A start-up business is an entrepreneurial venture that endeavors to validate a marketplace need by developing a viable value proposition around a founder’s innovative product, service, or processor platform. There are many difficulties and impediments associated with starting a new business and others that come with maturing it to profitability.
Recent market intelligence on start-up failure reports that many start-ups commence with boundless potential, but about 90% fail to make it past the three-year mark because the founders don’t have the tenacity or knowledge of how to overcome the challenges they find themselves faced with on a day-to-day basis.
- 50% of all new businesses fail within five years.
- You’re more likely to succeed if you’ve failed than if you’ve never tried.
- Scaling too fast, too soon is the number one reason most new companies fail.
- Two founders, rather than one, significantly increases your odds of success. You will obtain 30% more investment, grow your customers three times as fast, and will be less likely to scale to fast.
Founders face an array of challenges, that they must overcome before they can enter the market with a saleable product. Typically, a startup will begin by building a prototype, to validate, assess, and develop new ideas or business concepts. Also, start-up founders need to conduct intense research to deepen their understanding of the technologies, business concepts, and the commercial potential in targeted markets.
Financing Approaches and Decisions
There is always a period between the decision to start a new business, and when revenue and profit generation. During that time, the founders must have the necessary investment to fund startup experiences, cover business cash flow, and ordinary living expenses. It can be tempting to continue to charge more on personal credit cards, but ultimately, those debts must become payable, and the interest costs become a significant drag. On an ongoing basis, founders must balance the desire to pay the operating cash needs of the business and the accumulation of funds to grow and expand their start-up business.
The financing approaches available for founders cover:
Bootstrapping is using only the founders existing resources, including finances, computing, and other equipment, and living space, to start and mature the new business. This approach is in contrast to obtaining external capital or taking on debt to fund the start-up and expansion.
The bootstrapped company strategy is survival-based and focused on maximizing financial resources and not wasting funds with unnecessary expenditures. The resultant profits generated with bootstrapping are used to continual fund the business.
The sources for external capital include:
- Friends and Family
- Angel Networks
- Incubators & Accelerators
- Private Equity Firms
- Venture Capitalists
Equity variations include convertible notes and convertible securities – SAFEs / KISS doc.
Loans and Debt
The sources for start-up loans include:
- Small Business Administration (SBA)
- Online Lending Platforms
- Financial Institutions
Debt is the riskiest to the entrepreneur. Sometimes, this type of financing includes warrants to reduce the lender’s exposure. If the company cannot repay the debt within an agreed period, the lender exercises the warrants, and the start-up must give up other assets, including equity in the business.
Business Start-up Challenges
There are numerous make or break decisions and actions to be taken in establishing a business start-up. Everything, including choosing a name, handling the legal and regulatory paperwork, accounting, payroll, setting up a work location, developing strategy and plans, obtaining resources, and staffing takes time and effort.
Starting and successfully maturing a start-up to success requires founders to possess the appropriate passion, entrepreneurial spirit, willpower and persistence, free time, money, and the honesty of knowing what that does not know.
“Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma – which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition.”
Today, the most common start-up challenges facing founders are as follow:
The business plan is the foundation of a start-up business and is a priority for completion. A successful business plan is a roadmap through each stage of starting and managing the business.
Business plans help obtain funding and bring on new business partners. Investors want to feel confident they’ll realize a return on their investment. The business plan is the tool to convince people that working with the business or investing in the company is a smart decision.
There’s no right or wrong approach to creating a business plan. What’s important is that the business plan meets the needs of the founders. Most business plans are either Traditional or Lean Startup.
Traditional Business Plans are more common, use a standard structure, and provide detailed content.
Lean Start-up Business Plans are less common but still use a standard structure. They focus on summarizing the essential points of the critical elements of the plan.
Traditional Business Plans use some combination of the below sections.
- Executive Summary
- Company Description
- Market Analysis
- Business Strategy & Strategic Alignment
- Organization and Management
- Service and Product Portfolio
- Marketing and Sales
- Funding Request
- Financial Projections
- Risk Management
- Appendix (Common items to include: credit histories, resumes, product pictures, letters of reference, licenses, permits, or patents, legal documents, permits, and other contracts.)
Intellectual property (IP) for startups covers the protection of a company’s copyrights, trademarks, patents, and trade secrets. IP protection is much more straightforward at the beginning of the business than after the ideas have matured and become successful products. IP protection provides the startup founder(s):
- Legal checks on the competition.
- Defensive means against infringement claims.
When a startup patents its ideas, its valuation generally increases as investors are more likely to invest in a startup whose patents, designs, and trademarks are protected. Protected IP is recognized as a Unique Selling Proposition (USP) as it supports a sustainable and defensible differentiator and a high entry barrier to grow the venture faster versus competitors’ offerings.
The IP mistakes typically made by founders encompass:
- Lack of a formal IP strategy and supporting policies and processes.
- Insufficient research on existing competition.
- Delay filing with USPTO: copyrights, patents, and trademarks.
- Lack of attorney assistance: legal documents and agreements.
- Unprotect chain of title and ownership.
- Fail to protect trade secrets.
- None / weak confidentiality and non-disclosure protection.
