Guest post – Mike Harris talks small business failure

The following is a guest post from Mike Harris, a serial entrepreneur, creator and CEO of billion pound iconic consumer businesses Egg, Firstdirect and Mercury Communications, and is currently Executive Chairman and co-founder of one of the UK’s innovative young technology companies, Garlik.

The vast majority of  new  business ideas  do not turn into  successful businesses. VCs and angel investors  who back ambitious business ideas which need significant early stage funding are very cautious about who and what they will invest in because they have learned that even the most compelling pitch can soon turn to dust once the business gets going.

Even  new businesses with modest ambitions  – perhaps someone merely wanting to earn a living working for themselves -  come to grief often enough for banks to be extremely wary about who they will lend to.

At one level the reason businesses fail is very simple- they run out of cash. This is true of all businesses from the largest to the smallest. It takes catastrophic economic conditions or serious strategic errors to bring a large business down in this way but for small businesses it’s very common and can even be  the result of  apparent success – too fast an expansion eats up available cash even if profits look healthy. You  need more cash to continue than your backers are willing to provide . You are thinking it’s great but  banks and investors just see the risks.

My advice  to small businesses it to repeat to yourself a hundred times a day – CASH IS KING and watch the cash flow  obsessively. New businesses always underestimate how much cash it will take to get established – in the early days think how much cash you are going to need over the next 6 months and then at least double it. If you can’t put your hands on that amount of cash easily – slow down!

In the early days if you worry about cash, profit will take care of itself  – don’t worry about profit until cash is completely under control.

If you are going to go beyond survival and actually build a valuable new business you have to go beyond managing cash.

There’s a magic success formula for all businesses of all shapes and sizes.  After  a lack of attention to cash flow a lack of attention to this success formula is the root cause of most  new business failure or disappointment .

Here it is:

Successful   businesses have three characteristics:

• They differentiate themselves from everything else out there
• They communicate that differentiation powerfully to everybody that they may be of interest to and indeed everybody  they are exposed to
• They execute that differentiation near flawlessly

In this article I’ll cover how to perform a quick check that your business has sufficient differentiation. In future articles I’ll cover the other two success factors .

Differentiation Basics

When you try and introduce  a new product or a new   service  to the world  you are competing with numerous existing businesses and numerous   successful products and services which are already on the market.

To stand any chance of success your idea  must  turn into a set of products and services which  represent some sort of breakthrough for people in achieving things that matter to them  in their personal or business lives  ie the idea must address currently unmet needs , both rational (ie what something does) and emotional (ie how something makes me feel or how something makes me look).

Differentiation Quick Check

Ask yourself how is this idea different from what’s already available to people?  What problems is it solving  in a new and better way, what is it making possible that wasn’t possible before, what new and desirable experiences is it providing?

Ask yourself how many people this would appeal to and would the cost be worth it to them (remembering people measure cost in time, complexity and  quality of experience as well as  money).

Try it yourself  – ask yourself those questions about the VCR when it was first introduced, Sky Plus, email, Satnav , Google,Facebook, Twitter, the ipod, the iphone, and two of mine Telephone banking (Firstdirect) and Internet banking (egg).

I’ll think you will find you get very clear and compelling answers.

When I ask those questions on any business  pitched to me however  I rarely get  clear and compelling answers. Those with the resilience and determination needed to be successful  often come back to me later with a much better pitch – sometimes this pitch tells me the business has a chance , sometimes it becomes very clear to both of us they are wasting their time on this particular business and they should go and find another one. I tell them  if you are going to fail it’s always good to fail  as early as possible and as cheaply as possible.

If you read the story of most successful entrepreneurs you will find a lot of quick, cheap failure!

Mike has been extensively featured in mainstream media including The Guardian and now here at WeLoveBusiness.co.uk. Mike is now heading up The Difference Engine UK, set up in July 2009. It is a business partnership between Anurag Gupta’s company The Difference Engine inc and Mike Harris’s company  Find Your Lightbulb Ltd.