Entrepreneurship is, at least for the first few years, a wild test of your survival instincts. Poor preparation, a lack of intuition or a run of old fashioned bad luck and any start-up will be crossing the River Styx like the other 90% of wishful entrepreneurs’.
It isn’t always survival of the fittest either so how do you even begin to avoid the drop?
Firstly, by knowing the potential pitfalls. The devil you know is better than the devil you don’t. In this case, it is the problems entrepreneurs routinely face that get out of hand and can end up tanking a business. It’s just like driving. If nobody ever told you about black ice, potholes or hydroplaning, you could well be cycling to your start-up. Knowing the potholes out there saves you a few tires.
One caveat: there is a good healthy list of problems to watch out for so we have broken this piece into two articles.
Cash Flow is like Air
It comes as no surprise for most that money features highly on the list. Running out of it accounts for 29% of failures and is this second most powerful poison for start-ups.
Low funds are naturally more potent earlier in the entrepreneurial life-cycle. Established firms, with reputable credibility can typically lean on the favor of suppliers or pursue investment easier than the fresh out of the box start-up. Even then, you are likely just buying time.
The pessimistic principle of prudence is a good place to start and guide your stance on your funds. Don’t overestimate your income and never underestimate your expenditure. With this as your starting principle, any entrepreneur can construct some goals.
How soon do you need to be making sales and what is your break-even point? Two vital questions to start out. 60% of start-ups launch with less than $25,000 which in the grand scheme of things is not a huge amount. Understanding how far this has to go and when you need to start generating an income is integral to survival.
If you are part of the 40%, you perhaps have a little more time but need to consider what you will be investing in. Start-ups like Daqri managed to plough through $250 million of investment capital and end up in the wastelands due to poor use of their funds. Funds require careful management and diligent capital outlays that will actually yield results. Planning is prudence!
Scaling Up is a Process
Profitability per unit and Learning are Essential
If you’re a repeat entrepreneur, you know the giddiness of your first sales. You think you have made it and it is time to blow the hinges off and reach the masses. Stop! Take a breath. Figure out how profitable your sales are. If you are making money per unit then proceed with caution and learn as you go. You might not be a perfect fit for the market just yet so be prepared to adapt.
If not, figure out how to turn a profit because more sales might make more revenue but might not make more profits.
Having per unit profitability allows you to scale with assurances that you are not racking up debt… always a nice feeling. Then the real challenges of scaling kick in.
Box CEO, Aaron Levie articulates the point with the finesse it requires. From the outset, create a vision of where you would like to get to will always keep you on track but you need to remain nimble enough to evolve along the way with what you learn.
Hiring and Shedding are more difficult than you think
Solo-entrepreneurs who reach a level of scaling understand the need to hire most but what do you hire for? Sounds like it should be simple.
Do you hire for marketing, accounting, production or what role do you need taken off your plate? This is shedding and is often much harder than you think when faced with limited resources. Everyone wants the most bang for their buck. Assessments on which hat to offload should result in creating the most business value.
Beyond just shedding, hiring has longer term consequences worth considering. You need to hire in line with what you want your business culture to be. You can’t expect to attract the best talent over time if you make snap judgements. Early hires set the tone for the working environment as much as you do.
Furthermore, new talent requires training. Employees need time to understand the processes, goals, expectations and priorities. People who gravitate towards start-ups tend to enjoy the excitement of helping a new product launch and with that comes added responsibilities. Start-ups are notorious for scope-creep… the simplicity of asking an employee to do something outside their job description. As the entrepreneur, you need to work on various different projects but that doesn’t necessarily translate to the team.
Efficient Processes Make Scaling Possible
Growth isn’t only challenged by hiring and profitability; it is challenged by the internal systems and process. Let’s say you are a design engineer and for every RFP you receive, it takes 4 hours to envision and draft a proposal. Assuming you do amazing work, you start getting 20 calls a week but only convert on 5 of those. Suddenly, there are 80 hours of work to do but not necessarily the guaranteed conversion rate to warrant a new hire.
Developing efficient processes should apply across the board. As an entrepreneur, there are innumerable demands of your time and being on the hook for hours on any one topic can impact profitable projects across the board.
Timing is everything with Investment Capital
Significant growth is a strange thing to quantify but you will know it when you see it… and when you do, be ready to make decisions. If you are sitting on the precipice of explosive growth and need the backing of a financier, you will need to have some serious conversations with yourself. It may or may not be the news you want but securing venture capital can certainly come too soon.
Getting Financed Too Soon
Securing financing before you have set a sound, confident company vision can create tension in the power dynamics. Investors will always want to see a healthy ROI as early as possible. Where they have purchased a considerable stake, they often look to exact influence over the direction the company is taking. Finance and mentorship are invaluable as a new entrepreneur but so is retaining the steering wheel.
While the vast majority of start-ups need quick cash to stay afloat or get to the next level, vetting the investor should be part of your plan. What is their track record and do they add value to your company? Are they offering ideas in discussions or making demands? And will they be available for later rounds of investment?
Lastly, don’t forget about your customers. If one of the selling points to your customers is that you are in touch with their needs and haven’t “sold out” for a de-personalized approach, will there be an impact on their opinions?
Getting Financed Too Late
If you have run out of money you have sought financing too late so let’s not spoon feed the obvious. It’s not getting to that point that is worth being concerned about.
Investors are in the business of making money. As much as they are hopeful for your success, that is the primary aim. Many investors stay out of the seed capital arena due to the higher risk. Favoring well-established companies helps to deduce who is most risk averse. They take convincing. No doubt you have already arrived to the point but later stage investors take time to come by and if you’re in a rush to get cash in, it might already be too late.
Scaling is a funny business. You are excitedly eating up the market share to attempt to gain a foothold from competition but it can be difficult to keep a pulse check of your expenditure. Capital investments are part and parcel of the growth. Making estimates on where and when you will invest is a challenge. Before you know it, you might have assigned the financing available to you so be prepared to go into the market for investors earlier than you think.
Preparation is always going to save you in the long run. The pitcher’s position is always weakened by the heightened need for the investor. Doing the grocery shopping whilst hungry never ends well for anyone.
Dealing with the Ongoing Challenges
As mentioned, there is a litany of potential pitfalls for a start-up. Most, if not all, are avoidable if you know what to look out for. Advice, time management, marketing, problem solving and flexibility are features in the second piece of the menu. Preparation, honesty and early acknowledgement of your problems is half the battle. Action is typically the other half!