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The ten things you should not do as a startup.

The startup failure cheat sheet. The ten things you should not do as a startup.

Once upon a time in a different life I wrote a book on failure. It was a summarized edition of everything that went wrong at the three start up I founded that failed. It was my not-to-do list. Here is a short summary of the original 200 pages from Reboot

1.1  The curse of technology – The  mythical value driver or Technology doesn’t matter.
Technology is difficult. You would expect it to be a competitive advantage if you get it right. It is not. [1,2] 

Technology is not a competitive advantage. Yet businesses overemphasize the contribution technology makes in business or product success.  Anytime I see a business plan for a venture that emphasizes technology or a technology related factor as a value driver and or a competitive advantage, I know the  team has not done their homework and taken the easy way out.  

Not understanding the real role technology plays in your startup (its not the lead role) understates the commitment, the cost, the timelines and the effort required to rein in the technology demon – its impact on deadlines, deliveries, customer perception and an organization’s future.  
 
1.2 Big projects and big sales deals – The price of credibility or locking down the one that got away.
Should you aim at big projects and big clients right off the gate? You should not. 

Is there any correlation between targeting large customers, executing large orders and new venture failure? I believe so.  New ventures, without exception, lack the depth to survive closure or execution of large assignments and contracts. Without sufficient depth, such ventures make bad short term calls on pricing, delivery terms, hiring, concessions and service level agreements that put them on track for eventual failure. Success is built on a collection of small wins, not big hits.
 
1.3  The perfect product  – The allure of Perfection.
Ship it first, seek perfection later. 

The effort spent in perfecting product offerings when customers are willing to work with imperfect solutions. Common phenomenon in technology companies where generations of the same product go through the never ending product development ==> testing ==> product development cycle without giving thought to customer interaction and the opportunity cost of perfection.   

There is a minimal acceptable feature set customers are willing to work with. Failed ventures climb higher on the perfection curve than their successful peers, ignoring financially viable product development strategies that get to revenue generation quicker and faster. 

1.4  Heroes  – The Hamlet syndrome [3]
You will never find the perfect life saving hire who will do it all for you. You will have to get involved and own it. 

When was the last time you were part of an organization that had found the “rain maker” who would save your soul, your startup, your investment and your clients and bring some sense of sanity to your life?  When was the last time such “rain makers” delivered on the promise linked with their arrival. Heroes are “very human” resource expected to solve insolvable problems.  
 
Why do heroes fail?  They don’t know where to begin, they wait too long, they carry too much excess baggage, they do too little, they compromise too much and they often fail to notice subtle transitions that change the power structure around them.  Heroes also fail because organizations and institutions succeed only when they grow beyond personalities and individuals; by definition, Heroes accentuate reliance on one man armies. 
 
1.5 Solving the wrong problem  – Prescription glasses 
Great products for wrong markets! Great solutions searching for appreciative and paying customers!  Great ideas going nowhere!  Welcome to the graveyard of brilliance that missed its mark.  

There is more to the question than surviving till you get it right.  First, in problem spaces involving new ventures, there will always be false optimal solutions – solutions that give the appearance of arrival at your intended destination, when the target objective is still miles away.  Second, successful product development is iterative product development that uses fine tuning as well as dramatic remedial surgery with an even hand.  Failed ventures spend too much capital on false optimal(s) and use single iteration product development models.  
 
1.6  Leadership  – Gods and generals or do you really need leaders in the garage?

Do you really need leaders in a start up with a headcount of three.  You don’t. 

Sidebar Sun Tzu presents an interesting and objective framework for assessing leadership potential.  The capacity to exercise moral influence (lead and inspire), the ability to observe external factors (feedback loop with the environment), the strength to command and the intelligence to chose the right doctrine for the problem at hand[i]
 
1.7  Faith, commitment and the inability to fail – Who will cast the first stone?
How difficult is it to walk away? 

It boils down to the battle of two mindsets: The practical view that emphasizes failing quickly & the emotional view that appeals to faith and invested effort to salvage anything if at all possible. Which one should you listen to?
 
There is only one reason for a business to exist. To make money for its owners and investors.  If on a forward looking basis, it fails to achieve that goal, there is no reason left to justify its continued survival. Faith and commitment are relevant when the underlying business model is viable, where numbers add up and profitability is attainable.  When these conditions are not true, faith and commitment are misplaced.   These conditions or test results are not static; a business model may be viable on day one but no longer be relevant or realistic two weeks down the road.  New and previously unknown information is generated as ventures reach significant milestones. It is better to ask simple questions again about capital, products, customers, economics and teams to grade ideas and plans as milestone go by than to rely on just the initial analysis, no analysis or the sin of all sins – irrational exuberance. 
 
