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10 stupid mistakes the newly self-employed make

Having been a non-employee for about 14 years now, I’ve made my share of stupid business mistakes.

I have also coached a number of people to start their own businesses, and I’ve seen many of them make similar mistakes. This advice is geared towards small business owners, particularly people who are just starting (or about to start) their own business.

by Steve Pavlina

1.  Selling to the wrong people.

While sales are important to the survival of any business, you don’t need to push your business on everyone you meet, including friends and family. Furthermore, it’s a waste of time to try selling to people who simply don’t need what you’re offering.

wrong-way-sign-dreamdoSelling to the wrong people includes trying to sell to everyone. Some customers are much easier to sell to than others. For example, my wife did web consulting for small businesses, and she’s learned that some clients are much harder to work with than others.

If a potential customer is broke and obsessively worried about every nickel they spend, if they want a web site but don’t know why, or if they simply don’t understand the internet well enough, they won’t be a good client in the long run.

Feel free to say no to customers that are more trouble than they’re worth. Let your competitors sell to them instead. You’ll save yourself many headaches, and you’ll free up more time to focus on serving the best customers.

Just because someone is interested in doing business with you doesn’t mean you should accept. In my first year in business, I probably said yes to at least 50% of the people who approached me with a potential business relationship. I wasted a lot of time pursuing deals that were too much of a stretch to begin with. I accepted lunch invitations from random business people who just wanted to “see if there’s a way we could do something together.” Virtually none of them made me a dime.

If you think a meeting is pointless, it probably is. Don’t network with random people just because you think you’re supposed to network. Today I accept such invitations less than 1/10 as often. If an offer doesn’t excite me right away, I usually decline or ignore it. Most relationships simply aren’t worth pursuing.  Learn to say no to the weak opportunities so you have the capacity to say yes to the golden opportunities.

2.  Spending too much money.

Until you have a steady cash flow coming in, don’t spend your precious start-up cash unless it’s absolutely necessary.

I started my computer games business with about $20,000 cash (my own money), and it went fast; shortly thereafter I was using debt to finance the business. Unfortunately, the original business model didn’t work, and it took five years before the business was generating a positive cashflow.  I soon learned that every dollar invested in the business was another dollar that eventually had to be recouped from sales.

In 2004 I started this personal development business with only $9 cash even though I could have spent much more on it. No fancy logo, no snazzy web design, no business cards or stationery. I paid to register the domain name, and that was it. That’s as much as I was willing to spend before I started generating a positive cashflow. All other business expenditures came out of that cashflow.

Your business should put cash into your pocket, so before you “invest” money into it, be clear on how you’re going to pull that cash back out again.

Obviously some businesses require lots of cash to start, but in the age of the Internet business, you can very easily start a lucrative business for pocket change.

3. Spending too little money.

It’s also a mistake to be too stingy with your cash. Don’t let frugality get in the way of efficiency.

Take advantage of skilled contractors who can do certain tasks more efficiently than you can. Buy decent equipment when it’s clear you’ll get your money’s worth. You don’t have to overspend on fancy furniture, but get functional furniture that helps you be more productive. Don’t use an antiquated computer with outdated software that slows you down if you can afford something better.

It takes time to develop the wisdom to know when you’re being too tight or too loose with your cash, so if you’re just starting out, get a second opinion. Often the very thought of getting a second opinion makes the correct choice clear. If you can’t justify the expenditure to someone you respect, it’s probably a mistake. On the other hand, there are situations where it’s hard to justify not spending the cash.

4.  Putting on a fake front.

Many one-person businesses refer to themselves as “we.” That’s something a lot of new entrepreneurs do, but it isn’t necessary.

There’s nothing wrong with a one-person business, especially today. My games business has mostly been a we over the years, but my personal development business is still an I. My wife’s VegFamily Magazine business is a we, since she has a staff working for her, but her web consulting business is an I.

It’s perfectly okay to refer to your business as an I when you’re the only one working in it. Pretending that you’re a we when you’re really an I is a bit silly. It’s not going to gain you any respect in a way that matters. Promoting yourself as an I may even be an advantage today, since people will know the buck stops with you, and if you make a promise, you’re the one who will carry it out. Promises from a we sometimes aren’t worth very much.

If you’re a newly self-employed person, don’t pretend you’re anything else. Price your products and services fairly for your level of skills and talents. Some newly self-employed people think they must become actors. The business they promote to the world is pure fantasy.

Trying to fool your customers in this manner will only backfire. If you’re so desperate for business that you need to lie, you shouldn’t be starting your own business. If you can’t provide real value and charge fairly for it, don’t play the game of business. Develop your skills a bit more first.

