Why Startup Companies Fail – How to Win

 

As a critical thinker, Dr. Peter Drucker left a giant legacy of thought leadership. For my money, the world’s foremost business philosopher left us with timeless teachings.

A personal favorite of mine is one of his lesser known quotes: “Arrogance is being proud of ignorance.”

The quote is applicable in a myriad of ways – whether it pertains to professionals’ careers or the companies for whom they work. As Biz Coach, I strongly recommend self-assessments for careers and a business-performance analysis for companies.

It’s vital to conduct a thorough needs-assessment of strengths, weaknesses, opportunities and threats – followed by development and implementation of a strategic action plan.

Of course, Dr. Drucker’s quote is also applicable in understanding the No. 1 reason why startups fail. Such companies don’t have a clear picture of their situations. They complacently assume that they do, but most don’t.

Consequently, nine out of 10 fail because they self destruct – not because they’re defeated by competitors. This is true in any sector.

Now, there’s informative confirmation about the reasons for startup failures from another source, Genome.

A Genome report on 3,200+ tech firms cites what it calls “premature scaling.” The startup Genome report concluded that too many early-stage companies try to grow at a pace inconsistent with their capabilities.

Among the Genome-study authors’ conclusions:

• No startup that scaled prematurely passed the 100,000 user mark.
• Ninety-three percent of startups that scale prematurely never break the $100k revenue per month threshold.
• Startups that scale properly grow about 20 times faster than startups that scale prematurely.

“A startup can maximize its speed of progress by keeping the five core dimensions of a startup Customer, Product, Team, Business Model and Financials in balance,” write the study’s authors. “The art of high growth entrepreneurship is to master the chaos of getting each of these five dimensions to move in time and concert with one another.

“Most startup failures can be explained by one or more of these dimensions falling out of tune with the others,” assert the researchers. “In our dataset we found that 70 percent of startups scaled prematurely along some dimension.”

Inefficiency causes failure

My sense is that such new entrepreneurs’ behavior fails to match their goals for success. Too often, they lack cohesive-business behavior. The study appears to confirm this point.

“Every startup has an actual stage and a behavioral stage,” assert the authors. “Actual stage is measured by customer response to a product. A startup is classified as inconsistent when any behavioral dimension is at a stage that is different than the actual stage.”

Hence, they call it premature scaling.

Conversely, the study points out that some companies behave in inferior proportion to their actual situation. For example, they’re not expanding fast enough or they fail to add enough of the right employee skills when they are needed.

Candidly, I love startups, but for the above reasons I don’t work with most of them. It’s one thing for new entrepreneurs to have great ideas, but it’s another when they fail because they don’t understand and implement best practices in management. As a result, they don’t properly manage financials and there are too many unnecessary opportunity costs.

Often, new entrepreneurs simply aren’t good at what they do because they don’t have enough practical management experience, so they insist on charging ahead too fast or they head in the wrong directions. Ultimately, they errantly burn capital.

Bottom-line: The solutions lie in avoiding the pitfalls implied in Dr. Drucker’s quote: “Arrogance is being proud of ignorance.”

New entrepreneurs need to temper their approach and be pragmatic – don’t allow conviction and passion to lead to unproductive exuberance. That’s what leads to chasing ill-health and results in failure.

Instead, seek Drucker-like expertise to fully understand your situation and to guide you. Then, you’ll be in a position to hire the right people at the right time, objectively calculate risk management, optimize processes for critical performance improvements, and adroitly fill the needs of customers for acceptance in the marketplace.

From the Coach’s Corner, a successful angel investor shares his insights: Tips for Increasing Cash Flow, Profits. 

Here are two other resource links – my startup strategies published by The New York Times:

Been There… Done That… Here’s How – New York Times

Advice on Taking an Entrepreneurial Leap – New York Times

“When you play solitaire, you can only beat yourself.”

 

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Columnist Terry Corbell is also a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complimentary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?

 

Startup Toolkit – How to Make a Hit on the Internet

 

First impressions are critical for entrepreneurs. People will buy depending on what they feel about you emotionally. Just like your bricks and mortar location, your Internet presence will be strong if you always remember why people will buy from you.

It’s important to tap into the psyche of your prospective customers – there are five value perceptions that motivate customers to buy.

That’s right, customers aren’t even aware of it, but they make a buying decision based on five psychological reasons about value: What they think about your spokespeople, image of your company, product or service utility, convenience, and price.

Yes, there are a lot of people who will only buy at the cheapest price, but ignore them. (For more on this topic, see this column.)  

Now that you’ve laid a foundation for sales to make a hit on the Internet, here’s the remainder of your startup toolkit:

Create a credible name. Thanks to the recession, businesspeople and consumers have changed their outlook. The dot-com era of quirky names will not work as well these days. Also, your name has to be relevant and easy-to-remember. That goes for your branding slogan or tagline, and your logo. Product or service utility is important in a slogan and logo – answer the question that all visitors subconsciously ask, “What’s in it for me?”

