Is Your Startup Sinking? Experts Reveal When to Hold On, or Move On

Entrepreneurs are eternal optimists. When you start a business you never expect it to fail. But if it seems like your startup is in a perpetual struggle to survive, experts say you may be unwittingly making mistakes that are hurting your success.

"Entrepreneurs can get so fixated on their baby -- which is their product or service -- that they have blinders on," said Les McKeown, president of Predictable Success, a business-growth consulting firm based in Marblehead, Mass.

Here are three warning signs that your startup may be sinking and what you can do about it.

Warning No.1 - You have the praise, but no purchases

While family and friends may think you have a great idea for a product or service, be careful banking on just praise.

"Entrepreneurs tend to give too much weight to praise," McKeown said. Instead, pay close attention to whether that praise is converting into revenue for the business. And if not, why not? Have you unwittingly entered a bleak industry or ignored a market shift?

Hold On: If sales are low, but your product offers higher profit margins than the industry standard, you could be targeting the wrong market, or one that's too broad.

"Look for a narrow niche that will make your product or service more acceptable in the marketplace," McKeown said. And you don't have to spend a fortune on research to find it, according to Robert Chelle, professor of entrepreneurship and founding director of the Crotty Center for Entrepreneurial Leadership at the University of Dayton. He says industry associations often have useful, free research.

Find attorneys and accountants who handle the lawsuits and tax returns of businesses in your industry; ask them for insight about the types of businesses they have seen succeed and fail.

Move On: By the end of year three, if you still have less than half of your business leads and proposals converting to real customers, it's time try something new, according to McKeown.

Warning No.2 - You spend more than you sell

One of the common reasons startups run out of money is that sales are half of what they expected, while expenses are twice what they imagined, according to Chelle. Of course, you'll likely spend more than you make when initially launching the business, but experts say there has to be a trend toward profits within a reasonable period of time for the business to survive.

"In year two, you should be starting to make a gross profit," McKeown said. "By the end of year three, if your revenue can't cover the cost of running the business, then every item you sell is losing you money. Many entrepreneurs are in denial about that."

Hold On: "If similar companies seem to be prospering, then there's likely still a preference for what you're selling," Chelle said.  Even so, you have to make a profit to stay in business. It's time to take a hard look at the bottom line.

If you manufacture a product, are you unwittingly cutting into profits by paying too much for raw materials? If you're a service provider, are your fees too high or too low? "I see it happen all the time, entrepreneurs hugely underprice services," McKeown said. And while you can usually justify lowering prices that are too high, it's far more difficult to suddenly raise your fees dramatically.

Move On: "If you're not covering your costs by end of year three, you're probably kidding yourself about the existence of a sustainable, profitable market for your business," McKeown said.

Warning No.3 - You (or your partner) slip into self-sabotage

Even if you have a viable business, it can sink if you or one of your partners has a negative mindset that constantly feeds on the struggles, instead of focusing on sales.

"For example, they might get caught up in the drama and the tension of capital raising or they're always going to see the lawyers," McKeown said. "You'll start to see [this warning sign] in the first year at a gut level, and if it's continuing by the end of the second year, you're in deep, deep trouble."

Hold On: If you or your partners are willing to acknowledge the problem, you can likely turn it around by seeking highly-regarded business advisors or mentors for help, McKeown suggested. Ask them to meet with you, say, once a quarter to shed some "external light" on the business and bring in more accountability.

"Having three to five advisors can help you slow down and see things more clearly," Chelle said.

Move On: If your partner is the saboteur and won't acknowledge it, and you can't remove that person from the business, McKeown said you're better off shutting down and starting over.