4 Reasons Why Young People Are Losing Money in Startup Businesses

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Article by: Stephen Kimani

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There is a hilarious yet very accurate clip of a Tanzanian MP lecturing his colleagues in parliament about youth self-employment. He states that even the MPs have sought employment yet they tell the young people to employ themselves.

Photo by nappy

If someone fails to secure employment after school, the automatic advice that follows is to start a business. Starting a business is usually not feasible for unemployed youth, because of insufficient capital. If you are unemployed, where do you get the money to start a business? You do not even have savings or assets you can borrow against.

Today though, I want to take the entrepreneurship conversation further. Let’s assume you have the initial capital you need to start your business, what then? According to Business Daily, small businesses have a 70 per cent failure rate within the first three years. However, if the business is started by a young inexperienced person, the failure rate is almost guaranteed. 

Many factors contribute to the success and failure of entrepreneurs. This article will talk about the factors that can easily make them lose their capital.

Going into a business one knows little about

More than five million young Kenyans are jobless. Due to the lack of employment, most of these young people start businesses to give them their daily bread. However, since they are young, still in their 20s, they know practically nothing about running a business and about whatever industry they want to go into.

Harvard Business Review (HBR) researchers found that the average age of an entrepreneur when founding their company is 42 years, not 20s as many might think. 

When one starts a business in their forties, they have upwards of 15 years of experience, hence they know much more about the business they are starting. They have honed their skills and networks in the field, and are also mentally prepared for the rollercoaster that is business.

Going into a business you know little about is like gambling. You underestimate the costs and overestimate the return. You underestimate the market currents and overestimate your skills and capabilities to create a thriving business.

All the deficits created by overestimating and underestimating issues related to the chosen business are charged to your capital. Essentially, you pay for your mistakes. Some of these mistakes are deadly and can wipe out your capital.

For instance, some time ago I used to sell Kienyeji eggs. I would get a tray at KSh 350 and sell it at KSh 450. On a good day, I would sell five trays and on a bad day, I would sell half a tray. On the day I sold half a tray, I only made 50 shillings. Therefore, I had to eat into the previous days' sales to pay bills, eat and survive. It was very difficult to not eat into the capital, let alone accumulate it to scale the business. 

Before I went into the business, I did not understand the market. I thought I would supply the eggs to shops and other retailers. That proved difficult because the sales were slow. I resolved to go straight to the consumer, and this worked, but now I had to sell the eggs at a cheaper price to undercut the market which shrank my margins. The slim margins made the business strain.

I didn’t know much about the eggs business. I just thought it would be something I could do to make ends meet. I also knew less about business itself. Most young people find themselves in this precarious position. 

The highest probability when going into a business you know little about is that the capital you have will not give you the runway you need to succeed, and you will burn it all before you take off.

Not doing enough research

Nowadays, when researching a business you go online. You read blog posts and articles. You watch YouTube videos and even join Facebook groups where such business is discussed. This is a great first step.

You can take this a notch higher and even visit established businesses and talk to their founders. You can even shadow them for a few days. If you do this, you are doing great. However, you still fall short of your optimum research to go into the business.

Small businesses are not like publicly traded companies whose financial statements you can access to determine how well they are doing.

In my brief experience in business, people are more inclined to share what is good about their business and hide the difficulties. Therefore in your research, you are more likely to hear or learn from a biased point of view. 

Doing research online and talking to a few people in the business you want to go into will not prepare you enough. You will therefore make a lot of mistakes, and pay for them out of your pocket. And the likelihood is that you will run out of capital in the process.

The reason the average age for a successful founder is 42 is that they have stayed in an ecosystem for more than 15 years. They have seen all the cycles of the business, and they have interacted with the customers, suppliers, and workers in the space. They understand the nuance of the industry to the nitty gritty. This would be the most ideal situation when establishing a business, working with your experience.

Not identifying a specific niche for your business 

Most small businesses started by the youth are copycat businesses. They are shops and kiosks. Therefore, there is very little innovation in the businesses. This is understandable because it helps hedge the risk.

Innovation is costly, small businesses cannot afford the price of innovation. However, business principles state that a business has to address a pain point of the customer.

What pain point will another shop on your street be addressing? 

For a business to thrive, it has to have a specific niche. The reason one shop survives is different from the reason of the next shop. They might be selling the same thing, but if you pay closer attention, each shop has its own niche.

You might add a third shop and have to close down soon after. In such saturated markets, it is very difficult to disrupt and create a unique niche. 

To survive, you will need to stay in the game long enough. To stay in the game that long means absorbing the costs and the losses. Do you have enough capital to burn till the business comes around?

Losses are a part of business

Business is many things and one of them is a money-burning machine. Amazon, one of the biggest businesses in the world, turned a profit after 9 years. This means that the business was sinking money for close to a decade. They turned a profit by firing a seventh of their workforce and closing down distribution centres.

The game of business is like a game of sinking money for as long as you need to before reaping anything back. 

Therefore, if you are going into business, be ready to lose money.  Like a wise gambler, only play with that which you can afford to lose. 

Many young people in the country, however, do not have enough to eat, leave alone money they can afford to lose. Truly a catch-22 situation.

Wrapping up

When you have the capital to set up a business, two factors that could make or break you are your knowledge and experience. Ensure that you gain as much of both as you can, and apply them well in your business.

What is your experience in business? Have you lost money?  How much have you lost?