- Unsuitable names for products and services.
- Problematic exclusive licensing arrangements.
As a start-up, the hiring process is significantly different from that of a traditional company. Established businesses have an organized and clear infrastructure and operation, formal hiring process, and regimented training programs. They have the resources necessary to investigate and train new hires and introduce them into the business in a timely fashion. Start-ups don’t have this luxury!
Most first time entrepreneurs lack the experience of what to look for when hiring employees. They assume that credentials and likeability are the only essential requirements. However, it is vital to consider the personal characteristics, and traits of the new hires as individuals with similar features and attributes can create and sustain synergy and a winning culture.
Start-up employees should be able to demonstrate that they are continual:
- Bias toward Action
- Possess Perseverance and Grit
In the early stages of a startup, it is essential to develop a prototype of the product to validate the founder’s original idea and design. The prototype, an early sample of the product, generally used to evaluate a new model to enhance precision by engineers, marketing professionals, and potential users. Prototyping serves to provide specifications for a real, working system rather than a theoretical one.
Prototypes explore different aspects of an intended design as outlined below.
- Proof-of-Principle Prototype
- Working Prototype
- Visual Prototype
- Form Study Prototype
- User Experience Prototype
- Functional Prototype
- Paper Prototype
Marketing & Sales
Most founders have a passion for their product or service, and this is good! However, do not let that enthusiasm blind the reality that others may not share this zeal. Founders must have a detailed marketing plan that identifies target markets, and potential customers make the benefits of the product visible to those prospects and motivate them to make a purchasing decision. Creating a formal marketing and sales plan early and then continually adapting it to market intelligence is critical.
The critical components of a marketing plan that keeps the sales pipeline full and the sales staff engaged include:
- Target Market
- Product Positioning
- Sales Channels
- Competitive Analysis
- Market and Sales Strategy
- Marketing and Sales Collateral
- Web Advertising & Social Media
- Technology Support
- Risk Analysis
- Metrics & Performance
Lean Start-up Methodology / Minimum Viable Product (MVP)
The Lean Startup Methodology is used to reduce product development cycles and quickly identify if a new product is feasible and has the potential for targeted market acceptance. The methodology focuses on assessing the specific demands of targeted customers and how to meet that demand using the least amount of resources possible and covers:
- Business-hypothesis-driven experimentation.
- Iterative product releases.
- Validated learning activities.
The methodology’s thesis is that startups are innovative experiments that determine:
- Should the company build the product?
- What is the potential for the business to create a sustainable and profitable business with the product?
Eric Ries introduced the Lean Startup Approach with his book “The Lean Startup: How Constant Innovation Creates Radically Successful Businesses’ published in 2011.
Startup companies can reduce market risks and initial project funding and avoid premature product launch disasters with iteratively development efforts to meet customer needs. This approach decreases inefficient and wasteful practices and strengthens product value in the early product development stages. The successful use of the lean startup approach can improve the potential for new business success without developing a picture-perfect product on the initial launch.
Customer feedback during product development and launch is integral to the lean startup process and ensures that the company does not invest unnecessary time, money, and resources designing features that consumers do not want or value.
When a business startup is unable to support the development of a perfect product for lack of financial or skilled resources, the lean startup advocates use of a Minimum Viable Product (MVP) product launch of a less than complete feature set.
In summary, an MVP product consists of sufficient features to satisfy early adopter customers and enable useful feedback for current product enhancement and future development activities. Collecting reactions and criticism from an MVP is often less expensive and more helpful than creating a product with excessive features at launch, which increases costs and risks for product failure situations.
“Startup success can be engineered by following the process, which means it can be learned, which means it can be taught.”
Small Business Failure
CB Insights reported in 2018, the ten top causes of start-up failure as:
- No market need: 42%
- Ran out of cash: 29%
- Not the right team: 23%
- Got outcompeted: 19%
- Pricing / Cost issues: 18%
- User un-friendly product: 17%
- Product without a business model: 17%
- Poor marketing: 14%
- Ignore customers: 14%
- Product mistimed: 13%
Professional Advise and Counseling
One of the most illuminating ‘Moments of Truth’ for entrepreneurs is realizing that they lack the necessary skills and knowledge for setting up a successful business start-up!
While going it alone can enable a great deal of personal satisfaction, not least individuality, fulfillment, and potential profits there are significant tests and encounters to master on the path to a sustaining and profitable business start-up.
Business start-up professionals, such as management consultants, attorneys, and accountants, within a defined scope, can provide valuable experience and insight to help founders understand, prioritize, and handle the mandates and complexities of the legal, regulatory and industry best practices requirements.
The use of external professionals typically produces the following benefits for start-ups.
- Engage expertise at the right time.
- Reduce overall expenditures.
- Collapse timeframes.
- Streamline changing workloads.
- Grow expertise for the future.
- Leverage the professional’s gravitas.
- Avoid unnecessary and costly errors and risks.
“Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly drive it to completion.”
The Way Forward
Knowledge Compass consultants successfully help client’s research, strategize, and plan the setup of new business start-ups.
Knowledge Compass provides consulting services with the use of an array of Frameworks, Analyses Tools, and Interactions from their Best Practices Consultant Toolbox.