5. Assuming a signed contract will be honored.

I’ve made this mistake more than I care to admit. I’ve had signed contracts with supposedly reputable corporations, and they weren’t worth squat when the CEO decided he wanted out of the deal, even for completely dishonorable reasons.

Sure, I was in the right, but did I want to go to court to enforce it? No, I’d rather continue doing meaningful work.

A signed contract is just a piece of paper. What’s behind a signed contract is a relationship. If the relationship goes sour, the contract won’t save you. The purpose of a contract is to clearly define everyone’s roles and commitments. But it’s the relationship, not the paper, that ultimately enforces those commitments. When I understood this, I focused more on relationships and worried less about what was on paper, and my business deals went much more smoothly.

Once you start falling back on the paper, the deal is already in trouble. Creative (and lucrative) business deals almost always stray from the paper contracts that represent them. One of my attorneys, who had worked on dozens of game development deals, told me that no deal he worked on ever followed the contract exactly; most weren’t even close. And these were big money deals in many cases. Business relationships are similar to other personal relationships — they twist and turn all over the place.

Written contracts are still necessary, especially when dealing with larger corporations where people come and go, but they’re secondary to relationships. Just don’t make the mistake of assuming that the contract is the deal. The contract is only the deal’s shadow. The real deal is the relationship. Keep your business relationships in good order, and you won’t have to worry so much about what’s on paper.

It’s sad but true that there are loads of scoundrels in business. Many of them hold titles like CEO, President, and CFO.  There are indeed people out there who seem to care about nothing but money, and they will lie, cheat, and steal to get it. In recent years some of the more despicable ones have gotten themselves indicted (or are already behind bars). But there are plenty of others to whom the word honor has no meaning.

For example, in the computer gaming industry, it isn’t unusual for large publishers to feign interest in certain games and string the developers along. They give the developer every indication that a deal is pending, but all the developer sees are delays and false verbal promises. In reality, the publisher only wants to keep the game off the market to keep it from competing with one of their own titles; they hope to cause the developer to miss the next Christmas season or to run out of cash and cancel the title altogether.

It happens. Business, especially the entertainment industry, is not for the timid.

6. Going against your intuition.

Intuition is just as important in business as it is in other settings. You’d be amazed at how many gigantic corporate deals are green-lighted or red-lighted because of some CEO’s gut feeling.

wrong-way-sign-dreamdoWhile you might think that logic is the language of business, that’s far from reality. If you base all your business deals on hard logic and ignore your intuition, most likely you’ll be in for a world of hurt.

We humans aren’t very logical to begin with. We simply don’t have enough data to make truly logical decisions because business deals depend on human beings, and we don’t have a logical system for accurately predicting human behavior.

Not being able to predict how other humans will behave is a pretty big gap in our logic. And intuition has to fill that gap. The real performance of human beings is what makes or breaks business deals. But to assume everyone will perform as expected is unrealistic in the extreme. No deal ever goes perfectly.

It’s hard to say no to a deal that seems juicy by the numbers when my gut is saying, “You’ll regret it” — but more often than not, I later see evidence my intuition was right all along. Sometimes I just get a bad read on someone, and then years later, several people I know are complaining about being ripped off by that person.

Intuition is a critical part of the decision-making process in business. Since business deals depend on relationships, you need to get a read on the other people involved in any deal you consider. If you get a bad read, walk away. If you get a good read, proceed with caution.

7.  Being too formal.

I’ll say it again. Business is built on relationships. In some settings, a certain degree of formality is appropriate, but in most business situations being too formal only gets in the way. Business relationships work best when there’s a decent human-to-human connection behind them.

I think it’s a mistake to be too formal even when looking to establish new business relationships. If someone mails me a letter that starts with “Dear Mr Pavlina” and then goes on to explain a long-winded business proposal, I’ll usually just trash it, especially if it uses the word “we” a lot.

Better to fire off an email with a “Hi Steve,” and just ask me very informally if I’m interested in the kind of arrangement you’re seeking. It saves time and opens the door to a real human relationship. Human beings don’t want to build relationships with faceless corporations. They only want relationships with other human beings… sometimes animals too I suppose.

Treat your business relationships like friendships (or potential friendships). Formality puts up walls, and walls don’t foster good business relationships. No one is loyal to a wall… except the one in China.

Formality is boring and tedious. People want to enjoy their work. If someone address me like a computer, I’ll respond in kind — by hitting delete. But if someone demonstrates they have a real personality and a good sense of humor, a connection is far more likely.

8. Sacrificing your personality quirks.

In the early years of running my games business, I took myself too seriously and assumed that I had to act “businesslike” … whatever that meant.  Being self-employed was a weighty responsibility, and other people were counting on me. Sink or swim, right?