If you really want to look professional, create a flavicon from your logo, which is also known as a Web site icon.

Establish a strong reputation. Demonstrate your expertise as an authoritative resource. Become known as a leader in your industry. Make informed statements in newspaper articles and other online forums.

Professional image. Your site needs to be low-key, but assertive in telling your story. Include a page that explains what you’re all about. That’s different from being too sales-oriented or ostentatious. Demonstrate you expect to earn your visitors’ business. Make certain your site’s layout capitalizes on the natural movement of the eye, which is to upper left, over to the right and then down the side. So a strong element needs to be on the left, too, such as a great graphic of video.

Professionalism also means an informative blog, which will help guarantee that you will have a higher search-engine placement. Encourage interaction. If you maintain a separate blog, make sure it’s synchronized with your Web site.

Showcase your team. Customers want to feel comfortable dealing with you and your staff. Buyers are impressed if you show pride in your workers. Show their images and bios on your site to point out their expertise.

Get media coverage and showcase it. It’s true more and more people are relying on social media promotions. But publicity in a credible news medium – newspaper, TV or radio – will generate the most respect. Flaunt it.

Testimonials. Become adept at generating testimonials, go for it.

Videos. Relevant videos now play a key role. Suggested topics include your philosophy of doing business or demonstrating the benefits of a key product or service.

Social Media. Your social media – Facebook, Twitter or even LinkedIn – should be coordinated with your site. Again, encourage inter-activity. There are two reasons to insert sharing buttons (i.e. the “add this” tool bar – www.addthis.com). It will enable visitors to share your Web site link with others, and you will be able to share your pages, too.

Proofread all copy. Obviously, errors do not promote professionalism. That means  you need to budget time to double-check all spelling and links to pages.

Fresh looks. Update your content as often as possible. Search engines and visitors will take note. But take care not to extremely change your look so you can continue to capitalize on your previous marketing initiatives.

Optimize. Be sure to use search-engine optimization techniques and coordinate your site with your social media.

Contact. Make it easy, very easy for visitors to get contact information – your location, telephone number and e-mail. But include your information in graphics so unwanted bots and spammers can’t pick up the information simply by crawling your site. You’ll avoid countless unwanted e-mail spam, phishers, and telephone calls.

Prevent online threats. Remember British Petroleum’s online nightmare – the fake BP Twitter account? It generates 10 times the number of visitors than BP’s Twitter account. Be sure to take five precautions against threats from Facebook and Twitter.

From the Coach’s Corner, here’s more on online marketing:

5 Strategies to Sell More from Your Web Site

In SEO, Your Site’s Download Speed Matters to Google

Breakthrough Strategies to Land Venture Capital in 2010

 

If you follow eight tactics suggested by premier financial strategist Joey Tamer, my sense is that you will greatly enhance your odds for landing venture capital.

She shares her expertise in a Wall Street Journal blog, Strategies for Finding Venture Capital in 2010.

Ms. Tamer is an expert consultant for early-stage technology and media companies whom I rely upon as an authoritative source on finance-related matters in my Biz Coach columns.

Whatever Ms. Tamer says, you can take it to the bank with confidence. 

21 Tips on How to Start a Business in a Recession

 

Conventional wisdom probably indicates a recession is not the best time to start a business. But if you have ever dreamed about it, there might be good reasons why the seed to start a business in a recession was planted in your mind.

Good ideas are worth a lot of money, especially in a recession. Many successful companies were launched in economic downturns. They range from General Electric to Hewlett-Packard.

A recession can be a good time if you have a great idea and have entrepreneurial instincts. Entrepreneurial personalities do not let fear run their lives.

Think of fear as an acronym: Frantic effort to avoid responsibility. Entrepreneur-types see a good idea as a responsibility to act. Plus, a recession motivates them to work harder and smarter on developing and executing their ideas.

True, consumer confidence is down, home foreclosures are increasing and the business climate is tepid.

As many companies cut back, new business opportunities appear. But you’ll have to hustle. Successful entrepreneurs do their homework and work as hard as dedicated athletes who train for high performance. Yes, there are numerous pitfalls for startups, and it will probably be the most difficult undertaking of your life.

Here are the 21 tips on how to start a business in a recession:

1. Pick the right niche. You’ll need to enjoy your work and be passionate about it in order to succeed.

2. Take baby steps. Strategize now while working at your present job. Don’t quit or wait for a layoff. If you’re out-of-work, money is problematic but you might not have a choice. Consider all your options.

3. Develop your vision. Write a one-page vision, which explains where you will want to be. Then, consider a business plan for a roadmap. Do your research and become an expert in your industry. Know your competition.

