20 start-up mistakes, and how to avoid them
Thursday, 29 May 2008
Last Updated: Thursday, 29 May 2008
By Amanda Gome
As the economy tightens, it is going to get harder to launch a business or new products and services.
But people should not be deterred. Great businesses are born from hard times and innovations are spun from the need to do it better, cheaper, faster.
But don’t get caught. If you go in with your eyes wide open, you will have a much greater chance at survival.
Here are 20 misconceptions I have observed entrepreneurs make when launching a new product or venture, and some examples – and some advice about what they should do at each stage.
Myth 1. “It will work. There was a real need in the market
for my product.”
Really? Says who? Many entrepreneurs start with a great idea for a product or a business. When the business doesn’t work they blame lack of money, wrong people or claim the market doesn’t get it. But most times they have simply not done a proper plan.
They are so enthusiastic, might have great networks, can give you a long list of potential customers. But their assumptions are flawed. And often important issues are not even considered.
Why? Two reasons. Enthusiasm gets in the way of reasonable planning. Secondly – and I believe more often – the entrepreneurs do not know all the questions to ask. They then find out the hard way.
To circumvent this problem, sit down with more experienced business people who will question your assumptions. You also must do a business plan. Why? The main reason is that on there somewhere will be an element of the business that you have simply not even thought about, and can then change your business model.
Myth 2. “It’s a billion dollar market! If I sell just one pair of shoes to just 1% of all the Chinese, I would make millions.”
I call this The China Syndrome. As soon as anyone tells me they have found a billion dollar market, I challenge them. Broad statements like this mean they do not understand the much smaller segments that make up every market and the costs of reaching that market.
Many entrepreneurs try to sell to the small business market. In Australia there are 1.8 million small business operators. Sounds like a lot, but there are the highly ambitious entrepreneurs who have more in common with a CEO of BHP Billiton; then there are the happy hobbyists, just working towards some pocket money for the Gold Coast holiday. Chalk and cheese.
There might be a billion dollar market, but you will only get a slither of it. So which slither are you after, and how much will it cost to reach it?
Myth 3. “I know who my customer is!”
No you don’t. Many entrepreneurs design, brand and market a product at a particular customer base.
But the problem is the customer is not the buyer. Take a lawyer as an example. A lawyer may set up a publishing business to provide content to other lawyers. The lawyer knows what lawyers want to read. But the lawyer is counting on advertisers for income. So in affect the advertiser is their customer. Yet the lawyer knows nothing about the advertising market.
Or take companies which design products for the children’s market. The customer is the child right? But who are the buyers of these products? Mums and dads.
Martin Chimes, founder of Unistraw, found this out the hard way. He designed a flavoured milk staw to look like a lolly candy. Very appealing to children – but has had to be redesigned, and now it looks like a health product and appeals to the real customer; parents.
So don’t ask who will buy my product? Ask where will the money come from to buy that product? That is your true customer.
Myth 4. “I have to keep going in the same direction even if it’s showing signs of not working because it might work in the long term and successful entrepreneurs stick
to their guns”
No, they don’t. Look at the stats and have the guts to make the big decisions, and quickly. Many entrepreneurs refuse to believe their strategy could be wrong. And let’s face it – after just a few months it can be humiliating, infuriating and frustrating to sit the staff down and tell them the business model needs a complete renovation. But heed the signs, and be prepared to change strategy radically if necessary.
Phil Ruthven, founder of IBISWorld, was a chemical engineer when he set out to launch an online database. The business world was not interested. But instead of giving up he changed tack and started a strategic consulting firm. “But I soon realised I couldn’t compete internationally against the likes of McKinsey,” he says. “Changing from a consultant in late ‘87 we almost went under, as almost all companies do. It wasn’t all misery, but it was very tough.”
Myth 5. “Want to be my investor?
I just need your money, thanks.”
It’s not so simple. In my experience there are three types of venture capitalists – lazy investors, smart investors and crooks. Lazy investors expect a big return on investment without lifting a finger. Crooks will wait until you need some promised capital, refuse to give it and then swoop in to buy the company in a fire sale.
Best are the smart investors, who sit on the board, give you great advice, introduce you to their networks, are supportive, understand your industry, and hold you to account – and who give you money when you need it. These type of investors are gold.
Myth 6. “Selling is easy. You pick up the phone...”
Sure – but it might not result in a sale. Companies are complex beasts. They spend at certain times of the year, buy in certain volumes, buy from different parts of the business – in fact have all sorts of requirements that could confuse you.
Software manufacturer Aconex learnt the hard way. It set out to develop document management software. But the procurement software was a big purchasing decision for companies, and a very hard sell. So Aconex changed direction. “Fortunately software for storing and exchanging documents was an easier decision for companies to make,” says founder Leigh Jasper.
