Still, DeMello no longer feels like just another stockbroker. "I know how much work it was to get where I am -- and I don't mean I think I'm at the top; as soon as I say something like that I'll crash in two seconds. But I feel I've done something that isn't that simple."
TRUTH AND CONSEQUENCES: WHAT THE EXPERTS KNEW
Sometimes, a critic is a founder's best friend
We called them The Experts, or commentators; one start-up chief executive sniffed that they were simply pontificators. Whatever the tag, each one's assignment was the same: read our start-up story and say what you think.
Our aim, of course, was to counterbalance the superheated plans of the founders we profiled (most of whom made seductively convincing cases for their companies) and to tell readers The Rest of the Story. The commentators pulled back the curtain a little, pointing out oversights, faulty logic, or calculations that raised positive thinking to an article of faith. And it's no wonder they weren't always popular. Whether competitors, academics, financiers knowledgeable about the industry, operators of similar businesses, potential customers, or editors of trade journals, the experts dumped hard reality all over somebody's dream.
Were they right? Yes, they usually were. The companies they received with heavy skepticism are the ones doing poorly.
More interesting than the experts' thumbs-up, thumbs-down verdicts, though, was that certain criticisms came up month after month, start-up after start-up. It began to seem as though there were intrinsic entrepreneurial blind spots. And the follow-up done for this article shows that 95% of the time the warnings -- listed here -- were wise.
* Sales will not grow as quickly as founders project.
* Miscalculations are usually made in what it costs to sell -- including everything from salaries for salespeople to budgeting for conferences.
* Most companies pursue too many kinds of customers or too large a geographic territory, or introduce too many products, given limited resources.
* People with key experience ought to be given stock or some other incentive to keep them fully involved, and too often are not.
* It's easy to let operating costs and overhead slide up, and too often that's what happens.
* Selling someone once doesn't make that customer a loyal buyer.
Which category of experts was best? Hands down, the financiers -- who, most frequently, were managers of venture capital funds with positions in companies comparable to the start-ups they were evaluating. Consistently, they got to the heart of the business under scrutiny, explaining what its competitive advantage was and how to give it leverage. Sometimes they'd simply say that there didn't appear to be any competitive advantage. The financiers didn't flinch when it came to stating what to them was obvious.
An example: Bruce V. Rauner, a venture capitalist in Chicago, reviewed two companies, including O! Deli Corp., a franchisor of delicatessens. When he looked at O! Deli he said the founders' gargantuan projections for franchise expansion made them seem too top-line oriented. And the way they'd gone public, merging with a shell company trading on the pink sheets, might make it difficult for them to raise additional capital down the line. But just as troubling was the simple fact that no one connected with the operation had ever run a deli. The CEO had spent his career as a consultant, and as Rauner pointed out, "the start-up desert is littered with the bleached bones of former consultants." This business, he stressed, comes down to selling sandwiches, not franchises.
Today O! Deli has 21 shops; the prediction of 500 for 1993 now seems pure whimsy. The founders, bored with the deli business, left to start new businesses.
Perhaps the venture capitalists are good critics because they routinely do for a salary what we ask them to do for fun: figure out whether or not founders know what they're doing. Unlike consultants or industry observers or even customers, they inherently use a tough but telling criterion: will this company make money for its investors? Are there people who want this product or service, and will the founders really be able to get it to them at a profit?
Other experts may not have been so consistently insightful, but their advice was always worth hearing. Operators of similar businesses or direct competitors, for instance, were good at cautioning against overestimates of swift market acceptance and assumptions about product or service uniqueness. They did, however, shy away from embracing new approaches. And in retrospect some of those new approaches worked -- sometimes they turned out to be as good as, or better than, the tactics the "experts" were using.
Fact is, perspective like that provided by our experts comes pretty cheap. It's often readily accessible. And it's shocking how infrequently it's sought. There ought to be a rule: Before you start a business, find 10 smart people who know the industry and ask them: How am I going to screw up? How else? How else? How else?
REPORT CARD
A confession: When it came to grading the experts, we were easy. Why? Because any advice is better than none. (Even bad advice can help by forcing you to consider why one tactic may be smarter than another.) Better, we say, to pick every available brain than to skip a single critic.
VENTURE CAPITALISTS -- Grade: A
Advantages: Evaluate businesses for a living; adept at spotting weaknesses and suggesting solutions; focus not on "Is it a good product?" but "Will it sell?"
Disadvantages: Usually return Inc.'s calls, but might not return yours
OPERATORS OF SIMILAR BUSINESSES -- Grade: B+
Advantages: Know customer attitudes and margins necessary for profitable operation; have survived mistakes; know industry swings
Disadvant
