Judgment calls, reality tests and mistakes of the heart that doom companies to failure.
We're not talking cash flow here. Or a bad hire. Or inexperience. We're talking about judgment calls, reality tests, and mistakes of the heart
Nobody who has the courage and drive to launch a new business expects to see it crash and burn. Most entrepreneurs believe that if they follow their instincts and at the same time use their heads in such areas as marketing, finance, and hiring, they'll at least make a go of it. And maybe, just maybe, they'll create a winner.
Ironically, though, if you go back and do autopsies on companies that failed, technical or tactical errors rarely show up as the principal causes of trouble. The companies' products were almost always well constructed. The employees were hardworking and professional. The founders themselves usually had more than a rudimentary knowledge of the market.
What kills companies usually has less to do with insufficient money, talent, or information than with something more basic: a shortage of good judgment and understanding at the very top. Once entrepreneurs have made the decision to go into business, too many fail to routinely step back and ask -- or let others ask -- if what they're doing adds up. Indeed, they're swayed by their sentiments to act in ways that, unwittingly, put their businesses at risk. They rely on too much heart and not enough head.
Regrettably, there's no electronic device you can buy that beeps when you approach a death trap. You've got to keep monitoring your position. But knowing the shape of the traps and where they're located may keep you from getting too close.
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Is this a great product, or what?
Forget about how much you love your product or service and how clever or state-of-the-art it is. When all is said and done, the most important test is whether it meets a market need. Most entrepreneurs are brash enough to think that if they like the product, so will others. But if prospective customers are more or less content with the competition, and you don't give them a compelling reason to change, you've violated a basic rule of the market. Unless you have piles of money to spend on advertising and marketing, you're going to have problems. As Jon Bayless, a partner with the venture-capital firm Sevin Rosen Funds, in Dallas, puts it, "There's a big difference between being on the leading edge and being on the bleeding edge."
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With a market this big, we need only a tiny share to make millions.
To the optimist, it may look as simple as rolling off a log: for example, say the tent market is $100 million and you decide to go into it with the idea of making and selling high-end quality tents to backpackers. Presto, within a couple of years you've got a $5-million business. But a lot of entrepreneurs don't take the time to understand how a particular industry is organized, notes Fred Beste, with NEPA Venture Fund, in Bethlehem, Pa. For one thing, tent buyers aren't only the people who go backpacking. Let's speculate that at least half the market is in circus, military, and special-event tents and another 20% is in low-priced models for the backyard. "If you do the math," says Beste, "you may find that your part of the market is only about one-fourth of what you thought."
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What a business! It's easy -- and cheap -- to start right away.
The start-up costs are low and the market is exploding. At the very least, you think you'll be able to match what you're earning in your current job. So what's wrong with this picture? A lot. Unless you can manage to find some point of distinction to help you rise above the flock of competitors (such as better distribution, faster turnaround time, friendlier service), you'll be clobbered. Every few months hungry new competitors will hop over the barriers to entry and try to steal your customers. Whether you like it or not, you'll find yourself doing all their market research.
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These projections are conservative.
No, really.
If you don't believe in what you're trying to do -- and that you'll succeed at it -- quit right now. But even if you're convinced you'll make it, it's suicide to have only one plan. As a discipline, you need to consider what happens if your assumptions are (for whatever reason) cockeyed. The best way to begin is to ask yourself hard questions: What if instead of taking 6 months to develop your product it takes 12? What if the average customer buys only half as much as you expect? Or only a fourth? Will you have enough cash to keep going? Where will it come from? Bill Zangwill, professor at the University of Chicago's School of Business and author of Lightning Strategies for Innovation (Lexington Books, 1993), talks about the "rule of two and three": that start-ups either take twice as long or need three times as much money to get off the ground as founders predict. The same can be said about some new products. With alarming consistency, the record shows that early projections (even the "conservative" ones) are almost never met.
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With my brains and your contacts, who can stop us?
It happens all the time. Two well-intentioned colleagues -- often friends -- go into business together and split the ownership smack down the middle, 50-50. Each has a separate area of expertise, but as "equals" they vow to make all the big decisions jointly. Unfortunately, those deals have a history of falling apart (often in a painful and costly manner). Sooner or later, one partner begins thinking his or her marketing savvy is worth more than the other's talent for finance or production. Given the dynamics, you can't glue the relationship back together, and all too often there's no mechanism for handling differences. If you're intent on going this route, at least have the foresight to work out a buy-sell agreement to cover what would happen in a stalemate. If you can't agree on the terms of a buyout when you're still friends, how will you be able to agree when you're at each other's throats?
