How to Recover from Failure as a Small Business Owner

Fifty percent of small businesses fail. Or maybe it’s 66% or 70% – depends on who you ask. Failure – on a small scale or a grand scale – is a part of doing business. When you run a business, you need a plan not only to succeed but also to recover from failure so you can keep trying.

What Does Failure Look Like?

There are a billion ways to fail in business. You can make a product that no one wants. You can run out of cash and have to close up shop. If you’re a bad boss, your team could walk out on you. You can make a wonderful product, but fail to market it in a way that makes sense.

Life is incredibly complicated. Running a business is even more so. It is statistically improbable that you will succeed on your first try. That means you need to be prepared for failure. You need to give your business love and attention but have a backup plan if things go sideways. (And things will go sideways.)

My Ill-Fated Board Game Kickstarter

It happened to me in 2018. I created a board game called Highways & Byways. I spent over $8,000 to create it, and it completely failed on Kickstarter. What’s more, there was no conceivable way for me to rework the product and relaunch, because that would require changing the entire game from the ground up, from theme to gameplay to artwork to materials. It was a total dud.

Two years later, using the lessons I learned from that Kickstarter campaign, I launched another game called Tasty Humans that raised almost $30,000 on Kickstarter, BackerKit, and our online store. Not bad considering our budget was $5,000!

It’s Part of the Process

Failure is part of the process of creating a sustainable business. You’re not going to get it right on the first try. You can read all kinds of guides about how to successfully launch products or services, but you will inevitably screw something up. Whether that leads to total failure or not depends on the particulars of your circumstances.

11 Most Common Reasons Businesses Fail

That said, no one sets out to fail. Drawing heavily from this Entrepreneur article, we’ve can think of 11 reasons why businesses fall apart.

1. Poor product-market fit

There is no phrase we use on this blog more than “product-market fit.” It’s so incredibly important.

Referencing our prior post on the subject, product-market fit can be thought of as “being in a good market with a product that can satisfy the market.”

To put that into plain English: the people you are selling to have to want what you’re selling. You have to make something that people care about. This is why Highways & Byways failed. It was a good game, but no one cared about the theme or the gameplay, and the price was too high!

2. Poor market positioning

Even if you make the perfect product or service, you still have to sell it. That means you need messages that speak to the unique needs of your market. This is where market positioning comes in.

A market position is “the place a brand occupies in the minds of the customers and how it is distinguished from the products of the competitors.” To simplify Wikipedia’s explanation, it’s a reason for people to care about not only your product but your brand.

3. No target market or a poorly understood target market

It sounds super basic, and it is. A lot of times, people get into business and they don’t really know who they’re selling to. Or perhaps they get strange ideas in their heads about the people to whom they are attempting to sell. You have to take the time to find a good target market for your small business.

4. Poor conversion optimization

If you have a basic level of marketing savvy, it’s not hard to draw attention or stoke people’s interest. Ultimately, though, you need to get them to buy your product or service.

If people are paying attention and interested in what you have to say, but not buying, then you suffer from this problem. You aren’t getting sales, or in marketing lingo, conversions.

If this happens, you need to figure out where people are dropping off and address the problems before they sink your business.

5. The business is untrustworthy

Reputation is everything. If your small business has a bad one, deserved or not, it can sink you faster than just about anything else.

6. Your business can’t compete with the market leaders

It’s not fair, but you have to compete with the big, bad bourgeoise of your industry to succeed. If you ship people’s packages, you have to be better than Amazon at something. If you make candles, you have to be better than Yankee Candle at something. Otherwise, people will just keep buying form the big company that always does a good job.

7. Bad expense management

There’s a reason there are stereotypes about startup companies working on card tables while their owners eat ramen. Business expenses are high. If you can’t cut the garbage, you’ll default faster than you can say “my poorly conceived, over-leveraged business has gone bankrupt.”

8. Bad leadership

If you want to succeed, you will probably need a team. That means you will probably need to be someone’s boss. If you’re a bad boss, your best workers will quit and you’ll be left with only mediocre and bad ones. That will crush a fledgling company fast.

9. No team spirit

Freedom, passion, and team spirit are the reasons a talented worker would choose a small business over a big one. Big companies typically offer better pay, more chances for advancement, better benefits, and more perks. Small businesses have the benefit of charm, humanity, and authenticity.

If your business depends on a team, and there’s no team spirit, it will sink your business. People need to look out for one another. This is the only way David companies can slay Goliath conglomerates.

10. The business can’t scale

Many companies become victims of their own success. Once you start selling a lot of units or providing a lot of services, expenses can go up very quickly. If you’re not ready, the growing pains will knock your business out.

11. Cash flow problems

Even if you’re very careful about managing expenses, you need to keep some cash on hand. A lot of businesses do well, but end up folding because of a few missed invoices or late payments.

