8.4: Advantages, Disadvantages, and Considerations
What you’ll learn to do: discuss the advantages, disadvantages, and important considerations of starting a small business
As author and retired entrepreneur Carol Denbow writes in Are Your Ready to Be Your Own Boss?, “If you want your new business to succeed, you must know why most businesses fail.” New business survival statistics are grim. From 2005–2017, approximately 21% of new businesses failed in the first year. Roughly half of new business fail within 4 years. And only 33% of new businesses survive for 10 or more years. Why do you think that is? Denbow’s next sentence provides a clue: “Most people spend more time planning their vacations than they do their new businesses.” In this section, we’ll discuss the pros and cons of starting a small business and, in particular, how to improve the odds of success.
Learning Objectives
- Explain why some business ventures fail
- List important considerations in deciding to start a business
Advantages and Disadvantages of Small-Business Ownership
There are very few things in life that can compare to the experience of creating your own business. As investor and former entrepreneur James Caan expresses it: “Nothing will ever replace the thrill of creating a profitable company from scratch.”
Starting a small business is a matter of self-selection and self-determination. While the founders of small businesses still are a part of the society they live in, their business ventures can allow them to step into an alternate reality, part of a social order in which each person—regardless of gender, race, ethnicity, religion, birth or circumstances—can achieve their fullest potential and receive recognition for their achievements.
A small business owner has an extreme amount of latitude in both business and lifestyle choices, from developing the business concept and operating environment to defining success. The benefits—measured in impact, revenue, or infrastructure terms—are essentially unlimited. Perhaps the most nebulous, but important, benefit of being a small business owner is the freedom to choose your business’s purpose and goals.
The flip side is that you own the decisions and the results of those decisions. Evasion is not an option: you can’t say, “it’s not my job,” point fingers, shrug or check out. Additionally, as a small business owner, you will probably be risking your own (and, perhaps, friends & family) capital. Essentially, you’re flying without a net. There’s no guarantee of a regular paycheck and no paid or subsidized benefits (including a retirement plan, holidays, or perks). You’re responsible for business development, business planning, HR, IT, and every other function as well.
Freedom from an employer’s expectations comes at a cost: you’re responsible for setting and managing expectations—for yourself and others—and for making the magic happen.
practice question \(\PageIndex{1}\)
This section is a discussion of the advantages and disadvantages of starting a small business. According to the author, the underlying advantage to starting a small business is the freedom to make your own decisions regarding what the business is and what it does. But on the other side of the coin, the author reminds us that there is a price to pay- what is that price for the freedom from an employer’s expectation?
- The founder owns all of the responsibility for expectations and results.
- The founder sets the hours of operation for the business.
- The hounder is responsible for selecting employees
- The founder must maintain accurate records
- Answer
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a. To be free of the expectations of an employer, the entrepreneur must accept the responsibility of self-expectation, as well as, the results of the business venture
Why Some Ventures Fail
Denbow’s point about the importance of planning is cited in virtually every list of causes of failure. Why is this so critical? Failure to do the research, analysis and financial projections that business planning entails makes a small business more vulnerable to the following common causes of failure:
- Inability to execute on the business concept
- Lack of or insufficient market demand
- Lack of product or service (competitive) differentiation & other marketing issues (the four Ps of marketing)
- Lack of awareness of and/or ability to respond to emerging trends, relevant developments (technology, regulatory, geo-political, environmental) and competitive actions
- Overdependence on a single customer
- Inability to manage growth
- Inadequate cash reserves or failure to effectively manage cash flows. Related point: inadequate cash controls or personal/business separation, including using business revenue as a personal slush fund
- Insufficient management experience or product/services expertise
- Lack of self-awareness and related personal/professional development
- An inability to acknowledge weakness and/or compensate for skill and expertise gaps
One of the most critical risk factors is the founder’s attitude and self-awareness, including the ability to objectively assess his or her management skills (or accept external feedback on this point), recruit to address skill and expertise gaps and effectively delegate responsibilities.
Statistics aside, it’s important to understand that failure isn’t final. The upside of failure is experience, a factor that contributes to success. Thus, the phrase “fail forward.” As Mike Maddock notes in his take-off on this concept: “the most inventive people are usually the best at failing forward, i.e., learning from what went wrong.”
practice question \(\PageIndex{2}\)
What are the underlying factors of the causes for small business failure?
- Government regulation
- Economic recession
- Failure to do the research, analysis and financial projections and the founder's attitude and self-awareness
- Failure to attract the right business partners
- Answer
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c . According to the author, these are the most critical factors contributing to the various causes of small business failure.
Considerations When Starting a Business
The three fundamental questions to consider when deciding to start a business are:
- Do you have what it takes?
- Do you have a viable concept?
- Is the reason you want to start a business consistent with your character and concept?
Yourself
Do you have what it takes?
The entrepreneurial assessments discussed earlier this module are a good starting point for self-assessment. Additionally, you might want to take the Grit Test developed by psychology professor and researcher Angela Duckworth.
Another way to approach the question is to review the type of questions a founder might ask in an interview and consider whether you would hire yourself. For perspective, scan the questions —and thought process behind the questions—shared by startup leaders and others in Firstround.com’s The Best Interview Questions We’ve Ever Published. According to Anne Dwane, one of the serial entrepreneurs interviewed, “the most important quality any start-up leader (current or aspiring) can have is adaptability.” To get at that, she asks (and you might want to ask yourself – and reflect on your responses) the following questions:
- What have you started?
- How would you describe yourself in your own words?
- How would a colleague describe you in three adjectives?
- What current trends are you seeing in your profession? (Substitute your target industry/market for your profession)
- What new things have you tried recently?
Additional questions to consider include Koru co-founder and CEO Kristen Hamilton’s questions regarding grit, rigor, impact and ownership.
Your Concept
Do you have a viable concept?
Viability is something that will come out of the business planning process, which we will discuss in the next few sections. Before you dive into a business, it’s essential to do careful planning to ensure that the venture has potential to succeed. Jumping in with no information and no plan is a recipe for disaster.
Your Business
Is the reason you want to start a business consistent with your character and concept?
The third consideration is doing a reality check on why you want to start a business. Consider Dwane’s opening question: “what motivates you and what do you want to do next?” Can you connect the dots? Starting a new small business will require a lot of time and energy—if you’re not truly passionate about your venture, especially when it’s new, it (and you!) won’t be able to stand up to the stress of day-to-day business.
practice question \(\PageIndex{3}\)
Besides the importance of self-assessment (does the founder have what it takes) and matching the venture with the founder’s character (is the business consistent with what the founder wants to do), what is the third most-important element in deciding to start a small business?
- Conducting a self-interview
- Conducting a customer survey
- Conducting a business planning process to create a viable concept
- Conducting a reality check
- Answer
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c. Besides the characteristics of the entrepreneur's personality and make up, conducting a rigorous planning process is vital to an informed decision to start a small business
Starting a business
Starting a business doesn’t have to be an all or nothing proposition. A number of successful entrepreneurs developed their business concepts while in school or working a traditional job. In his “The Surprising Habits of Original Thinkers” TED Talk, Organizational psychologist, professor and author Adam Grant discusses the mistake he made in passing on an opportunity to one of his student’s start-ups. He assumed that because the founders were working internships while developing the concept and had lined up jobs as a Plan B, they didn’t have the commitment to make the business a success.
The business the students launched: Warby Parker, a glasses e-tailer that Fast Company named as the world’s most innovative company in 2016. Warby Parker is currently valued at $1.75 million. For additional perspective, read Jason DeMers The Pros and Cons of Starting a Business While Working A Full-Time Job for Entrepreneur.