1.8  Capital and Partners  – The equity paradox
You need capital. Understand what it costs. 

Businesses need operating capital to run, risk capital to make bets, signaling capital to form relationships[ii]and intellectual capital to protect margins.  

For new ventures the bets are bigger and the relationship more uncertain hence the need for additional risk and signaling capital.  While thinking through the financial planning and capital budgeting process, ventures that fail, makes no separate provision for risk and signaling capital.  Left to fend with just operating capital these startup run into trouble when bets go wrong or when clients are hesitant to sign contracts with a vendor with no reserves to fall back on.   The thing is you don’t really miss capital till you need it.  The more you need it the more expensive and elusive it gets. If you have been not been smart enough to get your fill when it was abundant and cheap, the distraction and cost of raising capital can burn your business down.
 
Capital, irrespective of its shape or form, is not free. With capital, come partners; with partners come questions of allocation of ownership and equity.  The allocation occurs on the basis of contribution of implied capital – ideas, services, network, relationships or cash.  When implied capital is not contributed – ideas that are held back, services that are not delivered, networks that are locked away, relationships that breakdown or cash infusions too late, partnership and ventures run falter and die.  
 
1.9  Expectations management    – The undersold dimension
Set expectations correctly. Under promise and over deliver. Not just for customers.

Customers, family, employees, investors – It is important to ensure that these four stakeholders are on the same page with respect to the amount of pain, the likelihood of failure and the chances of success.  But then you have to remember that nothing is static or stable in the startup world (the only constant is change).  The expectation that needs to be set is that expectations will be reset as the game changes.  Link this to the fact that there are no short cuts, no free lunches, no inefficiencies and a statistically insignificant chance that you will actually come out ahead in the long run [4].  Without this mindset a new venture turns into a never ending, inconclusive shouting match of ‘you-never-said-this-would-happen’ kind.  The same mindset also plays a big role in retaining and motivating talent when options fall under water, contracts fall through, customers walk away and the annual bonus pool disappears.  

 
1.10         Diversification – Any which way you can 
Why is diversification a four letter word?  

Primarily because diversification comes in many distracting forms. From owners doing free lance consulting on the side to pay bills, to vendors getting into incremental services to close contracts, new ventures get into areas that take them further away from the focused path they were expected to follow. As Geoffory Moore puts it, to succeed you must first understand the difference between core and context and then focus on the core.
 
Model that work are those that starts with products and stays on track till they hit sustainable growth:

Product ==> Revenue ==> Profits ==> Growth ==> Sustainable Growth.  When diversification is used to generate revenues earlier, the model distorts to Revenue ==> Growth ==> Product ==> Profits ==> Sustainable Growth or other variations that push the product further down the road. 

The game is not about revenues. It is about succeeding in the line of business you have chosen and making a viable venture out of it.  To do that you have to get to Product and Profitability before you run out of capital.  Diversification takes you further away from that path.

[1] Economic rents indicate the existence of a competitive advantage. Just because technology is difficult to get right or because everyone does technology badly does not imply that it bestows such advantages on its users. 

[2] See “IT doesn’t matter” (HBR May 2003, Carr, Nicholas) and “What is Strategy” (HBR, Porter, Michael). In the latter Porter argues that Operational Excellence (one form of which is technology execution) is no longer a competitive advantage. Carr updates the debate in his controversial piece and suggests that technology is now part of the infrastructure dimension, hence common, ubiquitous and no longer a competitive advantage

[3] In Search of the Perfect Prince, (excerpt from the book Power Plays by John Whitney), Columbia Business School, Columbia University, NYC.

[4] When you add the net effort invested in a new venture and compare that with the end return as an owner or employee, more than 88% – 94% of venture capital funded startups lose out in the long run.  It is only 6%-12% of funded startup employees who break even or earn a positive return (Source Venture One, Venture Source, Vinod Khosla @ KPCB Venture Partners).  

If you broaden the pool and include all startups that apply for venture capital funding, your chances of making real money in the long run are less than 1 in 1000 (for a small venture/franchise, stakes are much lower and the survival rate is much higher on the non-VC route). 

Statistically and monetarily speaking you are better off with a regular pay check.  This implies that for rational adults who understand probabilities, working for a new venture is at best a lifestyle choice or a speculative gamble. In either case the high comes from being a “startup guy or gal” or rolling the dice.  For irrational adults or adults not comfortable with probabilities, it’s an uninformed decision based on incomplete information analogous to buying a lemon from a used car dealership.  Underlying motivators and personality types aside, you still need to set expectations for the group at large

From Reboot, the iBook on Startup Failure – available for free on the iBook store.

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