Boost your startup’s odds of making it big by understanding how to spot its potential weak points.
If you’re the mastermind behind a startup, you’ve set sail on an adventurous journey that calls for determination, creativity, and bravery. To ensure your startup survives and thrives, you’ll need a reliable roadmap to guide you past common, yet often overlooked, risks.
One valuable tool for this journey is a framework that assesses how various aspects of your startup are performing and pinpoints areas of vulnerability. In this blog, we’ll dive into such a model, one that pinpoints key reasons why even the most promising startups, led by experienced entrepreneurs, can go under. Embracing this model will help keep your startup on the road to success.
Evaluating your startup’s health
To understand how well your startup is doing, you need a dependable way to measure its health. Professor Tom Eisenmann from Harvard Business School, who’s an expert in startups, had an eye-opening experience when two of his former students’ startup ventures, one of which he had invested in, failed. This made him realize that traditional excuses for startup failures, like blaming the economy, didn’t tell the whole story.
So, he dug deeper and developed a framework to identify four crucial aspects that every startup should focus on. To succeed, a startup must make the most of these aspects and ensure they work together harmoniously. You can use this framework to assess your own startup and make necessary adjustments.
Eisenmann’s framework centers on four key opportunities:
- Brilliant Idea: Your startup’s unique solution to address a specific customer need, solving an important problem that other products can’t.
- Technology and Operations: The systems required to build, deliver, and maintain your product, including inventory management, sales, and customer service platforms.
- Profit Formula: Calculating how much money you’ll make from sales and the costs associated with earning that revenue, helping you manage your finances effectively.
- Marketing: Strategies to communicate with potential customers and convince them to buy your product, ideally turning them into loyal brand advocates for repeat sales.
These opportunities rely on the people involved in your startup, such as you, your co-founders, your team, investors, and partners. These people play a crucial role in supporting and guiding your startup. For your startup to succeed, these individuals must work together and complement both each other and the startup as a whole.
Why founders need industry expertise for their business
In 2012, Harvard Business School graduates Alexandra Nelson and Christina Wallace launched Quincy Apparel, a company that aimed to provide well-fitting business clothes for women. Despite their initial success, Quincy Apparel faced major problems due to the founders’ lack of knowledge in the fashion industry. They made the mistake of thinking they could handle garment design and production without understanding the specialized aspects of the industry, such as pattern making and technical design.
As a result, the company had operational issues, like ordering the wrong fabric and not understanding sizing standards. Their garment return rate was much higher than expected, and most returns were due to poor fit. This failure to deliver on their promise hurt their profits.
Quincy had a great idea, effective marketing, and a viable profit plan. However, their lack of industry knowledge led to their downfall. The lesson here is that founders who lack industry-specific knowledge can face serious challenges.
If you’re starting a business in an industry you’re not familiar with, take steps to compensate for your lack of expertise. Consider partnering with someone who has the necessary experience or seek advice from experts. Alternatively, invest in gaining industry knowledge to make informed decisions and avoid costly mistakes when building your team and operations. This way, you can increase your chances of success.
The costly mistake of building before understanding customers
Understanding your customers is vital for success as a founder. Let’s take the example of Sunil Nagaraj, who wanted to create software that matched singles based on their online behavior. Instead of studying the market first, he jumped into developing the software, assuming people would pay for it.
His mistake was not knowing what customers really wanted. People don’t typically rely on algorithms to find potential dates as they would for, say, choosing a bank. Plus, tracking their internet use for matchmaking raised privacy concerns. If he had done market research, he’d have realized these issues.
The lesson here is to avoid rushing into product development. Many founders make the common mistake of creating a minimum viable product (MVP) too early. An MVP is a prototype that showcases your product’s basic features. However, it should come after thorough customer research. First, you must fully understand your potential customers and their needs so that your product can truly meet their preferences.
In short, before building anything, take the time to learn about your customers and their desires. This knowledge will guide you in creating a product that actually resonates with your target audience, increasing your chances of success.
