Shaheen Tejani has looked at thousands of startup ideas since forming her early-stage venture capital fund, Vancouver-based Smart Seed Equity Inc., in 1999. She says the biggest reason startups fail isn’t because the idea is lousy. In fact, she has seen many companies with amazing business concepts that didn’t make it past their first year. So what gives? Most failed startups fall victim of common blunders. Here’s how to ensure you don’t sabotage your own launch.
Lack of market research: When Bob Glandfield hears an entrepreneur claim that his startup has no competition, “the hairs on the back of my head stick up.” If you’ve said the same thing, says Glandfield, president and CEO of Innovation Synergy Centre in Markham, Ont., a business advisory hub designed to help small companies grow, you probably haven’t performed sufficient market research. Every entrepreneur should scan the Canadian Patents Database to see who else is competing in the sector. Even doing something as simple as a Google search about your industry can help. Glandfield also recommends talking to potential customers: “You may think you fit in market A, but often you find out if you tweak your approach, you may find a niche in market B that is more profitable.”
Spendthrift cultures: Peter Beck has started dozens of ventures, ranging from a pet-food business to a long-distance phone company. The most recent is Toronto-based Swift Trade Inc., a provider of day-trading services to Canadian investors that placed No. 2 on the 2004 PROFIT 100 ranking. Beck says the biggest mistake startups make is to throw money at problems. To save precious resources, he says, entrepreneurs need to be more creative. Need custom-designed software that will cost $100,000? Beck says you might shave the price down to $30,000 by allowing the vendor to sell the software to other companies (you could even provide a list of firms that might be interested in buying it). By being creative, “you create an innovative-thinking corporate culture,” says Beck, in which your employees don’t see money as the only solution to challenges.
Poor credit practices: Many startups run out of money because they have to pay their suppliers before their customers pay them. Ironically, you may run into trouble precisely because you’ve landed a huge order. If that customer is, like many businesses, paying on a 90-day cycle, you may find yourself unable to cover bills due before then. The solution lies in understanding that it’s in the interest of suppliers for you to succeed, says Elspeth Murray, director of the Centre for Business Venturing at Queen’s School of Business in Kingston, Ont. See whether they’re willing to extend pay periods. And offer your customers 2% or 3% off for paying within 30 days.
Egocentric HR: Tejani says many entrepreneurs become afflicted with what the industry calls “founder’s disease.” You may be smart enough to realize you need to hire experienced business people to help commercialize your idea, “but you can’t emotionally deal with the issue of letting go,” she explains. Your meddling can cause talented people to quit. A good way to avoid this, says Tejani, is to figure out what you want out of the company: are you looking to hand it down to your kids, or do you want to cash out in a few years? By figuring out your long-term goal, you’ll realize that your idea won’t be your “baby” forever.
Neglecting social networks: Once you start your business, “you become so engrossed in running it on a day-to-day basis that it takes great effort to attend events and rub shoulders with similar people,” says Glandfield. Yet the effort is worth it. Many of the people you’ll meet at industry events, whether bankers, lawyers or entrepreneurs themselves, have experience working with startups. They may become trusted sources for advice to help your firm navigate potentially fatal challenges. “People are more open than you think,” says Glandfield. “A lot of the older guys are more than happy to help the younger guys if they’re asked. You can usually find a mentor no matter what business you’re in.”
© Chris Daniels