All new businesses suffer the sophomore slump but you can beat it if you know about it and how to capitalize from it!
I’ve seen this many times before and experienced it myself, a new business has just been launched and the excitement is turned up to 11 on the dial! You have a great new idea, product or service or maybe a hot new restaurant and you have just opened. You are flush with funding and your banker or VC’s are rooting you on with accolades and you have a ton of support from family and friends. Customers are flocking to your establishment to see what you are all about and to experience the newest game in town. All of your equipment is new, your employees are new and your new career is just about to define the entire reason you were born. You say to yourself, “I was made for this!” This is the honeymoon year of your new business or your first year or also called the freshman year and it’s a hell of a lot of fun!
But then comes the second year or your sophomore year. The sophomore year is generally where the honeymoon ends and because business moves so fast or maybe a competitor stepped in and started their freshman and they are sucking up all the excitement-air, you are now old news. This can be some of the hardest times for a new business and it’s so significant that it has earned a name, “The sophomore slump.” I too experienced the sophomore slump but for me it was more of a sophomore catastrophe! Our company did a ton of business and we grew even in our first year but when the receipts were counted at the end of the year, we could see that we were not scaled correctly and our expenses out-weighed our receipts. We were in the hole by a lot and we had to fund ourselves again to have enough cash to even start back up for a second year.
4 things happen in your sophomore slump that causes a lot of businesses to suffer but they can be vastly overturned to make the future much brighter and your business successful for a long time.
- You’re old news by your second year
One of the first mistakes a new entrepreneur does is forgets that the new wears off for customers very fast and especially fast for a new restaurant. A cool new place to eat out gets a lot of hype in the first year but by the second year, things begin to cool down with a competitor restaurant starting up or even worse, a customer experiences a bad meal at your place! One bad meal at your restaurant will spread through a community like wildfire and get worse with each time the story is spread! This is even true for non-dinning businesses. One bad customer service experience or your prices aren’t right and you start to hear crickets by your second year. The good news is- this is perfectly normal and happens to just about every new business with nearly impossible odd to avoid it! The thing to remember is this pain is temporary even though it’s likely to continue into your 3rd year. You are in full control and you can rebound from this part of the slump with focus on consistency, resilience to the bad reviews and never, never giving up! Keep pushing forward and fix the complaints. Find a way to separate yourself from new competitors and make the experience your customer’s get personalized.
- You made no money in your first year
I think most people understand that a new business doesn’t really make any money the first year of business and likely well into the next few years. This is an easy concept to understand on paper but to actually experience it firsthand is quite another. Nothing is quite as depressing as to see the first year-end report shows a loss. You can’t help but wonder if this is the beginning of the end and this is the start of a trend. You knew it was probably going to happen and you were warned about it but now you are really feeling it and it can be a scary feeling. But not to worry! This too is normal and fully expected by your funders. The thing to do is to really examine your mistakes and make the necessary adjustments to correct them. If you were like me and never owned a business before, you are learning on the fly with real money. There is excitement in that you can tap into and it will give you the power to move forward and find the profitable side. Nothing will make you hustle harder than thinking it could be all taken away from you if you don’t act on it. My advice,- do not take the advice of your banker how to fix your problems. They do not own a business and if they did at one time, they don’t anymore and now work for a bank! They don’t have the passion you do for your business. Also, do not hire a business manager with a business degree to fix your problems! This will accentuate your problems because they don’t own a business and they will cost you more money. Talk to other owners of businesses for the best advice.
- Your scaling was off
A lot of new business owners forget that they have to scale. Maybe they don’t forget about it but inevitably they don’t do it in their first year. It’s okay, we understand why it doesn’t get done because things are moving so fast and there are a lot of other things that do take precedence in the first year. When I forgot about scaling I was juggling a ton of new business and lots of new employees. I figured that I would just scale later. I said, “screw it, I just love it that I don’t have a boss and there seems to be no end to the success!” But eventually, you have to scale. Scaling is where you are making sure the business expenses of labor, operations, taxes, etc.… are not out-weighing your income. In the first year, it’s hard to see that balance through the whirlwind of excitement and hustle. The thing to do in scaling is to optimize, optimize, optimize! Even if it means firing your deadbeat cousin your family begged you to hire because you own a new business. Off-load the unnecessary weight that’s holding your scaling down. I had too many employees during my first year. I had to let some go and now we are doing 10x the work with half the workforce. You have to remember that an employee, new equipment, buildings, and revenue are nothing more than the byproduct of a successfully ran business with accurate scaling. Optimize in your sophomore slump but never forget to never stop optimizing long into the future of your business.
The sophomore year is a great time to restructure if you have the resolve to do it. It’s not easy to take a second look at the structure of your business while it’s on the downhill slide but this is the time to do it. I decided that we were going to go after other markets that our competitors were scared of during my restructure phase of the sophomore slump. While it seemed risky to aggressively go after other markets while completely broke, it paid off big in the end. Nothing is going to make you hustle harder when you’re broke or dying. Maybe your entity structure is all wrong and you need to be an S Corp rather than an LLC. Or maybe you need to fix your branding, marketing or quite simply your logo. An author once published a book that sold almost no copies but then decided to just change the cover of the book and give it a different title on the next printing. Later that year, the book was a bestseller without changing a single word in the book! Here’s a big one that helped me tremendously, take a second look at your commercial insurance policy. You might be over insured and paying way too much. I went from paying $25,000 per year in commercial insurance to $5000 per year. I was way over insured for what I needed. Remember that insurance is a business too and they want to sell you the most they can!
To capitalize on your sophomore year you have to quit thinking like an employee and start thinking like a business owner! You made some mistakes and you have some losses from your first year. Learn from them and fix them like a boss! You were exactly right when you said you were made for this so now start acting like it and get your ass to work. The thing you have to remember is that you are not immune from the sophomore slump and neither are your competitors! With that said, now is the time to define who you are and show the world that you will come into your senior year profitable and unstoppable and that you were the one that could withstand the pressure and the heartache of a failed year. You beat the competition that folded their cards on the second hand because success for you is an insatiable quest that can never be satisfied!
Daniel J Bockman