Another one (start-up) bites the dust

Key takeaways

§? The rate of failure of early-stage ventures is high

§? Some maybe out-of-touch with the market

§? Start-ups can face a serious cash flow issue

§? Even if they have an accepted product, new ventures may have poor marketing

§? Some fail to scale their organizations promptly

Early-stage ventures face several challenges when getting off the ground. As a young or aspiring entrepreneur, you might wonder what to look out for and what you can do to avoid frequently made mistakes. As we all know, the failure rates are very high at this stage of the business life cycle.

There are two issues in entrepreneurship—the dynamics of start-up and scale-up. While young firms are searching for a viable business model, post-start-ups are looking at how to grow their newfound model. Establishing a business model is searching for how your firm can earn revenue, deal with costs, and manage risks. The last item is often ignored as entrepreneurs fall in love with their ‘baby’ and develop a blind spot for risk management. However, each risk must be identified and planned for.

Tom Eisenmann, Professor at Harvard Business School, has taught there for 24 years. In his course, The Entrepreneurial Manager, he points to two areas entrepreneurs miss: they do not engage the right stakeholders (bankers, staff, suppliers, investors) early, and they rush into an opportunity without testing the waters.

Sometimes, we suffer from what psychologists call tonic positivity. While confidence and passion are reasonable traits, ignoring the wrong signals can lead to failure.

Lack of market acceptance

Not all ideas are commercially viable, and allocating scarce resources can cause a start-up to fail. Of course, entrepreneurs often introduce innovative products where demand is difficult to assess. How do you test something relatively new to the customers? Entrepreneurial research suggests that prospective buyers may not be able to visualize the benefits and functionalities of the product effectively. Instead of doing traditional research, entrepreneurs develop a prototype and get feedback. You can offer a sample, do a webinar, and get feedback with a service.

Inadequate funding and cash flow management

Start-ups are like SUVs; they are gas guzzlers and behave like cash sponges. Frequently, entrepreneurs need to pay more attention to the cash required and borrow less or seek less capital from investors. Without money, your business stalls and end of your dream. Seeking advice from an accountant may not help as they do not have historical data. However, you can phase the start-up stages—idea generation, idea evaluation (on paper), prototyping, market testing and evaluation, product refinement, and launch. Then, estimate cash and other resources needed at each stage. Note this method is iterative—back and forth in the progression is expected.

Poor Marketing and Customer Reach

You could have a great product, but how good is your client acquisition and retention? The more efficient way to market on a shoestring budget is to use social media or develop a landing page for a free offer to attend an event or get a sample. Remember, many are doing the same, so write a catchy email with a subject and body to avoid being deleted. Several well-scheduled emails are best since they have low click rates.

Ignoring Customer Feedback

Even if you have an offering with some market acceptance, your prototype may not be perfect and needs refinement. The lean start-up method suggests that feedback from your target is often required. Remember, you cannot be all things to everyone, and don’t even try. Sometimes, customers speak in puzzles—they may not know what is wrong or what improvement is needed, and they do not expect them to know how to fix the product. Give them different options and package the ‘new offer’ as a special edition or version like the fast-food industry. They think it is for a limited time and must be dropped if it fails to get traction.

Wrong team

Talent management can be a big issue for small firms as they cannot pay competitive salaries. A good business partner with investor potential can be attracted to improve your capital structure. Additionally, getting your employees to think like you can boost the business. Intrapreneurship is about creating entrepreneur-like behaviour inside the venture. Generally, employees will not be as opportunity-seeking as you. As part of your training, you should communicate the concept of the intrapreneur and how you will support it. Do not forget that you need to reward this kind of behaviour.

Lacking of differentiation

We know that it is very likely competitors will have a similar offering. If you just started in the race, how do you stand out? Despite your best efforts to use innovation in your strategy, you may be perceived as me-too. Pricing and justification can separate you from the pack. iPhones and Cross pens are good examples. Even in a price-competitive market, buyers’ needs and markets are changing; new opportunities will emerge, which could be your chance to change your business model.

Failure to Scale Properly

After identifying your business model, some of your work in building the organization is not done. You have produced and street-tested a racing car, but it is not on the track. Many times, entrepreneurs launch the rocket before going through all the checks. Before pressing that launch button, you need to identify all the failure points, like NASA. Growing your business requires a different mindset than a start-up. Often, entrepreneurs do not make this transition and try to create more new offerings; instead, they should focus on what is ready to generate revenue streams.

Scaling your business is like the foundation of your house; while it is not sexy, it is where you start to put together the two other components—walls and roof. Your foundation, walls and roof must be integrated. If there is a hurricane, the roof is not attached to the walls, and the latter is not anchored to the foundation, your structure can collapse. Your business is similar; all nine business model components must be integrated for upscaling.

New entrepreneurs need to know the common errors existing ones make. Wouldn’t it be nice to know before you embark on the journey? Many times, budding entrepreneurs fail to make the mindset transition. Venture creators often ignore the signals, proceed passionately, and find their dreams dashed. Assume that many of your assumptions need testing. Do not be risk averse on one end of the continuum. On the other end of the spectrum, you need to remember that starting a venture is a business experiment, and unexpected things can happen. And, you do not want to be dust in the wind.

Sajjad is an SME and Family Business Advisor who supports entrepreneurs in scaling their ventures. In his spare time in Trinidad and Tobago, he tries to produce organic tropical fruits and vegetables and practise sustainable farming in his home garden.

His book, Build Your Legacy Business: Solopreneur To Family Business Hero, is unique in its combination of entrepreneurship and family enterprise.

You can contact him at [email protected] or www.entrepreneurtnt.com