Map out the buying patterns and habits of your customers. Understand the tricks of the trade. Can budgets be split across departments? Can a deal be restructured so the executives at the top do not have to sight it and juniors can sign off? It’s insider knowledge, so seek out experienced players and ask for advice.
Myth 7. “I love my business partners!”
On day one, you might. But often the biggest regret of entrepreneurs is the business partners they chose. Often companies are started by a couple of mates throwing some spare change into the biscuit tin. The roles are never clearly defined.
As the business grows, usually one partner emerges as the clear leader. The others need to accept this and fall in behind. But usually the opposite happens.
John Randell, who runs A1 Rubber, says the biggest problem in his first business was business partners. “Everyone puts their hard earned money into it, they all expect to run it, and therefore there wasn’t a clear management in the business. Removing partners is actually far less frustrating. You’re only responsible to yourself,” he says.
The other major trouble with business partners is a difference in ambitions. One wants to reinvest in the company to grow fast, the other wants to pull the money out to support a lavish lifestyle. Or one wants to build a juggernaught and the other wants to pick the kids up after school. How do you suss out your business partner? Lots of meetings before a formal shareholders document is signed.
Myth 8. “I can be all things to everyone”
Entrepreneurs fall into the trap of accepting every job they get regardless of size and whether it fits the long term strategy of the group. They get distracted and chase every opportunity down every rabbit hole. As a result they spend most of their day doing something that represents 10% of the business.
Lisa Messenger, Messenger Publishing, says she first set out to develop a sponsorship business. Then she began writing for marketing magazines and industry magazines about sponsorship and marketing. “I also got lots of calls from small businesses asking for help, so suddenly I was all things to everyone. I was getting revenue of about $50,000 paying for an office and a staff member on about $30,000 and not paying myself anything.”
Sometimes entrepreneurs in their eagerness to win business promise too much and the job ends up costing them money with no long term gain. Lachlan Opray, founder of digital marketing company Impact Data, says in the early days someone would come in off the street and say: “ ‘The client is hot to trot if we do this’; so we did it.
“We also assumed that feature can then be rolled out to other businesses. But we underestimated the commitment of resources required. We learnt to adopt a more formal job specification procedure, which also helped the customer get exactly what they wanted. And we learnt to ask what is the wider client application? We would do that by introducing the question to any clients we were dealing with that week. If the clients all said they loved it, we gave it the green light.”
Myth 9. “The more people we have, the faster we will grow”
A sentiment currently fashionable, as companies dash to build huge online communities as quickly as possible.
Entrepreneur David Gold learnt this lesson the hard way. With his first venture Dstore, everything was done in-house. It was costly and distracting. With his second business, Azure, he changed strategy. “I really wanted to be able to focus on the core of what we were trying to do, rather than deal with organisational politics and a large team and having accounts people and technical people and sales people and business development people and all that. I just wanted a smaller team and outsource everything else.”
Myth 10. “Attitude when hiring is more important than skills”
Yes, it is. But you need the right skills to build a successful business. Entrepreneurs find it far easier to surround themselves with optimistic people who reflect their viewpoint of the world. So they naturally gravitate towards people who are similar to themselves. They hire family, friends and old work colleagues. “Don’t tell me no, tell me how”, is the common maxim.
But sometimes entrepreneurs need to be told no. They need to be told the truth, not just have their views confirmed. They need to build teams with different types of people who will challenge them in a non confronting way.
In 2003, Lui Venturini and Cameron Newman started VN Power Solutions after observing the shortage of professional trade services. But the company almost didn’t make it after employing inexperienced and lowly paid workers, and expecting more than they were capable of delivering without training.
Another entrepreneur Tony Douglas, of EMC, says: “I also didn’t understand you don’t get ready-made staff and that the investment in their skills and development have major pay-offs for your business.”
Myth 11. “It will work if I have more capital”
Smart successful entrepreneurs look back and say that one of their biggest mistakes is not starting with more money. Why? They underestimated the financial requirements of launching a business or a new product. Many entrepreneurs are optimistic by nature, so they overestimate the size of the market and underestimate the cost of reaching the market.
They start in a fancy office, with too many staff and a big marketing budget. They forget to factor in insurance costs, pay roll and bank fees. Before long their costs have spiraled and they are running losses month by month.
The rule of thumb? It takes at least twice as long and costs double trice what you expect.
Start small, set very tight budgets and stick to them. Staff will whinge, but they don’t lie in bed at night worried about the health of the business – you do.
Myth 12. “It wasn’t my fault. Things happened that were out of my control”
I have sympathy for this one. Things can change that are outside your control.
But by staying informed, entrepreneurs can often predict where things are going and can develop a contingency plan. Interest rates are going up, the dollar is soaring, petrol prices are heading skyward, the government changes the regulations… outside your control.
But there is no use hoping it will improve.
