Getting a business off the ground demands a lot of effort. True particularly in light of recent events. This is why it’s such a tragedy that so much time and energy can frequently prove in vain. You choose a name, you incorporate a legal entity, you raise some capital, you come up with a product or service – and then everything falls apart. This is often because of mistakes startups are guilty of which can be avoided with some common sense.
Of course, many start-ups are bound to fail. Frankly, a good number should never be allowed to progress beyond the ideation phase. But many others are doomed to a brief and unhappy life only because of mistakes that might easily be avoided.
As a mentor for early-stage companies, I’ve encountered these errors more times than I care to remember. In some ways, they’re simply the stuff of common sense, yet countless entrepreneurs consistently fall prey to them. Here are three that are especially prevalent – and almost invariably fatal.
Selling something that no-one needs
Not knowing what you know is bad enough, but not knowing that you don’t know is potent.ially disastrous. A start-up that merely assumes the existence of a ready-made market for its product is condemned to the latter camp. This is one frequently one of the first mistakes startups are guilty of
Fledgeling tech firms are particularly vulnerable to this problem. They might create a product so novel that there’s no established consumer behaviour that can be used as a guide. The nightmare outcome is to be saddled with an offering that’s hard – or even impossible – to sell.
How can these “high-burden sales”, as I call them, be identified before it’s too late? Look out for products whose supposed benefits require extensive explanation. Those which fill gaps in the market that, all things considered, really don’t need filling anyway. A prudent response to uncertainty is to take an incremental approach to strategic sales. Maybe even better, to go back to the drawing board.
Setting too low a price
This is one of the mistakes startups are guilty of that’s most likely to derail early-stage companies that are already active in the marketplace – and which are even already profitable. In my experience, it tends to occur when a management team succumbs to some sort of cognitive bias.
This might take the form of an ingrained lack of confidence in a value proposition or an unswerving conviction that a higher price will have a negative impact on sales. Alternatively, it might be a corollary of a product having no direct competitor against which to peg pricing.
What usually happens in such circumstances is that a business can’t generate the cash margin that it requires or deserves. This leaves it unable to reinvest, which in turn leads to stifled growth and even collapse. The lesson: cultivate an accurate notion of the value that clients actually perceive in your product – you might be very pleasantly surprised by the high regard in which your offering is held.
Over-executing before the point of scalability
Many start-ups don’t understand the working capital implications of their own business models. Relatedly, they don’t understand how to expand a cost base at a pace that reflects sales growth. The result: they begin to run out of cash, they struggle to raise fresh capital as the crisis intensifies, and they eventually go bust.
Imagine, for example, that a company has to wait 90 days before it receives payment from one of its customers. This represents the equivalent of a three-month loan, so if sales double during the ensuing year then the size of the “loan” doubles as well.
Crucially, this means that the amount of cash tied up during the 90 days also doubles – and that’s how even a profitable company can end up bankrupt. Managers let success blind them to the ramping up of overheads and suddenly discover that they’ve reached an unsustainable “burn rate”. Ultimately, the key to scaling is to eliminate as many “unknowns” as possible and follow a growth curve that’s both balanced and properly funded.
David Falzani MBE is an Honorary Professor at Nottingham University Business School’s Haydn Green Institute for Innovation and Entrepreneurship and president of the Sainsbury Management Fellowship.