Failure is Not the End

When starting a business, you always want to leave some room for failure. You don’t want to take on too much debt and you don’t want to put all your hopes and dreams on one particular product. Give your business your earnest best effort, but make sure you always have enough resources left to recover from failure if things don’t work out.

Always have enough resources left to recover from failure. Repeat to yourself several times, because it’s a golden rule of business. If you can do this, then failure is not the end. You can try again and again and again until you succeed. Smart risk management is the structure upon which persistence is built.

What You Should Do Immediately After You Fail

Let’s assume that you failed and that you’re looking for a way to recover from failure.

First, I’m sorry that happened. I’ve been there. I know it sucks.

As long as you have enough resources left to try again, there is hope. From here, I recommend following a four-step process that I outlined in a post I wrote on a different blog after my own big failure experience.

1. Assess your situation

Before you go any further, take a moment to ask yourself if you can try again. Do you have the money, time, and will to try something new?

If the answer to all of those questions is yes, then proceed to the next step. If the answer to any of those questions is no, then stop now, cut your losses, and move on with your life. You’ll be glad you did.

2. Categorize the failure

Take a moment to reflect on your failure. Try to understand what went wrong and why. The particulars of your situations are naturally going to be different than anyone else’s situation.

The odds are pretty good that you made a common mistake. Review the 11 reasons businesses fail earlier in this post and see if any ring true.

You may also find that your failure happens for a reason that doesn’t fit neatly into a specific category. It could be that your business collapsed because of COVID-19 or because a healthy loved one suffered an injury and you became their caretaker.

Completely bizarre events happen, and we call them black swan events. If your business failed for reasons that are truly out of your control, ask yourself whether the failure was caused by a black swan event.

3. Define your process

After you identify the broad cause of your failure, map out your entire business process. Write down every significant step from idea to execution. (A game design example can be found here.)

4. Work backward to find your problem

Once you have detailed your entire business process, which may take a while, look at the last step. Figure out where things all went wrong, and keep asking questions and analyzing whether the roots of your problems came from earlier steps.

To use a concrete example from my own board game’s failure, the Kickstarter campaign failed to fund. The outreach efforts, promotional marketing, sampling and prototyping, artwork creation, play-testing, and game design processes all went well. However, the basic concept design had no product-market fit.

Because the root problem was so deep, it would have required an entire rebuild of the entire product. That wouldn’t have made sense, so I had to scrap the game. However, if the problem were with, say, promotional marketing and outreach, I could simply have run some marketing campaigns online and relaunched successfully a few weeks later.

How to Address a High-Profile Failure

After you have figured out what failed and why it happened, it’s time to address the problem. Odds are your team are expecting an explanation. You may owe one to your customers as well, depending on what went wrong. In short, it’s time to do damage control as a leader.

You have four broad options, all of which are appropriate in different situations.

1. Ignore it or walk it off: or, in other words, do nothing. Sometimes calling yourself out on small mistakes will make you seem bumbling and uncharismatic. This is obviously a bad approach if your mistake is a big one.
2. Minimize or explain the mistake: if you make a small mistake that’s too big to ignore, but still small, you can explain the mistake without apologizing. Large organizations tend to do this after public mishaps. In my opinion, this isn’t the best way for a small business to proceed.
3. Accept the mistake and apologize: in short, own your failure and say I’m sorry publicly. This is a good option for big mistakes. However, it can be very insincere if the mistake is massive, like the BP Oil Spill of 2010.
4. Explore your failure for public benefit: be a good sport about your failure, talk about it, and help others avoid making the same mistakes. This can make you look like a very good, generous person, but it’s the most emotionally draining option of all.

How to Emotionally Recover From Failure

We’ve spent the bulk of this post talking about how to recover from failure and do damage control so that your business can keep going. But don’t forget about yourself!

Small business is about passion. It’s about loving what you do and going up against absurdly difficult odds because you have a vision you want to impose upon the world. When you get rejected, it hurts. It’s deeply personal. It stings so badly and can really mess with your confidence.

Your emotional and psychological health is so important. That’s why I want to share a few quick tips from yet another blog post I wrote after my big business failure. These helped keep me sane in a difficult time, and I hope they do the same for you.

1. Focus on fixing the failure, not the pain of rejection.
2. Make a plan to fix the failure so you have a sense of control again.
3. Now that you’ve done that, let it hurt.
4. Once you’ve acknowledged the emotional pain, try to find a silver lining. You probably have new opportunities now.
5. Keep a sense of perspective. It’s not the end of the world.
6. Start something new to keep your mind occupied.
7. Build a dream team. Surround yourself with positive, competent people.
8. If you’re still stuck, take a break.
9. If you’re stuck after taking a break, seek a professional’s advice. That could be a therapist or a career coach.

Final Thoughts

To err is human. Failure is part of building a business, but you can recover from failure if you have the right mindset. Don’t risk more than you’re willing to lose, and be ready to learn from your mistakes. Do this for long enough and you can join the noble ranks of people who tried and tried and tried again, and then finally made it.