Myth 13. “We don’t need to focus on branding.
People know who we are”
No they don’t. Establish a vision, culture and identity that feeds through the company. Make sure the marketing staff are integrated into the middle of operations so that the business has a very clear identity and focus. Are you high-quality, blue chip? Or fun, savvy and cheeky? What are the three words that describe your business?
Myth 14. “There’s no one to help me”
OK, entrepreneurship can be terribly lonely; but there is help around. There are mentors, consultants, business coaches, networks, industry associations, government bodies and so on. Helen Jarman of Infoactiv Group says not accessing help was her biggest mistake.
“Back then I felt that I needed to do everything myself, and I just became very head-down rather than sort of reach out to the many networks available that I utilise now. I just wish I’d sort of wised up to that,” she says.
“I would have definitely accessed a lot more of the business and government network and grants and assistance that are available now. I’m very much part of the YEO (Young Entrepreneurs Organisation) network, the Entrepreneurs Organisation network as well as CEO Institute. We’re now working with the Australian Government, Austrade and so forth.”
Myth 15. “I am hopeless with figures.
I can’t even read a balance sheet”
Well, learn! Unless you are an accountant, most entrepreneurs have a very poor grasp of Take Guy Sigston who was founder of Lloyd Morgan. The bank foreclosed in 2002. It wasn’t from lack of reporting. “I didn’t understand the information that was being reported to me and frankly I was cheesed off with my accounting firm because, knowing what I know now, they saw this,” he says.
His advice? Don’t be afraid to spend a fair bit of time with your external accountant. “You need to sit down and drill them on ‘what does this actually mean?’,” he says. This becomes crucial as you build scale.
Myth 16. “I am making a profit so I can’t go broke”
Yes, you can – once that cash stops flowing. Carmelina Pascoe, who runs My CoffeeShop, says one of the most frustrating parts of running a business is to know you are in the black but you have no money to pay the wages.
When you are designing the business model, look for ways to ensure businesses pay you regularly, either through a retainer arrangement, weekly or monthly. Have strict seven day terms on all contracts and approach the most officious and best organised person in the office and make it part of their job description to ring the accounts department of companies and get that money in the door the day it is due. Make sure all the paperwork is correct and record the trail of invoices so they cannot get “lost” at the other end.
William Scott, founder of Smart Group, also suffered. “Friday would come along and you need to pay everyone the wages. We were always profitable, but sometimes clients don’t pay on time. So your credit cards are always worn out. We didn’t get our debtor finance structured until a year later than we should have.”
Myth 17. “I hate sacking people; maybe they can change”
No, they can’t. Often the people you hire to start the business are incapable of taking it to the next level. All the training in the world will not help. They simply do not have the right sales instincts, marketing flair, financial acumen or operational skills.
All entrepreneurs hate moving people on. But if you don’t move them on, you end up doing their job at night after they leave early, after you have finished your own! Monitor and measure staff performance through written job descriptions, informal chats and performance reviews.
Myth 18. “Having a board costs too much”
So do mistakes! Tom Potter from Eagle Boy Pizza says it took him 10 years to set up a board. He wished he had done it in the first two years. “You can’t afford not to, even if you just have a quarterly meeting of people who are there for no other reason than to help you. They’d tell me I was off my head, go away and think about it and re-present the upsides and downsides.
“By the next board meeting I would either turn up and say ‘you were dead right’ or I would re-present, giving a lot more thought and realising there were more opportunities or more risk involved.” Surround yourself with two or three advisers and have structured meetings every month or every two months.
Myth 19. “I have to do everything but I feel so burnt out”
A venture capitalist once told me the biggest problem with start-ups was not having to kick out the entrepreneur because they could not take the company to the next level. It was the entrepreneur walking out or being carried out.
Burnout is a huge risk factor in the first few years as the lack of staff and resources means the entrepreneur takes on a heavy workload and multiple roles. There is also the pressure that entrepreneurs put on themselves to be successful – and to pay the bills. Use good time management to avoid disorganization and procrastination needs to include time out. Make sure you are clear about the possibility it may take longer for the business to take off and plan for that.
Kikki.K’s Kristina Karlson reached the end of her energy when she had reached 20 stores. “We had been doubling revenue every year, but I was really struggling and at the end of my energy,” she says. Her solution was a mentor, cash injection and a finance person. “You get so tired you can’t see the business with fresh eyes.”
Myth 20. “I’m not selling now, so why bother thinking about an exit”
Set your business up from day one to sell. Keep accounting records, minutes and all documents as if an astonishing offer was going to arrive on your desk tomorrow. Have your trademarks up to date, meet your potential buyers on a regular basis and keep them informed about your progress. Think of your business as a product. Is it fresh, organised, up to date? Is it operating at peak performance? Is it something the marketplace wants?
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