Avoid Common Mistakes When Starting a New Business

“Self-confidence is the first requisite to great undertakings.” – Samuel Johnson


About four years ago, Jeff Landers, a New York real-estate broker, discovered what he considered a very big, untapped market: Many large companies had surplus space or offices they wanted to rent, but few commercial-real-estate agents were interested in brokering those deals. The solution? He started a cyberspace advertising business that Landers believed would make him the next Jeff Bezos.

To lure customers to his site, Landers posted a special introductory offer that gave away a free ad for a year. His objective: convert the freebies into paid listings ($59.95) in subsequent years. That sounds like a dubious marketing strategy to me, but what interests me here is how Landers pursued this strategy.

He spent most of his $10,000 life savings on building his website. When it was done, he was happy — until he realized he’d forgotten to do the First Thing. He’d failed to find a way to make a profitable sale!

So, at the 11th hour, he hired an expensive advertising firm and spent the rest of his nest egg on various selling schemes. Unfortunately, the advertising company he hired wasn’t composed of marketing geniuses. They tried this and that . . . and his bank account got lower and lower . . . and before long, he was broke.

A more experienced businessman would have stopped there, but Mr. Landers was still convinced his product would work — and since his advertising company was still convinced that he should keep advertising, he went to the bank and borrowed money.

It’s way too easy to throw good money after bad . . . and it’s hard to admit you’re wrong. What will happen to Mr. Landers? I don’t know. It appears that he’s still in the office-rental business — but, after four years of trying, his Big Idea still hasn’t become the blockbuster success he had envisioned. Meanwhile, let me tell you the story of another business — one that is going strong.

Car repairman Jack Panzarella had a very different idea for starting his business: He invented those silly, neon glowing things that some people install underneath their car frames.

When he came up with this toy in 1990, he had a mere $1,000 to his name. About a third of that paid for the installation of his first two neon-light systems, with the balance — and most of Panzarella’s time — devoted to selling his idea to auto shops and hawking his wares at car events.

Panzarella spent all his spare time traveling around, showing off his invention, and signing orders. They came slowly at first, but single sales often led to repeat customers. His products attracted a lot of attention and people heard about them by word of mouth.

He collected deposits, enough to build the systems ordered, delivered them, and then reinvested the profits in selling more systems. For months, he put nothing in his pocket, spending nothing on office space, executive perks, or product improvements. He just sold and sold until he knew exactly how to sell his product profitably.

After about a year of this, he had a working business. It wasn’t perfect, but it was profitable. Gradually, using only the cash flow he could spare, Mr. Panzarella began making improvements — fixing up his shop, buying some new tools, and ordering inventory.

By devoting his attention to selling first and taking care of the secondary business concerns later, Panzarella ensured that his fledgling enterprise would not suffer the normal (and normally lethal) cash shortages most first-year businesses encounter.

Today, Street Glow Inc. distributes its expansive product line nationwide and in 52 countries around the world, garnering millions of dollars in revenues. Without sales, as they used to say at the Rockville Center Billiard Parlor, “you got gots.”

Business plans, product revisions, and customer-service programs are all very important. But for a new business, nothing is more important than sales.

It may be the single most common mistake in starting a new business — spending precious capital on “secondary” considerations. What is secondary? My list would include real estate, office equipment, stationery, business cards, employees, software, and sometimes even the product itself.

What is primary? I’d put it this way: The first and most important consideration of any new business is the fundamental selling  proposition. Can you really sell your product/service the way you want at the price you want?

For example, say you wanted to open a steakhouse in your hometown. There are many considerations you would have to take into account, including location, decor, staffing, the menu, and so on. But before spending too much on those things, you would need to find out — somehow or other — if people in your area want to eat steak for dinner. Doesn’t that make sense?

It’s amazing how much money people will throw at a new business without ever getting an answer to this simple question.

I’ll give you an example. This happened just the other day.

I was introduced to a young man who was in the process of setting up an Internet counseling business. He (and his backers) had already spent a fortune on the website and he wanted my advice on putting together a huge network of counselors to respond to the big advertising blitz he was planning. “What is the best way to attract these counselors?” he wanted to know.

I told him I thought he was making a big mistake. I told him that his primary business consideration should be: “Can I provoke (through advertising) people to log on to and pay for counseling online? And if so, how much will they pay for it?”

I tried to explain to him that his current business plan would have him spending over a million dollars before he answered that primary question. The first thing he needed to do — and the main thing he need to spend his money on now — was to find out how much it would cost him to acquire an online client and how much net revenue that client would be worth. That, I said, would cost him about $50,000, not a million. And, when he was done — in 30 days — he would know with confidence if he had a viable business idea.