Failure. Bankruptcy. Embarrassment. Starting from scratch. These are the biggest fears every entrepreneur has when starting a business. But, for the most part, these outcomes are totally avoidable.

There are three sides to every new and eventually successful business. Most importantly, there is the passion. In order to be a successful entrepreneur, no matter what the industry, you must have a passion for what you are doing (click here to read my article on the importance of entrepreneurial passion). Then there is the business acumen side… you need to know how to manage everything from staff to inventory to marketing. Then, there is the industry you choose. That’s where most people learn the hardest lessons of being an entrepreneur. Certain industries quite simply are just shitty, and not ideal for entrepreneurs. Certain businesses are likely to fail – and they regularly dish out embarrassment and financial hardship.

While it is pivotal entrepreneurs follow their passion, it is important to be aware of which businesses are most likely to succeed; and on the contrary, which ones aren’t.

Over the last decade I have reviewed, invested in or consulted for dozens of businesses in several different industries. Along the way I’ve learned a thing or two about risk. And I’ve learned which businesses to generally stay away from. Here are five of the industries I would NOT start a business in… the odds of success just aren’t nearly high enough for my liking.

 

Restaurants

The restaurant industry has gone through a massive makeover in the last three decades. It has gradually grown from favoring a neighborhood concept/mom and pop atmosphere, to becoming one of chain restaurants and homogeneous offerings.

Chain restaurants enjoy deep cost benefits in the ability to purchase in bulk. This includes everything from condiments and meats, to advertising and promotions. One of the only differences I’ve noticed between the major chains in my area is the, shall we say, appearance of the servers. Some of the restaurant chains in my area go for the more professional look, while others seem to think less clothes on their servers is best. It’s quite sad really, but sex evidently does sell – even if the food is sub par.

Restaurants are also subject to major wars between brands and chains. And while they control significant market share, the start up restaurant, unless catering to a niche or high-end crowd, will find it hard to compete.

Starting up a restaurant is not a great business idea for an entrepreneur who is on a limited budget. While failure rates for restaurants are a bit over-inflated, they still shut down at double the rate the average startup does in the first two years.

 

Grocer

Grocers don’t create rich entrepreneurs. There are two main reasons for this. First, you will not have the bargaining power that comes from having large sales volumes. As such, you will have a high product cost. That high product cost will result in extremely thin margins and may even be above the selling price at national chains, who have significant buying power. Second, you would have to battle the online grocers and retailers who are increasingly aggressive and have two elements of cost that you cannot compete with. First, they are large buyers, just like the retail chains; and second, they have no floor space to build; instead, they have distribution centers and the cost of storage per unit is much lower than a storefront. This sector is heating up, but not for individual store owners. I know what you may be thinking: what about organic grocers? Same results. It’s not an industry for the little guy – best to move on.

 

Internet Cafe

I love my coffee. And I really looked into this industry for my own personal interests as I considered opening up a chic coffee house in town which would only serve the finest of brews. Almost immediately into my research of the industry, I knew this was a bad idea…

Internet cafes are a dying breed in much of North America because the number of people who are not connected to some form of 3 or 4 G service is dwindling fast, and mobile devices are growing at astounding rates. What you could do a couple of years ago at an Internet cafe you can now do on your iPhone or iPad, or some other smartphone and tablet. Even if a tablet is not 4G ready, most of them have Wi-Fi, and there are numerous Wi-Fi hotspots around cities which are free to use. Most restaurants, coffee shops and delis provide it for free. The concept of the Internet cafe is still plausible in third world countries, but in places where individual Internet and home connectivity has high penetration rates, this is no longer feasible.

Lastly, the North American culture is a busy one. Everyone is in a rush. Who has the time to sit down and waste thirty minutes sipping on an espresso. This isn’t France; people don’t get paid in North America to be lazy…

[Tweet “This isn’t France; people don’t get paid in North America to be lazy…”]

 

Travel Agencies

Putting up a physical store and running a travel agency is about as archaic as it gets. If you’re considering starting a business in this industry, please proceed to slap yourself in the face and wake up.

There are two problems with this industry. The first is the prevalence of the Internet, and the second is the way the airline travel industry is changing. Whatever you need to buy in terms of your travel needs can be done online. There are numerous sites that buy bulk tickets from carriers and operators – and get them at deep discounts – then sell them to highly trafficked websites. You cannot compete with that.

The second reason to stay away from this industry is the way airlines are changing their modus operandi. Many airlines (the majority) exist to attract the budget traveler and have resorted to cut out the middle man and sell the tickets directly to the traveler, there by saving huge costs. Flying on a plane is no longer an elegant way to travel. It sucks. It’s inhumane, and people know when they book a ticket on a plane they will be treated like cattle. As such, unless flying first class, a traveler’s main objective when purchasing a ticket is to save money.

Travel agencies are still used in countries where the Internet penetration rates are lower than the United States and Canada, but even those numbers are moving against the industry.

 

Social Sites and Search Engines

If you’re thinking you want to follow in the footsteps of Zuckerberg, Brin or even Gates, then you should very quickly give your head a shake, and perhaps, as I suggested above, slap yourself. If you’re going to take your entrepreneurial talents online, create something unique. Stay away from industries where the barriers to entry are so firmly erected that you will not be able to make any headway unless you are significantly funded. Microsoft has a large market share, as do Google and Facebook. You want to start an online company that could complement the Yahoos and Googles of the world, not compete against them. You want to use the internet infrastructure already created by these giants to promote your business. You want to start a business that a Yahoo, Vice, Huffington Post, Google or Microsoft would want to buy down the road.

Before jumping into an industry you need to look at three things. First, who are the major players in that industry within the market you hope to target? Second, what kind of margins are the present players extracting from this industry and what is the major factor in their return on equity? Is it volume or gross margins? I look for businesses with big margins (30% or higher). Niche within a niche is where you will find such margins. Finally, you should ask yourself if you have something new to offer. Are you filling a void? Does your product make an industry more convenient? What is going to drive consumers to your business? Are you saving people time, money, stress?

Stick to what you know, what drives you (your passion), and stay away from the five worst industries I mentioned above. (I hope restaurants aren’t your passion…)

Next week I’ll write about the 5 industries entrepreneurs can enter with the highest chance of success.

 

Stay hungry,
Aaron Hoddinott signature

 

 

Aaron