The three most common mistakes for start-ups
The first steps towards getting a business off the ground are fairly well defined. They include choosing a name, incorporating a legal entity, raising capital, developing a product or service, and negotiating key partnerships.
All of this requires no mean effort, which is why it’s such a tragedy that the failure rate among start-ups – particularly in the technology sector – is so high. A short and painful existence may be practically inevitable in some cases, but there are many instances where the avoidance of common errors could make the difference between survival and demise.
Below are the three mistakes that I’ve encountered most frequently when mentoring and supporting early-stage companies. They might sound the stuff of common sense, but it’s amazing how often they are made.
1. Selling something nobody wants
This is perhaps the biggest problem that a company faces when developing an innovative product. It presents an especially dangerous challenge for tech start-ups, which often deal in products that are so novel that there’s no established buying behaviour to use as a guide.
In effect, this means that a company doesn’t know what it doesn’t know. And it’s vital to recognise this, because the alternative mindset – which is to assume the existence of a ready-made market – can lead to harsh and insurmountable realities.
The most harsh and insurmountable of all is to be left with a product that is difficult – if not impossible – to sell. I call such a scenario a “high-burden sale”, and it is usually characterised by a product whose alleged benefits require too much explaining or which seeks to address an issue that really doesn’t need addressing in the first place.
This is why it is essential to acknowledge inherent uncertainty and to take an incremental approach to strategic sales. Simply put: the product graveyard is full of “better mousetraps” that no-one bought.
2. Having too low a price
This is the mistake that most often limits the growth of early-stage companies that are already active in the marketplace. In many cases it affects companies that are also already profitable.
It usually occurs when a management team is afflicted by some form of cognitive bias – for example, an entrenched lack of confidence in a value proposition or an unwavering belief that a higher price will dramatically constrain sales. Sometimes it can be a consequence of an innovative product having no competitor against which to peg pricing.
A business that falls into this trap is unlikely to generate the cash margin that it requires or deserves, as a result of which it won’t be able to reinvest, as a result of which its growth will be stifled. This chain of events can eventually culminate in collapse.
Potential remedies tend to lie in having an accurate perspective of the value that clients actually see in a product. One company that I helped to mentor chose to double its prices within the boundary of the M25 and was astonished to find that sales were basically unaffected, that cash flow was completely revolutionised and that growth accelerated at an unprecedented pace.
3. Over-executing before the point of scalability
Companies that make this mistake run out of cash. They do so because they don’t appreciate the working capital implications of their own business models and, relatedly, because they don’t understand how to expand a cost base at a speed that reflects sales growth.
By way of illustration, imagine that a business sells a product to a customer but has to wait 90 days to get paid. That’s the equivalent of a three-month loan; and if sales double in the following year then the size of this “loan” also doubles – meaning the amount of tied-up cash doubles.
This is one reason why even profitable companies go bankrupt. They build a “burn rate” that’s unsustainable, allowing early success to blind them to the ramping up of overheads. And it’s tough to raise more capital as the crisis deepens, because the fact that sales are lagging behind costs undermines a management team’s credibility.
So scaling is undoubtedly a tricky “chicken and egg” affair. The key is to ensure that a business faces as few “unknowns” as possible and can therefore produce a balanced and properly funded growth curve. If all the major questions have been answered then it needn’t be a matter of additional inventive steps or market discovery: ideally, it’s purely a matter of resources and money – something that the investor market should be ready and willing to supply.
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.