The Truth About Start-ups

It was a similar story in Albany, N.Y., where Todd W. LeRoy and Michael L. Atkinson started their Video's 1st chain of drive-through video stores in 1987. Dazzled by their idea, they boasted they would sell 5,000 franchises by the middle of 1990, and that each unit would rent 116 movies a day.

They figured wrong on both counts. By the middle of 1990 Video's 1st New Releases Inc., the parent company, had shut down. So, too, had the 10 Video's 1st kiosks that had dotted the country.

The founders had made grossly inaccurate projections because they hadn't investigated what was involved in setting up franchisees and because they failed to quantify how much customers really wanted the drive-through service; they started selling franchises before their corporate-owned units were even two months old. Franchisee Rick Taylor, who owned three Video's 1st kiosks, says he's learned something about due diligence: "I had an M.B.A., but this experience was my doctorate. If I did it again, I'd spend more time analyzing the market and the product, and I'd talk to competitors rather than rely on the information provided by the franchisor. I was so enamored of the concept that I jumped, then looked."

How did the successful companies approach the market differently? Some, such as R.W. Frookies Inc., a cookie company, or Appliance Control Technology Inc. (ACT), a manufacturer of electronic controls for appliances, made sure their products were unique but not so different that customers didn't know what to make of them. Others, such as VideOvation, a purveyor of video yearbooks, took a year or more to test their programs and customer response, making sure they weren't misjudging demand or their ability to execute the concept.

"We've learned to pilot things," says Alan Khazei, who with cofounder Michael Brown runs City Year Inc., a nonprofit urban peace corps for 17- to 22-year-olds in greater Boston. The venture was originally approached as a nine-week summer pilot rather than a yearlong project. And changes in the program have been tried in small groups before being launched full-scale.

"We've really tried to build in time to evaluate what we've done," says Khazei. He and Brown hope to take their volunteer-for-a-year concept nationwide but don't plan to expand until they've honed the program a few more years in Boston.

If You Don't Have Experience, Buy It
The strongest companies were led by people with experience in their industries. Companies started by people new to their fields didn't fare as well. It's all about respecting the marketplace -- why waste time and money managing from ignorance? You have to know your business, and if you don't, you'd better find someone who does.

ACT, Rusmar, and The Plastic Lumber Co. have all carved out somewhat comfortable niches for themselves. ACT founder Wallace C. Leyshon says experience has made the difference. "Most of us here have been at this business a decade," notes Leyshon, who was business director of a division of Motorola Inc. before starting ACT. "We probably have a little higher probability of developing proper strategies than people who thought out their businesses over a shorter period of time."

Rusmar, the landfill-foam company, was founded by a scientist who was quick to bring in another chemist with experience in marketing and sales. Founder Paul A. Kittle also hired Arthur Andersen Co.'s emerging-business group as a resource. As a team, they brought revenues last year to a profitable $1.5 million. Similarly, the founder of Plastic Lumber (a manufacturer of "faux wood" lumber products) hired a key technical specialist in plastics manufacturing right at the start. Today Plastic Lumber is negotiating with some large companies that would, in return for processing, provide it with capital, long-term raw-material contracts, or technical assistance.

When expertise was needed, smart companies didn't just make educated guesses or even turn to consultants. They made seasoned people part of their crews. Those that didn't hire the necessary know-how -- including Video's 1st, Sieben's River North Brewery, Oualie, and Landmark Legal Plans, all of which are now dormant -- didn't fly.

Your Competitors Aren't Dumb
Smart founders knew that starting out without the benefit of experience would hurt them. They also recognized that competitors are to be respected. Because even if you'll be pushing a product or service that represents an improvement on what's out there, your competitor still has one thing you don't: a viable business. When start-ups ignore that, they turn arrogance into red ink.

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