The entrepreneur faced with running out of money, having burned through his operating capital before revenues can make the company self-sustaining, may blame investors who lose faith. While books and articles describe the drama of the Valley of Death, they seldom observe that a startup’s demise is usually caused by imprudent application of resources and, even more likely because the entrepreneur’s initial idea is not attracting sufficient interest in the market. In most instances, startups die because the entrepreneur could not describe a successful product that had scale potential. His original idea was not good enough and he could not find another idea fast enough that appealed to a bigger market. While it is hardly a “law of entrepreneurship,” a good rule of thumb is that great ideas always find sufficient capital to be realized.
The fourth resource is the communications that you have with the market. How you take a prototype to market varies by the nature of your business. Eric Ries made a name for himself proposing the notion of “lean startup” that hinged around his experience with a software product that let his users co-design. The founders of Sheex tried prototypes with friends who they thought would be honest. Amy Upchurch bought advertising on Amazon’s site to test the market uptake of her formula to overcome morning sickness.
Being able to accurately read market signals—how your current and potential customers use and value your products—is a critical corporate competency. Understanding customer reaction is critical in determining how your product might be modified to achieve greater market uptake and how to set prices to sell the maximum number of units that consistently make the highest profit.
Market competence is not the same as advertising your business. Many entrepreneurs make the mistake of believing that, if they can get sufficient press attention for their product, the way is paved for success. While media coverage likely won’t hurt, no amount of advertising will help a product the market does not value for its utility. Further, the ease of generating “buzz” on the Internet has led many would-be entrepreneurs to misread real market reaction to their products. Much of what appears on the Internet about new companies and their products is generated, most often without effect, to attract investors. Great ideas get capital; bad ideas may attract a first round of investors but, without tangible evidence that large numbers of customers are ready to pay for your product, investors will abandon ship.
Planning by Monthly Diary
You know that entrepreneurial planning is, by nature, situational. As you strive to find your path to long-term success, it is important to periodically self-evaluate where you are headed. Review the condition of your startup monthly, being as dispassionate as possible in assessing whether you are on a path that will lead to scale growth. The discipline of a periodic review of your startup’s status and potential, which really is “planning as you go along,” should be part of your management practice. Build a brief analytic template, no more than four or five written pages, accompanied by several separate spreadsheets, that make an ongoing record of your progress and your plans for the upcoming period. This document is the diary of your startup.
Your summary of progress should describe in precise terms the state of your innovation and the actual status of your product at the reporting moment. Carefully record what is causing your product to evolve. Note how your research is progressing, including how you are responding to specific customer needs. Document how you have gathered systematic market feedback. Write down your record of various prototype trials and the outcomes they produced with what types of customers. What are the specific next steps that you believe will provide valuable information to you about what will make your product more successful?
Of course, you will want to list your customers, if you have any, and what sales or income you can expect from each. These estimates should be written down on a separate spreadsheet and checked every month against previous estimates to determine whether you are misleading yourself about the potential of your product. Whether you have customers or not, you should be developing specific views as to who will buy your products, at what price, and whether the revenues from those sales will sustain your company.
Next, you should record any formal market commentary on your product. Are there news stories, discussions of your product in trade magazines, newsletters, or online? If so, are they helping your sales efforts? Should you be dampening premature discussions of your products and the supposed progress of your company to protect your idea, or should you be encouraging it to build your brand?
Throughout all of this, you must track the financial status of your company, how much money you have, what your sales and expenses have been. What’s your burn rate—how many months can you survive with the money on hand? Once again, you’ve got to go back to your previous forecasts to see if you are improving your performance. Do you need to be approaching investors, emphasizing more sales, or cutting expenses?
Finally, you should constantly evaluate your staff. Until you have reached a critical mass of about thirty employees, you should be judging the contribution of each individual to your company’s progress and note what you expect of them in the next phase of the company’s growth. (After thirty employees, this analysis likely needs to become more formalized.) Do your previous assessments of an individual suggest that he or she is becoming more or less valuable? Write down your intended personnel decision and, later, remind yourself why you did or did not execute against your plan.
Every year, you should review these monthly diaries to see if you are making progress against your vision, or figure out how you can plan for more luck.
CHAPTER 11
Becoming a Successful Entrepreneur
Professor Mike D’Eredita of Syracuse University has a unique perspective on how to train entrepreneurs. As a rowing coach with a worldwide reputation for helping struggling crew teams, D’Eredita always has some country’s Olympic hopes in his hands. He also is an entrepreneur, having invented a rowing simulator. One of his machines is used by Frank Underwood in the Netflix drama House of Cards.
