The Truth About Start-ups

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When our expert panel reviewed the plan for Sieben's River North Brewery Inc., for instance, one competitor cautioned that food at the Chicago restaurant should be kept simple. Another warned that unless one person took responsibility, details such as "making sure the salt-and-pepper shakers aren't greasy" would be missed.

Sieben's shut down this past September. Cofounder Bill Siebel concedes the main mistakes were underestimating the challenge of running a restaurant properly, and not having a restaurateur for a partner. "There were 180 people working on the restaurant side, and one on the brewery," he says. "That's how our headaches balanced out."

When we talked to our experts about the Queen Anne Inn Ltd.'s prediction of reaching 80% occupancy in its third year, four of them said it was unrealistic for the Denver operation to base its profit-and-loss projections on such high occupancy. Four years later the inn is finally profitable at nearly 70% occupancy -- after raising its prices each year.

Richard N. Keener and Leif Blodee, founders of furniture manufacturer Keener-Blodee Inc., in Holland, Mich., thought they could sell $1.7 million worth of chairs their first year. But one analyst said, "For them to expect to be able to whack 7,100 units out of somebody else's hide is a gross miscalculation." This past December the bank auctioned off the company's equipment. "We overextended ourselves," says Blodee. "We tripled the size of the plant and then tried to build sales, and the sales didn't arrive."

The point is, all these companies should have learned more about what was coming down the pike by studying the competition -- really studying what worked, what didn't work, what expectations other players had developed about the market. There rarely is a reason to think life is going to be easier for a new business just because it's new. "What would make companies smarter? Look at the examples of others, and don't assume those companies make mistakes," reflects Buddy Systems' Tom Manning.

It Isn't the Sales. It's the Sales Cycle
No founder has ever overestimated the amount of capital necessary to get started or the amount of time it will take to be legitimated by the marketplace. You know that; it's boring. But what a lot of companies repeatedly miscalculated was the sales cycle -- the length of time between the first sales pitch to the customer and that customer's actual purchase.

Robert P. Bennett, founder of Micro-Fridge and a management novice when he started out, was caught off guard when sales to hotels didn't take off as he'd anticipated. Bennett proposed that they test the company's units in their lobbies and survey their patrons. Bennett found that 80% of those who tested the MicroFridge ordered within 45 days -- faster than expected -- but the test period still added an unplanned month and a half to his sales cycle.

Says Frederick A. Cardin, founder of the O! Deli Corp. chain of franchised delicatessens, "Our growth was substantially slower than I had hoped, because it can take a long time to get stores up and running in an office building." Landlord negotiations took longer; sites in new buildings had to wait until the facility was built and leased before opening; units replacing existing delis had to wait until leases either ran out or were bought out by the landlord.

"Those are timing issues, and over the long run those problems even out and go away," says Cardin. "But in the short run, we have a backlog of franchises waiting for sites" -- and a cash flow problem, since stores can't generate revenues if they're not open, and corporate overhead costs still mount. New investors not only bought out Cardin's share of the company last year but put additional money into operations. Miscalculating sales cycles led to similar cash flow problems, from the mild to the ruinous, with other start-ups as well.

Don't Underestimate How Much Time Simply Being the Boss Will Eat Up
Founders were thrown for a loop by the responsibilities of being CEO. Not only were they expected to be chief technologist or strategist or salesperson but interior decorator, human-resource director, and office manager, too. Those who delegated well didn't get overwhelmed by minutiae. Others got buried.

"Never having run my own business before, I didn't realize all there was to it," muses MicroFridge's Bennett. "I didn't have a concept of all the administrative aspects. They sound trivial when you try to list them -- you know, expense reporting, supervision, sick days, holidays. But when you throw them all together, they're a huge chunk of management time. I had no idea."

More painful, though, is Daniel J. Dart's experience. In July 1987 Dart and his partner, Ann O. Hartman, opened Blackstone Bank & Trust Co., in Boston. Today Hartman is gone and Dart is a consultant to Blackstone, after resigning last fall in the wake of a crackdown by the Federal Deposit Insurance Corporation. The bank's loan losses reached $2.2 million on its relatively small portfolio of $50 million; the bank is shrinking its asset base to maintain required minimum capital ratios.

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