To determine where you are business-wise, conduct a SWOT analysis to assess your strengths, weaknesses, opportunities and threats. Some firms then develop and implement a strategic plan. A business plan is a management tool vis-a-vis a strategic plan, which is a leadership tool.

This also means learning accounting techniques, forecasting your cash flow, and considering buying good bookkeeping software.

4. Seek expertise. Read about successful entrepreneurs. Look for a mentor and a qualified sounding board.

Also, contact a Small Business Development Center. The organization has countless offices throughout the country.

Here’s the link: http://www.sba.gov/aboutsba/sbaprograms/sbdc/index.html

5. Get a head start on marketing and selling. Line up customers before you launch. Always remember: Cash flow is paramount.

You might want to read my column, “The Seven Steps to Higher Sales,” http://www.bizcoachinfo.com/archives/27

6. Market and sell every day. Establish a marketing budget and stay with it. Many companies lose market share by cutting advertising and promotion. Implement strong public relations.

Make yourself known to your local public officials and news media. Suggest to reporters that they consider interviewing you when they want an authority in your niche. Look for ways to multiple sales with your customers.

Consider networking with larger companies – many outsource to micro-businesses.

7. Make customer service a priority. When customers take their businesses elsewhere, my research shows 7o percent of the time it is because they feel taken for granted.

Practice great customer service for referrals and repeat business. Survey your customers. When a customer pays you a compliment, ask a question such as this: “What are the names of two people just like you who might appreciate my company’s services.” Be sure to follow-up with the referrals.

If you plan to free-lance or become a consultant, consider my “60 Ground Rules for Effective Client Service,”  http://www.bizcoachinfo.com/archives/106

8. Harness the power of the Internet. Learn blogging and search engine optimization techniques, and how to develop online press releases. A strong Web presence is paramount.

9. Line up your resources. Seek references from trusted associates for a good accountant and lawyer. Plan your policies and procedures. Learn to manage your books.

10. Arrange your financing. You’re unlikely to get a bank loan without a track record. Besides, it’s more economical to use your own resources and start from scratch. Avoid reliance on credit cards and home equity.

If you are seeking investors, consider another column I wrote: “What No One Tells You about Raising Investment Capital” in an interview with leading consultant Joey Tamer: http://www.bizcoachinfo.com/archives/1177

11. Appearances matter. Look professional – pick a good business name, logo, memorable tagline, and a branding-benefit statement that adequately tell your story. That also means quality business cards and stationery, a Web site, and email address using your domain name.

12. Understand legal requirements. That includes business license and taxes at the local, state and IRS. If you’re planning to hire employees, check with your appropriate state agency.

13. Consider buying a micro business. Avoid buying a company that’s losing money unless you’re certain you’ll succeed. Consider proposing owner-financing in a leveraged buyout. But do your due diligence. Walk away from a prospective seller who shows even a hint of bad practices.

14. Develop backup plans for equipment and operations. You’ll never know when bad weather or misfortune will strike. Fortune favors a prepared mind and business.

15. If you plan to hire employees, learn best practices in human resources. Hire the best workers, who demonstrate the 3 A’s – attitude, appearance and ability. (Note a good attitude is most important.)

Motivate them to be productive and to make your business look good in the marketplace.

16. Location. Just as in buying a home, there are key points to remember about where to locate (scroll down to the last paragraph for a link).

17. Keep sources of inspiration handy. Bone up on slogans and quotations to keep you motivated.

18. Community service. In addition to your regular routine of hard work, recreation and exercise, you’ll find it gratifying to devote time, talent and/or money to a worthy cause to lessen the misery in your community.

19. Network and join your local chamber and industry associations. Develop relationships and become a spokesperson for your industry. Become known as the “go-to” person.

And get involved in public policy when events adversely affect your industry. Government agencies are not known for enhancing or even protecting entrepreneurs’ economic and political liberties.

20. Budget time for continuous improvement. It’s vital to regularly reflect on your business and how to evolve in the marketplace. Review your SWOT analysis annually, and fine-tune your planning.

21. Remember to play and rejuvenate your mind. That means you should exercise, engage in your hobbies and do whatever works for you to stay mentally healthy.

Again, if you start a business, it will be the hardest thing you will ever do.

Yes, it’s a lot of footwork. But if you start with these rules, you’ll enjoy a competitive edge.

From the Coach’s Corner, to help you determine your entrepreneurial capabilities, here’s a link to a Small Business Administration site:

http://www.sba.gov/assessmenttool/index.html

For more insights on starting a business, I was honored when New York Times columnist Brent Bowers featured me.

Here are links to the columns:

•  ”Been There… Done That… Here’s How”   http://www.nytimes.com/2008/02/26/business/smallbusiness/26hunt.html? _r=1
•  “Advice on Taking an Entrepreneurial Leap” (including tips on where to locate a business) http://www.nytimes.com/2008/03/26/business/smallbusiness/26hunt.html