Written by our Master Pjotr van Schothorst (PVS Investments)
You have a good idea for a new product or service. Or your startup is running for a few years now and you reached a plateau in sales. Where do you go from here? In this article, I provide a few tips for founders. I know, most entrepreneurs don’t like reading and prefer doing, and hope to learn by just doing. But I think you can improve your chances of success by taking the time to read about the successes and failures of others, and the best practices that have bubbled up from these over the last decades.
Read about why startups fail, and make sure you cover for the main causes
It may sound a bit negative, but I think there is a lot to learn from this. CB Insights, an industry information and analysis service for investors, analyzes startup failures continuously. You can read now on their site about 378 Startup Failure Post-Mortems, or their analysis of these in their The Top 20 Reasons Startups Fail article. Here are the top 5 reasons:
- No market need
- Ran out of cash
- Not the right team
- Get outcompeted
- Pricing/cost issues
Many actions can be taken to prevent these things from happening to your company. For example:
1. No market need – Here you can do depth interviews with your future customers. Eric Ries puts it like this in his classic book The Lean Startup (good summary):
- Do customers recognize that they have the problem you are trying to solve?
- If there was a solution, would they buy it?
- Would they buy it from us?
- Can we build a solution for that problem (at an acceptable price level – my addition)?
You need to find answers to these questions in the interviews. You can describe your product in words or images, there is no need to build a prototype or minimum viable product (MVP) before doing this.
2. Ran out of cash – you can turn this around and make sure you find the right funding well before you run out of cash. It often takes way more time for a VC financing round to close than you hoped for and counted on. So start on time, even before you’ve reached all the milestones you planned to reach before approaching new investors. It is good to be on their radar well before you need their money. They don’t like surprises, and they don’t like to be forced to hurry.
3. Not the right team – Here the short answer is: find the right team :). The question is, what is the right team, and why does it appear so hard to create it? A good team has a mix of skills, personalities and backgrounds, which complement each other. I think what often is the case is that the founder is the inventor, a technical person, who doesn’t have any friends and contacts with a commercial background. Or the founder is a marketing person who doesn’t know any technical people. Nowadays, there are ways to still find people with a different background. Here is a page with 10 websites to find co-founders for startups. I don’t have any experiences with these myself. I got in contact with my co-founder through my personal contacts network, but I think such cofounders “marketplaces” can work.
4. Get outcompeted – Yes there is always room for multiple players in a market. An old saying goes: “if there is no competition, there is probably no market.” The important factor here is to find a small segment of the market that you can dominate, for example with one extra feature, which makes your product or service very attractive for that segment, even when your product costs more. As Peter Thiel, a famous and successful entrepreneur and investor, writes in his book “Zero to One”: it is always better to become a monopolist in a small market than a small player in a big market.
5. Pricing/cost issues – Many startups are so desperate for clients that they give away way too much for nothing. They spend lots of money on acquiring customers, but they don’t make any money from them in return. They all point to the famous success stories like Facebook and Google, who also spent years making big losses just to get enough “eyeballs”. The reality is that most investors want to see a cash-positive product-market fit before investing in a company, which means: making more money from a client than what you spend on acquiring that client plus the manufacturing cost of the product. This is the “proof of the pudding”, not only for the investor, but for you as the entrepreneur as well. Going back to the first point, about interviewing prospective clients: there is nothing wrong with asking them how much they would be prepared to pay for your product or service. Somehow founders, especially the ones with a technical background, find that a difficult question to ask. But it is an essential one, and you may be surprised that the price they mention may be higher that you expected.
Tom Eisenmann, professor at Harvard Business School, also analysed startups and the reason they fail. He wrote the book Why Startups Fail: A New Roadmap for Entrepreneurial Success, and a summary of it in Harvard Business Review. What he found (from the book description of Amazon):
- Bad Bedfellows. Startup success is thought to rest largely on the founder’s talents and instincts. But the wrong team, investors, or partners can sink a venture just as quickly.
- False Starts. In following the oft-cited advice to “fail fast” and to “launch before you’re ready,” founders risk wasting time and capital on the wrong solutions.
- False Promises. Success with early adopters can be misleading and give founders unwarranted confidence to expand.
- Speed Traps. Despite the pressure to “get big fast,” hypergrowth can spell disaster for even the most promising ventures.
- Help Wanted. Rapidly scaling startups need lots of capital and talent, but they can make mistakes that leave them suddenly in short supply of both.
- Cascading Miracles. Silicon Valley exhorts entrepreneurs to dream big. But the bigger the vision, the more things that can go wrong.
Read about and use Best Practices for startups and business in general
Startups are analysed by many researchers and investors. Some of these write good books and reports about them. If you don’t like reading, some of these books are now even available as audiobook, so you can listen to them when driving your car or bike, or while exercising. I mentioned a few already earlier, the works of Eric Ries, Peter Thiel and Tom Eisenmann.
- For Dutch entrepreneurs: Jeroen Bertrams, a successful Internet entrepreneur and investor who earlier already wrote the very useful and informative book for starting investors “Succesvol investeren in startups” recently published a new book: “Start-up: van idee tot exit“.
- The Harvard Business Review Entrepreneur’s Handbook: Everything You Need to Launch and Grow Your New Business
- “Good to Great”, a management book by business researcher Jim Collins that describes how companies transition from being good companies to great companies, and how most companies fail to make the transition. Collins identified several key characteristics in companies that made the leap from good to great (from Wikipedia):
- Level 5 Leadership: Leaders who are humble, but driven to do what’s best for the company.
- First Who, Then What: Get the right people on the bus, then figure out where to go. Find the right people and try them out in different seats on the bus (different positions in the company).
- Confront the Brutal Facts: The Stockdale paradox—Confront the brutal truth of the situation, yet at the same time, never give up hope.
- Hedgehog Concept: Three overlapping circles: What lights your fire (“passion”)? What could you be best in the world at (“best at”)? What makes you money (“driving resource”)?
- Culture of Discipline: here, people do not have jobs; they have responsibilities. When you blend a culture of discipline with an ethic of entrepreneurship, you get a magical alchemy resulting in superior performance.
- Technology Accelerators: Using technology to accelerate growth, within the three circles of the hedgehog concept.
- The Flywheel: The additive effect of many small initiatives; they act on each other like compound interest.
Collins found that the main reason certain companies become great is they narrowly focus the company’s resources on their field of key competence.
Much of the book is also freely available from Jim Collins’ website.
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