Why Does Starting a New Business Take 3 Years?

So, you want to start a new business? First off, good for you! There’s nothing more rewarding than creating something of your own and watching it blossom.

But, as I’m sure you’ve heard, the stats say you are likely to fail.

Why Does Starting a New Business Take 3 Years

Starting a business takes time and money. Sometimes that’s not a bad thing, however. Learning how to create a business is a journey of discovery, not just of the new entity, but of yourself.

But, why does starting a new business take 3 years to shine? Well, there are a host of reasons. But for this piece, just know that the stats don’t lie. The payoff for successfully developing a profitable business is massive, but the probability of reaching that goal is low.

Is it worth it to reach for the stars??? YES! Just know that fleshing out a well thought-out business plan doesn’t happen overnight.

Let’s look at the numbers. After 1 year in business, only ~80% are still open. After 5 years, that number drops to around 50%. Check out the following chart and you’ll see how steep the slope is for the first 1-7 years.

But, why is that?

Starting a Business Requires Failure

If you are wanting to start a business, let’s hope you can fail AND keep going. I truly believe that being a great failure is the key to success in business.

Having a great idea and being able to deliver a product or service in a format that a consumer wants takes time and lots of trial and error. If it was easy, we’d all have monster businesses, right?

The reality, though, is that a business takes years to construct. Behind many of those “overnight successes” is likely a story of massive failure and defeat. Oftentimes, we never hear about famine, just the feast.

The first few years in business are critical. Poor planning is likely the most common reason for businesses shutting their doors. Running out of runway (ie…$$$) can lead to a crash and burn. Can a person new to entrepreneurship really plan for how tough it is mentally? Probably not. But, that’s what’s great about life.

As Mark Twain beautifully put it, Good decisions come from experience. Experience comes from making bad decisions. Those 2 sentences encompass entrepreneurship better than anything I’ve ever read or experienced. Put even more simply, failure = experience.

3 Reasons New Businesses Take Time to Build

For starters, the mental and physical stresses of taking the leap are massive. Ask any entrepreneur and they’ll likely agree that the first few years are brutal. The first reason new businesses take 3 years to succeed is because you have to find out if you have what it takes to keep going year after year.

There is so much rejection in the formative years, which can kill a new business owner’s spirit. But, rest assured, it is necessary. I say this because when you get enough feedback from the market that is negative, that is the signal that makes or breaks you.

Those that can accept the criticisms and pivot will find eventual success. While those that continue on the path of no change will likely fail.

The 2nd reason new businesses take 3 years to succeed can be summed up in two words: track record. A track record only comes over time. There is no way around it.

For example, trying to start a home remodeling business from scratch with zero evidence that you can actually do the job is a tough row to hoe. Who wants to take the dive and be the first to give you a shot at redoing their home?

Eventually someone will…maybe a family member or maybe you’ll decide to remodel your own home. The bottom line here is that your track record will take time. It builds trust. Also, it has the ability to show the market that your business has been around for a bit and likely has prior work to point to when making a pitch to a prospect.

Remember earlier when I discussed experience? Prospects need to see that you have the experience and know what you are doing.

Finally, the 3rd reason new businesses take 3 years to succeed, is simply running out of runway…ie money. This is critical because if you can’t support yourself financially, how on earth can you support a business? Simple…you can’t.

A business is a living breathing thing. Just like one of the pillars in personal finance is having an “emergency fund” for just in case, you should think the same way about a business. Most likely, you’ll never know the exact amount of money you’ll need to carry you until your business breaks-even.

A great rule of thumb I like to use is to have more saved than what you assume you’ll need! Being over-prepared monetarily can’t be stressed enough. This is why you hear about side hustles a lot these days, which is keeping your day job while you work on your new business/hobby in your free time. Being able to not have to worry about next week’s paycheck is a huge burden to remove when fleshing out your new idea.

The Bottom Line

Starting a business can be one of the most rewarding things you can do. But, it comes with its own set of challenges. Being prepared for the rough journey ahead is the key. Just like my 9th grade teacher used to say, “proper planning prevents poor performance,” – if you lay a strong foundation, you’ll be ready to rock!

-PFkid