I started my games business in my early 20s, and people in their early 20s are invariably weird. But I assumed that as a business owner, being weird wasn’t appropriate or acceptable. So most of my business letters and emails looked like they were written by the same people who created Microsoft’s EULAs. The job title of “President” really went to my head. I learned how to function without a personality.

It took a number of years, but eventually I became comfortable just being myself, especially after my games business became profitable. Now that I’m a blogger, my personality quirks and unusual experiences are strengths.  My personal oddities give this blog a unique flavor. If I were to take myself too seriously and write more formally, this blog would be very dull and would likely lose much of its audience.

It’s perfectly okay to be your own weird self and to inject your own unique spirit into your business, especially if you’re in your teens or 20s. Don’t be afraid to be more like Steve Jobs… and less like Steve Ballmer. Don’t pretend to be something you’re not. Ultimately you’ll enjoy your work much more if you attract the kinds of customers and partners that want to work with you for who you are — warts and all. Send the people who only want to work with androids to your corporate competitors. They deserve each other.

If other people can’t handle your weirdness, too bad for them. Focus your energy on the people who can.

9. Failing to focus on value creation.

It’s easy to fall into the trap of thinking that the purpose of a business is to make money. But the real purpose of a business is to create value.

While it’s possible to make money in the short run without creating much value, in the long run it’s unsustainable. Even criminal organizations have to create value for someone.  When you know your business is just sucking value away from others without providing anything in return, it will erode your self-esteem, and the business won’t be much fun to run.

Why does your business exist? It exists to provide some sort of value, both for you and your customers. The better you understand what value you’re trying to provide, the better you’ll be able to focus. The basic value provided by my games business was cerebral entertainment. The basic value provided by StevePavlina.com is personal growth. Too often, business owners aren’t clear on what value they’re trying to provide. They just sell stuff and hope for the best. That’s a lousy business model. The world doesn’t need more selling or more stuff. But it always needs and wants genuine value creation, and that’s where you should direct your efforts.

Presently this web site contains over 400 free articles. That’s a lot of value creation. Thousands of people visit each day to receive some of that value. Helping people grow is the business’ primary aim.

10. Failing to optimize.

Although value creation is essential to a sustainable business, it’s equally naive to assume you can simply focus on creating value, and the rest will take care of itself.  

You may build a business that provides good value but loses money. As a business owner, you need to find a way to deliver your value in a cost effective manner. Most likely your first attempt will be very suboptimal. You’ll waste too much time, money, and resources trying to produce and deliver your value. That’s OK though. Many businesses start out that way.  Just don’t let yours stay that way.

Once you have a particular business process in place, pull it apart and re-optimize it from time to time. Look for ways to make it more efficient. Can you get it done in less time? At less cost? Can you do it less frequently? Can you outsource it? Can you dump the process altogether?

I used to process credit orders for my games business manually. I started the business in 1994, and when I’d receive an order through the mail or via my website, I’d use some software to input and run the orders by modem. At the end of each month, I’d manually tally the sales.  That worked fine when sales were low, but it became burdensome as more products were released and sales increased.

Several years ago, I upgraded the process such that online orders were fully automated, including instant delivery of the game download. All orders are recorded in a database, and I can view real-time reports to see how sales are doing for each product. It took some work to set this up, but it was well worth it. That one optimization saved me a lot of time and effort, and I don’t have to pay high fees for a third-party order processing service.

Don’t fall into the trap of using archaic methods for doing routine tasks that could be automated, including inventory management, billing, accounting, order processing, communications, and marketing. If you find yourself doing the same repetitive tasks month after month, make sure you put some effort into optimizing them. Not optimizing is like throwing time and money down the drain. It’s often much easier to save time and money than it is to create them.

An internet business has abundant opportunities for optimization because it’s so easy to try new things and measure the results. In the first year after launching my site, I experimented quite a bit with Google Adsense. Many people don’t like the ad layout on my site, but it’s the most effective layout I’ve tried so far. I use it because it works.

Adding the donations page was another optimization. Some people click ads, some people donate, and some do both. So even though value creation is the primary aim of the business, this is still a for-profit business and needs to generate income in order to be sustainable. If I don’t eat, I don’t write. More money means more resources for ongoing value creation. So value creation and optimization go hand-in-hand.

It takes significant effort to build a successful business, but it’s also a tremendous growth experience. I know many people who have quit their jobs to run their own businesses. Many of them didn’t do as well as they’d hoped, but I don’t know any that regretted taking the plunge.

There’s simply no substitute for holding the reins of your own destiny.

This information was first published April 10, 2006

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