Entrepreneurs

The top 3 reasons why entrepreneurs fail

Wipeout
Stefano Rellandini | Reuters

While the specific statistics are tough to nail down, it's widely reported that the majority of new businesses fail, many citing a 90 percent or more failure rate within five years.

What's the cause? Here are three of the top reasons that entrepreneurs fail, so that you can avoid the same fate.

1. They don't give themselves enough runway.

You often hear that it's cheaper and easier to start a business in many industries nowadays thanks to technology. However, the cost of starting up is only one "cost" factor related to a new business.

Many people do not understand that it typically takes two to three years for a business to build a true foundation. This means that you need to not only have enough money to start the business, but also to operate it while it stabilizes and to live on over that two- or three-year period.

I often use the acronym "TGFO," which means "Thank God for Oprah," because when Oprah Winfrey started her network, OWN, it took her between two and three years to get it to that foundational point.

If it took Oprah, who had every monetary and other resource imaginable at her disposal, plus a raving, large fan base, a few of years to get her businesses to the point of a solid foundation, you should expect it to take you at least that long, too.

If you don't take this two- to three-year view, you may end up having to close up shop before the business gets a fair chance to survive.

2. They don't know what being an entrepreneur entails.

Many aspiring entrepreneurs have a fantasy-driven view about what it means to own a business. Thinking of an idea is fun! Writing a business plan and picking out your logo is fun! Executing that idea as a business day in and day out is not always fun. So the best preparation is getting real about what it means to own a business.

Everyone thinks that if you love to do something, you will get to do more of it when you run a business. That could not be further from the truth. When you run a business, you have to do and oversee so many functions, from marketing to accounting to employees to customer service and more. At the end of the day, you actually spend less time doing whatever it is you enjoy doing.

If you like to bake cakes or create music, you end up spending less time doing that because more of your time is spent on those other business-critical tasks. You'd spend more time doing what you love with a job in that function than with a business in that industry.

Also, there are far too many people willing to risk their entire life savings (and often family and friends' life savings too) on a business that they have absolutely no experience in and haven't prepared for.

Before you start, get some experience so that you know if you even like that business, let alone want it to be your sole focus for years. Some ways to get experience include getting a job in that industry, asking to follow someone who is already running a similar successful business, reading and researching to understand all aspects of running a business, getting advice from experts within your field, and crafting a business plan with milestones that you want to achieve and smaller steps that will get you there.

This way, you won't end up quitting or failing from what you don't know.

3. They don't have a market for their product or service.

One of the most critical steps an aspiring entrepreneur can take before starting to help ensure some level of success is to make sure that there is a market for their product or service. As important, it also tests to see if the aspiring entrepreneur can reach the target market as well.

Try testing out your product or service on a small scale first. If you want to make cupcakes, for example, make sure that you not only can get some orders, but that you get repeat, frequent orders from customers before investing in a storefront. Or consider doing a pop-up shop or food truck on a smaller scale to hone your business skills.

Also, make sure that the market wants the product or service at a price that makes you money (assuming that you are not a high-flying tech company, for which the rules of the game are different). If you have a camp for pets, it may be only worthwhile for you to start if you can charge $100 a day to cover your costs, but most pet owners won't pay that price.

Testing assumptions, doing research and going small-scale allows you to pivot instead of falling flat on your face.

Carol Roth is a "recovering" investment banker, entrepreneur, investor, speaker, small-business advocate and author of The New York Times bestselling book "The Entrepreneur Equation."