The Truth About Start-Ups
Recent studies offer some clues about which start-up efforts take hold and which don't. But the biggest lesson is this: what successful start-ups do -- and when they do it -- is not at all predictable
Despite what the experts may tell you, there is no "right" way to start a business. No particular sequence of steps from A to Z will ensure your success. While no particular period of time is "normal" to get a company off the ground, most of those entrepreneurs who get a business going do so in about a year of concentrated effort. Those working on a start-up for much longer -- apparently with less intensity -- have more trouble getting their businesses going.
Those conclusions are based on recent studies of the start-up process that show launching a business to be no more orderly or natural than learning to swim. In fact, there are a lot of parallels. In swimming, first you get over your fear of the water. Once you jump into the shallow end of the pool, you may start by getting your head wet, or you may try floating or exhaling underwater. Whatever the sequence, in the end you may learn to stay afloat in the deep end and actually get from one side to the other. Some people are swimming in no time; others take much longer. Some never quite get the hang of it and climb out of the pool.
For our study we interviewed a representative sample of U.S. adults who reported that they were trying to start new businesses. Six to nine months later we interviewed them again. Both times we asked them about their start-up activities, such as writing a business plan, installing a separate phone line, getting financing, and the like. There were more than 20 activities on our list. We then measured the popularity of each activity and when each occurred in the start-up process.
Our conclusions: start-up activities occurred in every possible order; the time devoted to the start-up phase varied dramatically from one business to the next; and not every start-up involved the same set of activities by a long shot. We used the date of the first start-up activity, whatever that activity was (and usually there were two in the first month), to mark the beginning of the start-up process.
Not surprisingly, 5 out of 6 of those interviewed reported that they'd given "serious thought" to the new business by the time they'd completed the first activity. That, of course, left one-sixth who were in the midst of at least one start-up activity without having given serious thought to their new business. Even the most frequently cited initial activities -- investing money in the new business, saving money to invest, and preparing a written business plan -- were reported by only one in 4 in the first month. Only one in 6 had started seeking financial support. None had created a new legal entity or hired employees. Only one in 12 had worked full-time on the new business during the first month; 4 out of 5 were working someplace else during that time.
About half (46%) of those contacted in the second interview claimed that their start-ups had become going concerns. All had received money from sales, although only one-fourth reported a positive monthly cash flow (another reason to have delayed full-time personal commitment). For half the respondents, sales occurred within seven months of the first start-up activity.
By the second interview, the successful launchers had engaged in 7 to 15 of the start-up activities. But where had they started? By getting a bank loan? Writing a business plan? Filing for incorporation? Putting an ad in the yellow pages? Basically, the respondents were all over the map. More than nine-tenths had invested their own money in the business. The same number had purchased equipment and facilities and developed a marketing program. More than three-fourths had created a written business plan; sought financial support; organized a start-up team; or applied for licenses, patents, or permits. At least half had begun to save to invest in the new business; received financial support; or created a new legal entity. Almost 2 in 3 were still not devoting themselves full-time to the new business. Two in 3 still did not have a separate phone listing or a federal employer-identification number. Only one in 4 had a first model or prototype. Only one in 4 had a separate business phone line.
Just as there is no one way to learn to swim, there is no one way to start a business. On the other hand, all swimmers must master the basics, and all the new businesses eventually got around to most of the basic activities. Recognizing that nothing is more basic than taxes, two-thirds had filed their first federal income-tax return by the time of the second interview. Typically, returns were filed 14 months after the beginning of the start-up process.
If the start-up activities themselves varied, what about their timing? Some rough patterns emerged that are evident when the start-up process is divided into three chronological segments: months one through three, months four through eight, and months nine and beyond. For those with a successful launch, activities usually occurring in the first three months included investing personal funds in the business; developing a written business plan; seeking and receiving financial support; organizing the start-up team; and obtaining a separate phone-directory listing. Those occurring midway in the process, four to eight months after the first event, included initiating savings to invest in the business; looking for, leasing, or buying equipment and facilities; applying for licenses, permits, or patents; developing a model or prototype; and creating a legal entity. Activities occurring relatively late in the sequence, at least nine months after the start date, included developing a marketing program; installing a separate phone line; hiring employees; acquiring a federal employer-identification number; and filing state unemployment-insurance taxes, federal social-security-tax payments, and federal income-tax returns.
But what of those 54% who did not report a successful launch by the follow-up interview? Had they given up? Hardly. Only about one-eighth reported that they'd given up. Most of the others claimed they either were still working on the start-up or were temporarily distracted and planned to get back to it. Since that group had pursued almost as many start-up activities as those with a successful launch had, it is clear that the differences were not related to enthusiasm for the start-up.
The unsuccessful had been involved in the start-up process twice as long as those that reported a successful start-up. (Because a small number of start-ups may take several years to get going, average times are misleading. We'll use the median -- the number that divides the group in half -- to describe the start-up window. For example, about half those with operational new businesses knew the business was successful in less than seven months; the other half knew in more than seven months.) For those still working on their start-ups, the median time from the first activity to the date of the follow-up interview was more than 18 months. The median time from the first activity to quitting, for the few that quit, was several years.
Almost all the start-ups were part-time efforts until they seemed to be successful, and most involved teams of future owners. One team may have devoted 2 hours a week for two years; another, 50 hours a week for a month. Both would have contributed 200 or so hours total to the start-up effort. We thought it would be useful, therefore, to consider the person-hours devoted to each start-up. The successful launches took an average (a useful measure in this case) of more than 2,000 person-hours (about one person-year of full-time work). The average time invested by those still trying was about 1,000 person-hours (half that of successful start-ups). For those who had given up, permanently or temporarily, the average time invested was about 500 person-hours (half the time spent by those who were still trying).
We have, then, two similarities between the start-ups that made a go of it and those that didn't. The team sizes were about the same, and the number of activities reported was about the same. But there were also differences. While almost all start-ups were secondary efforts for the teams (most of whom retained their day jobs), the successful launches happened relatively quickly and reflected an intensive concentration of work. If substantially more than 2,000 person-hours have been devoted to a start-up, if it is dragging into the second year, and if there is not much evidence of positive monthly cash flow, it may be time to reconsider the entire endeavor. (In other studies, we have found people that have been working on start-ups for more than 10 years without a first sale.)
The swimming-pool metaphor of business start-ups holds up pretty well. More than 7 million U.S. adults are in the shallow end of the start-up pool, trying to develop the skills needed to deal with the deep water. Each is learning the right skills in a different way; all who are successful master the basics. Most of those who become successful find out rather quickly, in less than a year. Others may spend a lot of time -- several years -- fooling around in the shallow end before they climb out of the pool. But the starting of businesses is a dynamic process, with a constant shifting as new people jump in, others successfully negotiate the deep end, and others climb out of the shallow end. It is also clear that some who leave the pool, whether they're successful or unsuccessful, go back in for another try.* * *
Start-up Activities Tracked
· Invested own money in the new business
· Initiated savings to invest
· Wrote business plan
· Sought financial support
· Sought facilities/equipment
· Bought facilities/equipment
· Organized start-up team
· Received money from sales
· Drew salary
· Obtained separate phone listing
· Generated positive monthly cash flow
· Received financial support
· Applied for licenses, patents, permits
· Developed first model or prototype
· Started working full-time on new business n* * *
Paul Reynolds is Coleman Foundation Chair in Entrepreneurial Studies at Marquette University, in Milwaukee. The U.S. pilot study that provided the data for this article was developed with Richard Curtin and James Morgan at the University of Michigan Institute for Social Research.