The dangers of growing too fast
Startups that grow too quickly often fail. Fab.com, a successful flash-sale site led by experienced entrepreneur Jason Goldberg, initially sold $600,000 worth of products in just 12 days. However, three years later, it was spending $14 million per month to stay afloat and had to lay off 80% of its U.S. workforce. In year four, the U.S. operations had to be shut down due to rapid growth that had become unsustainable.
The main lesson is that rapid scaling can be dangerous for startups. This happens because strong early success and abundant investment can lead to overexpansion, sometimes into a saturated market. Even with a $40 million advertising budget in the second year, Fab couldn’t significantly expand its customer base, which had reached a plateau.
To avoid this “speed trap,” use the RAWI test:
- Ready: Evaluate if your startup is ready to scale. Does it have a proven business model, room for customer growth, and enough profit margin to withstand slower growth rates?
- Able: Consider whether your startup has the ability to access necessary resources for quick scaling, including hiring and managing a larger staff.
- Willing: Decide if you’re willing to scale. Scaling increases your workload and might require diluting your equity if you seek more venture capital.
- Impelled: Examine if you’re scaling only because of competition. Make sure that the cost of gaining new customers doesn’t outweigh the profit.
Regularly review these points to determine the right time to scale. Don’t rush into it if there’s limited growth potential.
The importance of choosing the right leaders
In the world of startups, having the right senior management team is crucial for success. Let’s look at the example of Dot & Bo, an e-commerce company that sold unique home decor. Founded in 2013 by Anthony Soohoo, the company quickly grew, making $15 million in revenue in 2014. However, as demand surged, the company faced challenges.
To handle the increased pressure on warehouse and shipping operations, Soohoo hired a Vice President of Operations (VPO). This VPO had an impressive resume but lacked experience in e-commerce operations. This choice ultimately led to the company’s downfall, even though customer growth remained strong. By the time a more experienced VPO was hired, it was too late, and Dot & Bo went out of business in 2016.
The key lesson here is that startups need the right senior management to thrive. The initial VPO’s lack of experience caused problems, such as choosing the wrong system for managing operations. This system couldn’t handle the variations in supplier delivery times, leading to customer service challenges, delayed responses, and increased costs.
In the end, the company’s demise was not just due to technology issues but the wrong choice of a senior manager. To ensure your startup’s success during growth, it’s crucial to have specialists in key roles rather than generalists, even if they have impressive backgrounds. If you can’t afford a top specialist, consider hiring a mid-level one who can provide the expertise your company needs to support its growth. Remember, without the right leader, your business may not reach the finish line.
The pitfalls of overly ambitious ventures
Trying to achieve really big goals can often lead to failure. Entrepreneurs, who are people trying to create new and exciting things, are vital to society because they come up with groundbreaking ideas. In 2007, Shai Agassi wanted to make electric cars popular and reduce their impact on the environment. He got $900 million in investments to make this happen, but his company, Better Place, only sold a few cars.
The main lesson here is that when you have overly ambitious plans, they can fail.
Agassi’s problem was that his idea was just too big. To make his electric cars affordable, he needed lots of people to buy them and trust that they could recharge or swap their batteries. He also needed car companies to work with him because not everyone wants the same car model.
In the end, Agassi couldn’t create a product that enough people wanted at a price that would make money. He thought 20 percent of households in Israel would buy his cars, even if they cost a little more. But he didn’t even come close to selling half of them.
If your idea is very risky like Agassi’s, there are steps you can take to lower the risk. First, remember that people don’t like big changes, even if they’re good. So, make your innovation easier for people to accept.
Second, make prototypes that don’t work and get feedback from people. This will help you improve your idea and see if people are interested in it.
Finally, don’t pretend there’s more demand for your product than there really is just to impress investors. That will only make it harder to meet your sales goals. Be honest about how many people might want your product, and it’ll be easier to figure out when you’ll make back the money you invested.
In conclusion, when startups don’t succeed, it’s common to oversimplify the reasons behind their failure. However, these simplified explanations often miss the mark, and that’s why 50 percent of founders who try again with a new startup face the risk of making the same mistakes. To avoid this, it’s essential to regularly assess your startup’s well-being using a reliable framework. This approach helps you identify issues early on and make necessary corrections before it’s too late.
Inspired by a book “Why Startups Fail”; Tom Eisenmann”