Are You Starting an Iceberg Business?

According to the American Restaurant Association, nearly 60% of restaurants fail within their first year of operation.  

That statistic shouldn’t come as a shock to anyone. We’ve all heard that the failure rate for restaurants is higher than almost any other type of business. But if that’s the case, why do so many people still start them? 

It’s simple: a restaurant is an iceberg business.

Starting a restaurant seems easy. “I am a great cook,” the future restaurateur may tell themselves. Or they envision themselves in the front of the house, greeting guests, being the perfect host.

But like an iceberg, where 90% of the mass lies below the water, a restaurant is infinitely more complex than it seems on the surface.

To start, restaurants have one of the highest overhead rates of nearly any industry. Nearly two-thirds of every revenue dollar goes toward food, beverages and labor. Most of the rest has to cover rent, utilities, advertising and other incidental costs. There is very little opportunity for profit—not to mention room for error.

It turns out that “being a great cook” is one of the least important aspects of having a successful restaurant. What is important are the mundane and non-glamorous tasks. You have to order efficiently, minimize spoilage, manage labor costs, and market yourself effectively. It’s scarily hands-on. Instead of greeting guests by the bar, you’ll be in the back repairing your ice machine, or on your hands and knees unclogging a grease trap.

The sea of startups is full of iceberg businesses.

Do you love Italian ceramics? Can you picture how much fun it will be doing your bi-annual buying trip to Tuscany? Good for you. But how well do you know how to find the right retail location, negotiate a lease, minimize shrinkage, advertise effectively and so on.

Have a great idea for a clothing line? Fine. But how well do you understand manufacturing, inventory management, returns, margins, shipping, etc.

I hear close to a thousand pitches a year and it pains me how many of them are iceberg businesses.

It doesn’t need to be that way.  Almost all the information you need—whether it’s about opening a restaurant, starting a clothing line, or doing a SaaS business—can be found with just a little research.

And if you still decide to start, start small: sell your ceramics at the craft fair. Do your can’t-miss cacio e’ pepe out of a food truck. Hand sew a dozen of those blouses by hand before you place a big order. Most importantly, find out if you love what the business is really about, not what you imagine it will be.

If you are passionate about something, I’m not saying “don’t do it.” I’m just suggesting you want to know what you’re getting into. Because if you don’t know where all the holes are . . . it’s highly likely you are just going to fall into one yourself.

And if you’re still wondering if your idea is an iceberg business, ask yourself this: does it look easy? 

Because if it looks easy, it just means you don’t understand it.

Many ideas in this post were first discussed in the Neverland entrepreneurial community. Join us there!

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