Fact: Most entrepreneurs are driven by the passion to fulfil a dream and the companies they launch are the vehicles by which they hope to achieve them. These entrepreneurs often have the technological wherewithal to execute on their vision and to create the product and/or service that realizes their dream.
Fact: Eight of ten start up companies fail. Several of the failures do not even get off the ground and consequently are denied any serious market reckoning.
There is something about these two facts that makes reality very confusing. If passion and dreams are what is needed for success, then start up companies have them aplenty. And yet, we find that so few of them actually succeed. What is wrong here?
The truth is that the market for a business is an unforgiving place. Any single mistake can bring a business down just as any missed opportunity can allow a competitor to take control. Passion, confidence and skill are necessary attributes in this battlefield but cannot be substitutes for good business sense and appropriate business strategy. Here is a compilation of the typical lapses that start up companies are often guilty of.
Absence of basic market research – The entrepreneur does not believe in market research and instead relies on his ‘gut’ feeling. This is further reinforced by an inadequate rigour in finance, marketing, sales and human resources. The company is run on instinct and not on the basis of true market feedback and hard data.
Over confidence – Entrepreneurs are hopelessly optimistic, until they fail. Financial estimates about market size and penetrability, time to revenue and performance against competition are always biased in favour of the entrepreneur and his company. Formal marketing and sales departments do not exist until too late in the day, and even then are often added as necessary evils – not as core parts of the business. This has the result that professional ability in these spheres is unavailable to the entrepreneur, who continues to run the company on instinct and gut feel.
Neglect of sales – “If we build it right, it will sell” is often the startup mantra. This results in the entrepreneur neglecting the real difficulties in selling and especially in making the first sales and acquiring the first customers for the business. The importance of these initial sales cannot be overstated and must be planned and executed by the founding team with as much care and preparation as they would expend in product development. These customers represent the pivot on which swings the future fortunes of the company and to appreciate it, requires a mindset shift in how sales is viewed inside the company by the founding team.
Financial naivete – More companies fail because of financial imprudence than any other single factor. The importance of cash flow and sustainability needs to be well understood, with the time to break-even estimated pessimistically in financial planning. Product innovation and dazzling services require financial investment and must be supported by sales revenues and/or investments. There are too many sorry tales about companies that simply ceased to exist when money ran out, just as the product was ready for show time. Better financial planning would have given these companies an opportunity in the marketplace that they probably deserved.
Late entry of marketing – Businesses are about timing as much as probably everything else in life. The marketing and sales functions have a role to play quite early in a company’s existence, although this may not be apparent. A pipeline of leads have to be created and primed, collateral created, the company presence established at trade shows and other events – all of this well before the first sale is accomplished. Poor timing of these activities can yield terribly disappointing and delayed results that stress the company finances further. Delaying these activities may also lead to scrimped and inadequate financial support for them since the company is likely to be under increased financial pressure.
Inappropriate Legacy – The founders, especially if their backgrounds are in big companies, must realize quickly that their reputations or their earlier job titles alone do not guarantee success. The startup they have founded is as different from the big companies they worked for, just as water is different from oil and the two do not mix. This realization has impact on the decisions they will take in the course of running the company. For example, the expense account they were used to, does not translate well when running a fresh new startup. Decisions on hiring, travel and budgeting have dramatic impact on company viability and must be done with the perspective of a founder who is staking his life earnings on the success of the venture.
Inward Focus – There is no set formula for success despite the several hundred management books that are written to the contrary. Managing a startup to success is often a task fraught with difficult decisions and unexpected situations. Despite a firm plan and a resolute approach to execution, the entrepreneur must keep a steady ear to the ground, recognize changing market conditions, be willing to bend with the wind and be completely prepared to allow market feedback to determine how the company will evolve.