid for in cash upfront at the start of the month, and then before they receive cash, so it's the exact opposite of Amazon. They have to spend cash before they get to sell the items they purchased and then receive cash.
When you have a business that's engineered in this way it is nearly impossible to grow because the bigger you want to grow the more cash reserves you need, and the riskier things get, and the more nervous everyone gets especially investors, and you're going to need them if you have a business model like that and you plan to scale. You want to think, you want to wrack your brain for ways in which you can make your business cash forward. How can you sell things to people and then pay for the expenses after you've already receive the money? Think about it.
The second one is capital efficient. Capital is how much working capital do you need in your business to really make it run? What working capital is it's like cash, basically, in your checking account that needs to be there for the business to run, and go through its monthly cycles, or quarterly cycles. The more working capital that your business demands then the harder it is going to be scale. The leaner it is on capital the better, so you want to constantly wrack your brain thinking, "How can I make my company run in a more capital efficient way?" There's lots of ways to do this.
In the beginning, you can use contractors, you can work from home so you don't have a lease, or you don't have an office, or things like that. You can really just think of lots of ways that you can avoid overhead, and avoid spending money before making it. You're always going to have to spend money before making it, but you want to constantly think, "How can I be smarter about it this? How can I re-engineer my business model?" When you do that you're going to have way better cash flow, you're going to have way better reserves of cash in your bank account, and when you do that you're going to have way bigger balls.
One thing I tell people in my master mind is that the amount of cash reserves that you have sitting in your company's checking account is, basically, equivalent to the size of your balls. What I mean by that is the more cash reserves you have in that account the more confidence and the more aggressive you're going to be. I know this firsthand from back when I got started, I had zero reserves and I was constantly in survival mode, and I was so timid that I couldn't even make a phone call, I had no belief, and I wasn't willing to make any big bets, I wasn't willing to really take any risks, and I certainly couldn't weather any storms. I was, basically, living in a terrified state of mind, and I had good reason to be.
What I've noticed is the more I grow those reserves the longer term I can think, the better the decisions I make because I'm planning for the long-term instead of the short-term, the better the products I make, I'm able to hire better team members, and we're able to produce better work, and we're able to actually make more money because of the confidence level, and being able to see and think long-term. When you have small cash reserves you have no balls and you're very shortsighted, you're only thinking about that next client, that next buck because you need it to survive. That's why you want to grow your cash reserves, grow those things up.
You want to have in your bank account enough money to cover more than one year of expenses for your business if it didn't make any money. That's a good little be base metric. You want to have at least one year of cash reserves to pay for your entire business as it exists if zero dollars came in next year. That's just good planning, it's planning for things that are unforeseen, it's planning for changes that might happen in the environment that you might need to react to because there's always things that pop up that we've never planned for. That's why it's important to have those reserves, and it will also allow you to see longer term, make better decisions, and be more aggressive, and make bigger bets on things.
Really, it enables you to be more bold. In business, if you want to do well you need to be bold. Fortune does favor the bold. What I mean by that is, people who are willing to step out and take a swing at things that most other people would just run away from, that's how you get the real quantum leaps in your business. Not just by tinkering with small little things, but the big bets, the bold bets, that's where the big jumps are. In order to take those you need to build up those reserves, and the way you build up those reserves is by being more capital efficient, and having a cash forward business model.
Now, the third thing. What is the third reason why most businesses fail? That is that they don't assemble a good team. This one has a lot of different dimensions to it. It's not that they don't assemble a team, if you don't assemble a team then sure yeah, your business is going to fail because eventually you're not going to be able to handle everything, and eventually you're going to get tired, and you can't work forever. If you don't hire a team at all your business is going to fail. That doesn't mean if you hire a team that your business won't fail. Hiring a team's hard because not just anyone can do the job, and if even if you hire good people if good people don't have good leadership then they become bad people. If people who aren't that good have good leadership sometimes they can change, but sometimes they can't. It's a really interesting multidimensional thing, building a team and managing a team, and really creating a good culture. That's the third reason why most companies fail because they don't assemble a good team.
I'm not really an expert about building and assembling teams, but I've learned quite a lot of things over the past 2, 2 1/2 years since I've moved from just being a [solo-preneur 00:20:55] to having a team. Now, I think including contractors, we've got almost 50 people. What I've learned from that experience is that you really need to hire great people, you need to set the bar really high. A lot of the time with startup businesses they're willing to just hire anyone based on any recommendation from anyone. If you assemble just people like that then you're not going to have a great team. You've got to think about it like a sports team, you want to headhunt the best of the best, you only want to have champions on your team. Then, you need to make sure once you've got them that the standards are very high, that people are working very hard, they're really motivated, they're really bought into the vision, and the mission, and everything, and that good work is being done.
Those are the three main things. The first one is the biggest one by a mile and that is most businesses fail because they don't solve a market need. Make sure you don't fall for this one. The second one is most businesses fail because they do not monitor and manage their cash flow. The third one is most businesses fail because they don't assemble a good team. Those are the three main reasons, from a postmortem analysis, of why most companies fail. If you don't do those things, just like Warren Buffett said, "If I don't go to the place where I know I'm going to die then I won't die," so in your business if you don't go to those places, if you don't make those mistakes then you're pretty much good. Sure, there's some other things, but those are the main ones, those are the main killers. Avoid these three things at all costs. Ask yourself every single day twice a day, maybe three times a day, "Am I making sure that we've got these three things covered," because these are the most important three things that you can possibly think about or worry about in your entire business, and they're not going to change.
This is what I love about great principles, they're not like trends or fads, they're not going to change. In 100 years business is still going to be based on solving needs, and in 100 years it's still going to be based on teams, and maybe it won't be human teams, maybe it'll be robot teams, but still teams. Then, the second one, which I missed in there, is the cash flow, that's still going to be the same. You want to find out what the first principles are in business, what are the things that you absolutely must get right, and the things that aren't going to change or move around with the mood, and the swing of things in the marketplace, focus on those, never let them out of your sight, don't take your eye off the ball, and you'll find your path, and you'll find your destination to where you want to go.
That's it for this video. What I want you to do right now is if you liked this just click that like button, and then also subscribe to my YouTube channel. I release a video like this once every week, and click that subscribe button so that you get notified when I release these. Finally, leave me something in the comments section below, if you enjoyed this, or if you have any feedback, or questions, or also if you want to suggest a topic that you want me to address, or if you've got a question that you want me to answer in an upcoming video let me know. I will be reading those blog comments myself, personally, so let me know your feedback. Thanks for watching.