Running a new business can be exciting and life changing. Taking
an innovative idea and bringing it to life. Potential rewards are towards the
upside when a business succeeds. Start ups have generated an entire mythology
around the topic. What often is ignored surrounds the unspoken negative side
with business failure rates during the initial 5 years. I have read that around
80 % outright fail, 10 % organizations live on in a lesser form while 10 % grow
to become big, successful entities. Working in a well connected startup; I have
dealt with many new businesses and bringing their products into reality. This
post is part one of two in a series addressing the two main pitfalls I believe
cause this large failure rate, marketability and corporate mismanagement. We
will address the former and most important factor in this article.
Business sales come down to one question, “Why should I buy
this product or service?” Breaking the question down into smaller components
yields even more simple items. Do I need this product? Is this the best version
on the market? Will I get good support and service? Many more questions arise
that define a customer’s desire in purchasing any product. Other less obvious,
but very important factors that come into play are product functionality,
accessibility, culture and even the zeitgeist. The best example of a product
missing in the secondary categories is Chevrolet trying to sell the Nova (no go
in Spanish) in Latin America during the 1970s.
Larger more established companies also face the market
challenge, but have more leeway since they are often diversified allowing a
greater margin of error. With a startup, a few errors are fatal. Being a small,
young company forces the business into creating a viable product with its main and
often only product. For it to survive within such a short time frame, the
product is required to fit into one of three main categories:
1 Revolutionary – nothing like this has ever been seen
before
2 Disruptive – this product is the better mousetrap
3 Niche – this product fills a previously empty void within
an industry.
If the business is a market failure from the beginning,
these are (in my humble opinion) the root causes and should raise a flag within
anyone who is dealing with a nascent business:
Delusions of Grandeur –
The inventor has the best product in the world that is going
to conquer all markets. Founder(s) can be good salespeople and make it sound
like their technology is just unstoppable. Another related delusion is the
founders’ obsession since it is their lifework while overlooking the obvious
flaws. Big egos are at play here. Yelling at the sky to make it green just will
not make it happen. Reality will one day step in and make an ugly scene with
all involved.
Lack of Due Diligence –
Modern technology is complex and is built upon decades even
centuries of prior discoveries and inventions. One can easily point out the con
artist who comes and tries to sell you a bridge. New products or services do
not tower as the Golden Gate
Bridge since they inhabit
only the thought process of the company’s founder. Does a variation of this
product exist? Has this idea been tried before without luck? Those who cut
corners will downplay these quintessential questions.
Insufficient Product –
The product is put onto the drawing board, prototypes work
and production begins. Once the initial sales are complete the technology
works. It just does not work well enough to displace an alternative or does not
make the product worth purchasing in comparison to the price. In other words,
the benefits do not match the high cost.
Application Missing –
Key to any new successful endeavor is the “killer” application.
The customer will buy this product to complete a necessary task or resulting
entertainment. Failure to fulfill an application is a recipe for disaster
resulting in no orders. Starting a business before a previous demonstration will
most likely lead to this endless, financial drain leading to a slow death. Focus
is demanded to avoid this trap.
This post is not as a condemnation of start ups, but is
educational for those who wish to engage in such enterprises. Start ups and
small businesses are the backbone of the US economy and encourage job
growth. This in turn makes our economic engine purr along while many in the
world stammer. We should encourage those who are willing to take the risk and
start their own enterprises for it benefits them and society as a whole. Part
two of this series will address the broader issue mismanagement found in all
corporation sizes.