All athletes must learn the rules of the games that they play. Of much greater importance to competitive athletes, however, they must develop winning skills. To prepare Olympic athletes for competition, statisticians use big data to identify the best techniques to improve performance. Swimmers, rowers, sprinters, and hammer throwers keep setting records because the techniques of thousands of previous champions have been studied in great detail, resulting in improved dolphin kicks; the ideal timing, depth, and angle at which oars should enter the water; new insights about the best ways to push off the track’s starting blocks; and the perfect way to spin and release a sixteen-pound weight to achieve maximum distance.
Athletes with potential are identified the same way. Olympic coaches study the race results and game performances of tens of thousands of high-school and college players in a search for competitors with enough raw talent to compete at the highest level of a sport. A handful of prospects are invited to Olympic training camps. Those ready to commit to what can be several years of training in pursuit of Olympic glory are drilled in the latest techniques that will increase their likelihood of winning. Athletes and coaches are carefully matched; prolonged and intensive interaction requires personalities that fit well. Only athletes who constantly improve during training are invited to continue.
In our discussions of the fact that incubators and accelerators fail to increase the chances of entrepreneurs starting successful companies, Professor D’Eridita wisely observed that, “If we trained our Olympic Athletes like we train our entrepreneurs, America would never win even a bronze medal.”
You know now that writing business plans won’t lead to success. And, as D’Eredita’s observation reminds us, there are no training-camp equivalents that can teach you how to be an entrepreneur or teach the best techniques or “moves” to increase your chances of success in starting and managing a flourishing new business.
Advocating to the contrary, however, are endless Internet
lists of authoritative “dos and don’ts” for anyone hoping to start companies. Not surprisingly, many contradict each other. Erstwhile entrepreneurs, maybe successful and maybe not, journalists, professors, investors, and observers up in the stands, with no experience playing the game, offer opinions about what you should know and do to create a winning startup.
Absent an Olympic-style recruiting and training experience for would-be entrepreneurs, what can you do to increase your chances of success? What follows are my views of what successful entrepreneurs do to build great new companies that survive and flourish. These ideas are distilled from the stories in this book to the basics of what might be called the “science” of startups. They reflect my experiences founding companies as well as what I’ve learned meeting and talking to thousands of entrepreneurs before, during, and since my ten years at the Kauffman Foundation. In addition, these observations reflect what can be gleaned from the large databases that Kauffman funded to capture the history of thousands of startups. I have watched the game, played it myself, studied how others might increase their chances of winning, and helped others play by providing investment capital.
To illustrate these lessons, I chose the entrepreneurs in this book to stand in for the average Everyman entrepreneur. Each created products, and then the companies to make them, that have improved the lives and happiness of their customers, including many of us.
1. Be Ready When Your Entrepreneurial Moment Comes
Most of the people who you have met here can be described as “accidental” entrepreneurs. In fact, few set out to create their own businesses; their ideas to start companies were inspired by seeing innovations that had the potential to reach wide swaths of customers whose lives could be made safer, healthier, more convenient, and even happier by the speed, labor-saving, or pleasurable nature of their ideas.
Entrepreneurs most often are the creatures of circumstance. Art Ciocca was so disappointed with Coke’s decision to sell off the division that he had rebuilt, which he saw as poised for a great future, that he found himself buying the company. Ciocca vividly recalled that his career goal had been to climb the corporate ladder to head a major food company. Fate, however, laid open a very different opportunity.
Patrick Ambron was not a wannapreneur, driven by a career dream of graduating from Syracuse University with a startup under his arm. Only by trying to help his roommate find a job did Patrick start down that road.
Of course, Art and Patrick, like the other entrepreneurs we’ve met, took up that challenge when others in their situations might have demurred. More likely than not, there is nothing special in the psychological make up of entrepreneurs that predicts who will embrace an opportunity that comes their way. Entrepreneurs are not business daredevils, they are not race-car drivers. Rather, they seem to have been in the right place and at the right moment in their careers when a good idea, which they decided was worth pursuit, came into view.
Nonentrepreneurs may be people unlucky enough to never have seen the need for an innovation. Or maybe they simply couldn’t envision that they ever could start and run a company. Perhaps, at the moment in their lives that an entrepreneurial opportunity or inspiration presented itself, they were not free to take up the challenge of a startup or to pursue a promising innovation. But, if you think that you might be an incipient entrepreneur and are inclined to be on the lookout for your moment, you should work to predispose luck to break your way. That could include saving money to invest in your startup and to cover the loss of income when you step away from your day job.
2. Make Innovation Happen
In the rush of excitement that comes with launching, many startup founders make the same, ultimately fatal, mistake: They ignore the reality that every new company needs a good idea. Startup failure rates are rising, in some part, because too many people are starting companies with ideas that just aren’t viable. It may look great on paper but will—sometimes very quickly—fail the market test.
