Starting a small business means making mistakes, particularly for first-time entrepreneurs. So how do you keep your business from becoming a casualty of your own inexperience? Seeking the advice of those with expertise and wisdom is one way to avoid the pitfalls.
NerdWallet wanted to pin down the most common mistakes made by first-time entrepreneurs — and how they can avoid them. So we put the question to educators involved in entrepreneurship programs at universities across the country. Here’s what seven of them had to say:
This is Part 2 on common mistakes for first-time entrepreneurs. See Part 1 here.
Mistaking belief for evidence
“The most important mistake that I see entrepreneurs making is that they fail to appropriately manage information about their idea. [They] often ‘believe’ their idea is a good one, and hence they often do not actively solicit information that enables them to learn if their idea is actually one customers will pay for.
“One way first-time entrepreneurs can avoid this mistake is to view their idea as a hypothesis, and design experiments to examine if customers will actually pay for it. If the idea passes this first hurdle, the next set of experiments should try to figure out what is the most effective way to reach those customers who are interested in purchasing the product.”
Find a mentor who doesn’t tell you what to do
“My favorite type of entrepreneur to work with is those who are independent thinkers who also learn from as many sources as possible. … [They] carefully listen to advisors, investors and mentors, and then they decide what advice to take and what advice to ignore. One way to cultivate this approach if you don’t have it is to find a mentor who helps you think through problems, instead of telling you what you should do.”
— Jonathan Eckhardt, executive director of the Weinert Center for Entrepreneurship at the Wisconsin School of Business, University of Wisconsin-Madison
Misestimating and misunderstanding
“Most first-time entrepreneurs stumble on these three mistakes: overestimating the size of the market and what strategies it will take to penetrate and develop that market, underestimating the funds needed for the startup, and not understanding their cost structure.”
Find a sounding board
“Pay attention to the advice you receive. No consultant likes saying, ‘I warned you about that.’ Involve your banker, accountant and legal advisor early on, and make sure you understand how to answer (and avoid) the three most common mistakes I’ve mentioned.”
— James Donaldson, professor of economics and business administration at Juniata College
Thinking ‘I’ll just charge less’
“I’ll echo Jim [Donaldson] that unfortunately there is more than one common mistake that first-time entrepreneurs make. I’ll add that most first-time entrepreneurs have trouble understanding how to price their products and services — their typical response when I ask that question is usually, ‘I’ll just charge less than my competitors and undercut them in the market.’ This mindset, along with not really understanding what it costs to provide their product or services, usually is devastatingly eye-opening. Most first-time entrepreneurs tend to look at their products and services from their own point of view and not understand what the customer really wants or needs.”
Don’t try to do it all
“Don’t discount testing the waters — try your product or service out on a small scale. Most first-timers are surprised to learn that they could actually test their product with often little or no significant expense.
“Don’t try to do everything yourself just because you think it will save you money. While there are cases to be made for bootstrapping, sometimes it will pay to have the right person do something for you or with you.”
— Terry Anderson, director of the Center for Entrepreneurial Leadership at Juniata College
Failing to focus on execution
“I think the most common mistake is that individuals just create businesses that don’t have as many customers as they think they will have. So they overestimate the demand for their product or service. The other mistake is that they don’t focus enough on execution, because as you know, you could have a brilliant business idea, but if you don’t execute in an exemplary manner, it’s just going to be frustrating for your customers.”
Talk to people
“Go out and talk to potential customers. Oftentimes, people launch businesses without talking to a single customer. They think they have a really good idea, and it seems obvious to them the business is a good idea, but when they try to market it, they find they have a lot fewer customers than they thought they would have. …
“[Get familiar with] all the nuts and bolts aspects of starting a business. Really, it’s helpful to study that process. Almost any Barnes & Noble bookstore has good books on the fundamentals of how to start a business. It’s good to study that process before you jump in.
“The one piece of advice I would give on the positive end is not to let anyone tell you that you can’t do it. Sometimes naysayers, which could be well-intended friends or family members, will say, ‘Oh you can’t do that’ or ‘It’s going to cost too much money.’ And yet, there are many examples of people that didn’t have a lot of money or experience but, as a result of hard work, perseverance and passion, have succeeded and have had very rewarding careers as a business owner.”
— Bruce Barringer, department head of the School of Entrepreneurship at Oklahoma State University
Missing the mark on financing
The most common mistake is “failing to calculate the amount of financing needed and to arrange adequately for that financing. It helps if the entrepreneur understands the best sources of funding for new companies, which are — depending on the evolution and experience of the entrepreneur and his or her business concept — in this order: personal savings, friends and relatives, business associates, angel investors, and venture capital.”
Three personality traits of a successful entrepreneur
“Successful entrepreneurs come in all shapes and sizes, but for someone to be successful as an entrepreneur, it helps if they have a strong sense of urgency, realism and conceptual ability. Their constant sense of urgency will help them take advantage of time, their most precious asset. Their ability to be realistic will allow them to create a successful strategy as a situation exists, rather than complaining about all the obstacles in their way. Their conceptual ability will allow them to recognize a problem, assess it and seek a solution while others are still trying to determine whether there is a problem.”
— Jerry White, director of the Caruth Institute for Entrepreneurship at the Cox School of Business, Southern Methodist University
Not having a business plan
“There are many common mistakes at various levels. The most serious is the lack of a business plan. The ideas come easy, but the execution is very difficult. Creating the plan allows the entrepreneur to discover and identify pitfalls and problems. Mistakes can be avoided, if they can be identified.
“Another common mistake is the mispricing of your time. Entrepreneurs and small businesses many times will assume that since they receive the profit of the company, they don’t specifically include the time they spend into the cost of the product or service. This produces a false sense of profit when they are only recouping their salary.”
First, work for someone else in the industry
“When I am approached by someone for advice on starting a new venture, my advice is to work for someone else in the industry first. Understanding the business environment, the industry trends, the competition and the talent is not something you can learn from a book. The chance to make mistakes and get your hands dirty on someone else’s dime is invaluable.”
— Mike McAteer, professor of management and entrepreneurship at Berkeley College
Treating yourself as your market
“I think the biggest one is when … you work within your own silo. You’re down working in your basement for six months, and you throw it out to the world, and you stand there waiting for everyone to come to you, and you hear nothing but crickets. That’s the old model of how to build a business.
“People are still being educated on the new way to build a business, which is the lean startup methodology, which is to use customer discovery and build a solution for a problem that the customer wants. How to solve a problem for others, as opposed to you. If you’re only building something that you want, then you have a total addressable market of one, but if you figure out what the customers want before you build something and invest, you can have a total addressable market of millions.”
Get out into the world
“Get out of the office, your building, your homes, and network with other entrepreneurs or other people in your ecosystem, and find out how others are going about solving problems and working in their market to address the similar problems. It’s shown that teams of two or three are always more successful. … So if they can form some relationships with people that have complementary skills, they are much more likely to succeed.”
— Jason Frasca, entrepreneurship instructor and startup mentor at Montclair State University
For more information about how to start and run a business, visit NerdWallet’s Small Business Guide. For free, personalized answers to questions about starting and financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.
Top image via iStock.