By Cynthia Kocialski
Every entrepreneur has the same goal – to have a thriving new business, to succeed. No one starts a new business for it to be marginal, for the business to own them, for it to fail. Yet, more than half of new businesses fail within 5 years, and the statistic has held true across the decades and in other countries. Do entrepreneurs pursue a path that seals their new businesses’ fate?
How much does funding really matter?
The first myth is about funding. Most entrepreneurs believe funding is their biggest issue. The venture capitalists that have backed eBay, Google, and Facebook have disproven this myth. Their portfolio companies have access to all the funding they need, and yet, only 2% of their companies reach IPO – and this is the ultimate goal of venture capitalists.
So if it’s not funding, what is the key to success? Above all else, entrepreneurs need to be resourceful. They need to be creative in how to reach their goals. They can’t take the obvious path of simply writing a check to get everything done.
Approximately 1% of early business proposals receive funding and only about 40% of IPOs were companies that were investor-backed; proof it is possible without funding. A true entrepreneur isn’t going to let lack of funding be a roadblock to their dreams, they will find a way to make them happen and this is what investors want to see.
If an entrepreneur does secure funding, realize it’s not so much of an accomplishment as it is an obligation to perform under extreme pressure – congratulations, you just moved from the recreational league to the Olympics! Yet, most entrepreneurs believe that with funding they can relax when actually it’s just the opposite.
What’s the relationship between start-ups and their products?
Start-ups are more about the business of the product than the product itself. After all, a start-up is a new business; it’s not a new product or a new service! Many entrepreneurs focus their attention almost exclusively on the product and leave the business to an afterthought, erroneously believing the business aspects are simple, straightforward, and quick. Entrepreneurs will agonize over every feature put into a product, but when it comes to pricing, most often it’s less than a 15 minutes decision based upon how their competitors are pricing their products.
Consider that most professional start-up investors only consider the product to account for 10% of success. Look at publicly traded companies and your see research and development expenses are one-fifth or one-sixth of total operating expenses. A rule of thumb is it takes 10 times development expenses to commercialize a product. So, does it make sense for entrepreneurs to focus so much attention of product development or performing the service, and not the business model?
Why business plans fail?
Entrepreneurs write a business plan believing it’s the solution to the business of the product. But the plan is often a fairy tale, filled with guesses, baseless estimates, wishful thinking, and not much actual fact. Instead of beginning with ‘we will be a leading supplier’, it should start with ‘once upon a time’. The entrepreneur has missed the experimental start-up phase, where they discover what the right product and right business model are. This process of discovery is the idea behind the concept plan coupled with a strategy for business experiments. It creates a mindset for the entrepreneur that gives him permission to fail and continue on, until the right product and business model can be uncovered.
Are you missing the fundamental equation for a business?
I know that this is a simple question, but many ignore the beauty of its simplicity. What is a business? It’s providing a product or service that customers want and are willing to pay for. A business is a product plus customers plus revenue. Another big blunder is not focusing on the revenue element in the basic equation for business proof of concept.
Is your start-up ready to grow up?
Pre-scaling is another misstep – renting office space, hiring permanent employees, placing large orders and so on – before you have a proven business model. If you haven’t figured out what the right product is yet, how can you hire permanent people to develop it? Time and again, I’ve seen entrepreneurs hire developers, only to have to fire them because the right product required a different skill set. I’ve seen start-ups rent office space that’s only one-third occupied because they are anticipating quick growth and filling those spaces.
In the very beginning, entrepreneurs need to think short-term and temporary. They are more akin to a general contractor looking to subcontract out work to others. Think about how advances in science create better lives. First someone runs a series of experiments. When they find one that works, they publish the results and other scientists repeat the experiment to validate it results. Then the discovery is licensed and finally, someone builds the manufacturing plant to mass produce the product. Many entrepreneurs want to start at the end first – build as if you have a proven business and product.
About the Author
Cynthia Kocialski is the founder of three start-ups and helps entrepreneurs transform their ideas into new businesses. Cynthia is the author of Startup from the Ground Up and Out of the Classroom Lessons in Success. Cynthia writes regularly at Start-up Entrepreneurs’ Blog and provides in her video series information on getting funded.