As we’ve seen by now, innovation doesn’t come in for a landing on schedule. Most aspiring entrepreneurs can’t know when or where their great idea might arise. Many, particularly younger entrepreneurs, inspired by the “garage” myth, believe they can force a radical breakthrough if they mimic what they know about how other innovators came up with their ideas. They usually don’t know that most startups are the makings of middle-aged entrepreneurs who bring technical knowledge, as well as lots of business and industrial experience, to their task. With no appreciation of this, young aspirants are more likely to believe that novel products with no perceivable value to buyers will somehow catch fire once they hit the market. They imagine that people will realize that they really do need an app-controlled frying pan, a folding sailboat, or some other hardly believable thing. These naive entrepreneurs play something like startup roulette.
The difference between those who succeed and those who fail seems, in large measure, to be an individual’s inherent sense of how the innovation process works and how to implement that process. Good ideas take time to appear and be refined. They emerge slowly from what the innovator already knows, reflecting his ability to plug diverse pieces of technology or information together in new ways. Once a new idea has crystallized, it feeds the ongoing synthetic process. Innovation begets innovation. Again, this is why so many entrepreneurs are in their forties when their inspiration comes. Years of exposure to relevant technologies have shown them how innovations unfold from combinations of existing products and processes to make something new. And, once entrepreneurs like this have one good idea, they are more likely to have others.
“Everything comes to him who hustles while he waits.” That spot-on advice is attributed to Thomas Edison.1 If you are feeling the sense that you might be destined to start a company, look for opportunities right under your feet. “Hustle” in the circumstances in which you find yourself.
Pevco’s Fred Valerino has filed an average of three new patents a year since he began redesigning pneumatic tubes. He didn’t start his company envisioning that he would become an inventor; it happened more as a necessary response to emerging customer needs. Valerino learned how to speed up his inventive abilities. Like most successful companies, Pevco became an innovation platform for a constantly improving technology that keeps the company growing.
The model for this phenomenon may be Thomas Edison himself. It took Edison nearly a decade to perfect his light bulb, which generated only fourteen patents. When the light bulb was able to replace dangerous gas light in homes, Edison conceived of building a “grid” to bring electricity to buildings in lower Manhattan, his test market. The process required an intensive and nonstop period of innovation, solving problems as they emerged during the development of the first electric utility company. To make his dream a reality, Edison had to invent dynamos, transformers, regulators, switches, magnetos, meters, and fuses—the entire kit needed to light up one part of New York City. His grid served as his platform for innovation. Edison patented nearly four hundred inventions related to the generation and transmission of electricity, and his work provided a technological blueprint for the world’s future. For decades, General Electric, Edison’s startup, was regarded as the most innovative company on earth.
From the perspective of Albert Hirschman, the theorist who proposed the planning fallacy, the pace of innovation under pressure would not be surprising. In Hirschman’s study of planning, what separated failure from success was the ability of project managers to behave like entrepreneurs, creating solutions as if out of thin air to stave off organizational failure. Hirschman’s study suggested that, in most cases, the “hustling” approach required a manager to deviate substantially from the solution envisioned in the original plan. Entrepreneurs become innovators once a project is underway, mostly to stave off failure. Many times the plan itself holds the seeds of failure; recall how Michael Levin was locked in by his investor’s plan. He couldn’t pivot to capture an opportunity that arose from his original innovation.
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bsp; Of course, the returns on hustling while you wait are also enjoyed by entrepreneurs who, in one sense, play it safer. They buy franchises, tried and tested business ideas that come with detailed business plans. As we saw in the case of Bob Carlucci, once up and running, his franchises proved to be the seed of much larger businesses, which then inspired more new ideas. While he adhered, as required, to the franchisor’s required plans, he built adjacent businesses where he could invent new solutions to increase the efficiency of all his businesses, including a construction company and a bank.
3. Be Realistic About Time
Before Proteon failed its FDA Phase 3 clinical trials, Nick Franano told me that, if he had ever known that it would take sixteen years before he would know if his company would succeed, he would never have started it. Nick, like every entrepreneur, was bullishly optimistic about a timeline. Of the thirty percent of startups that survive past five years, most are not profitable until they reach their seventh anniversary. Successful companies that go public sell shares on average after they are more than eleven years old. Yet, the average proposed time to cashing out, an “exit” in business plan parlance, is four years. Having read thousands of plans, I have never seen one propose that prospective investors would have to wait ten years to get their money back.
Every entrepreneur wants to start a “unicorn,” one of the handful of companies whose great idea is so powerful that its life cycle is measured in months, and the selling of which in a few years provides a check denominated in billions. This is not likely to happen to you. In James Dyson’s words, your experience starting a company is more likely to be a “long slog.” The dream of success should sustain you, but understand how long and hard the path may be.
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