Starting a business is never easy. There are a million headaches in writing a business plan, getting financing, hiring employees, and finally getting the business underway. But being realistic about these difficulties is part of overcoming them. Entrepreneurs just make it harder on themselves when they go into a start-up with a too sunny outlook.
That's why U.S. News has put together a list of five Most Overrated Small Businesses. These are not necessarily bad business ideas. You might even be able to make your business dreams come true with one of them. But the popular perception of what it's like to run these businesses or how likely they are to succeed simply does not match reality.
We interviewed dozens of experts in the small-business community, including entrepreneurs and academics, about start-up ideas that have become clichés and don't hold the promise they perhaps once did. A few types of businesses stood out as the most overrated and form our list of start-ups to approach only with caution.
It might seem counterintuitive to call choices like restaurants and contracting overrated. After all, probably millions have found success in small businesses like these. True enough. But when it comes to today's entrepreneurs' chances of succeeding, the more established an industry is, the harder it can be to break through in it. "As industries get older, growth rates tend to slow. People build up economies of scale, so when you enter, you're at a competitive disadvantage," says Scott Shane, professor of entrepreneurial studies at Case Western Reserve University.
Keep in mind when reading this list that what is overrated tends to fluctuate over time and with the ups and downs of the economy. Certain types of businesses are going to have an uphill battle in a recession, especially those that cannot find innovative ways to cut costs. "The pitch that works best in tough economic times is 'I can do that for less,' " says Greg Gianforte, author of Bootstrapping Your Business: Start and Grow a Successful Company With Almost No Money. Some businesses, such as those trying to market "green" products, may have trouble making that pitch.
Fads can consign some business ideas to the overrated pile. More and more Americans care about energy efficiency—no argument there. But it's not clear how much those consumers will pay for "green" products that don't actually save them money on energy costs. Entrepreneurs shouldn't think that simply sticking the label "green" on a product or service will instantly stamp it as a success. On the contrary, if the "green" label means higher prices, customers may turn to your competition. "The evidence seems to be that a lot of consumers talk the talk but don't walk the walk" when it comes to green consumerism, says Michael Morris, a professor of entrepreneurship at Syracuse University.
Other overrated ideas come from taking popular ideas a little too far. You might dream about creating a blog or a social networking site that will be seen by everyone on the Internet. But let's face facts: Websites that don't sell anything struggle to make money on ad revenue alone. The odds of one person creating something the size of Facebook or MySpace are tiny. "The Googles and the Facebooks get so much publicity. But those businesses are really rare," says Steve King of the Institute for the Future. "It just gets so much hype."
Finally, some businesses get overrated simply because they are so well known that they are the first idea that comes to the mind of someone looking to start a business. Restaurants, contracting, and franchises fall into this category. Just because there are a lot of these businesses doesn't mean they are more likely to prosper than lesser-known start-ups. Sure, some of these businesses do make money and stick around. Yet the returns to the small-business person may be not as great as one would expect for all the effort expended. In the case of restaurants, "you can't assume that just because a business does millions in sales that it's even making any money," says Rosalind Resnick of Axxess Business Consulting.