Matthew Toren wrote a terrific article 7 Myths About Starting a Business That I Used to Believe. In it he debunks 7 myths about startups that could otherwise easily deter those with a great idea that don’t know any better. With these myths debunked, let’s talk about the seven signs that indicate your startup will be among the 50% that survive 5 years.
1. You Know Your Competition
Key to a product being successful in the market is that customers see it as a better solution to their pain than alternatives offered by the competition.
Better can be mean lower priced, or more convenient, faster, cleaner, greener, more exclusive, more reliable, and so on. These qualities are called differentiators.
I use the word competition here in the broadest possible sense, including companies that are directly competing with you (e.g., Avis if you are Hertz), companies that are indirectly competing with your company (e.g., bus companies if you are a rental car company), and the status quo (e.g., people who are not traveling because of the lack of transportation options).
2. You Know Your Financials
Lean is the only way to start most companies today, but prudent does not mean blind. Responsible lean companies document all their business assumption so they can run experiments to validate those assumptions and incrementally lower risk. Those same documented assumptions are also sufficient to create pro forma financial statements.
Those financial statements enable you to determine whether the company could succeed if the assumptions prove to be true.
3. You Have Room for Error
Pilots always have enough fuel to return to an airport, and always use a runway longer than is required for their aircraft type. Having room to navigate the unexpected is also crucial for startups because inevitably one, some or even all of these things will happen:
- Fewer visitors will come to your website
- Customer acquisition cost will be higher than planned
- Revenues will be lower than expected
- Customers won’t pay on time
- Materials, raw goods, and services will cost more than budgeted
4. Your Sales Are Planned Bottom Up
If you guess at your projected revenues, you are not setting up your startup for success. Instead, determine how you are going to sell. For example:
- Are you going to drive traffic to your website and then convert x% of the visitors to paying customers?
- Are you going to make x outgoing sales calls per day, and convert y% of them to paying customers?
See the article, 5 Steps to Get & Keep Your Startup on Track, to learn how to calibrate your revenue projections.
5. Your Experiments Are Planned
After you state your assumptions, run experiments to validate (or refute) them. Either way, you are making progress. Knowledge is always better than guesswork.
For example, run advertisements and perform SEO and see how many actual visitors you can drive to your website. Run A/B tests on various pricing models to see what price attracts customers.
6. You Have an External Board
If you put your co-founders and/or your officers on your board of directors, you will receive zero benefit from them; after all, you’ll hear the same things from them in the board room that you hear every other day.
Instead, fill your board seats with experienced individuals who (a) can offer you different opinions, (b) can bring skills that your current team does not have, (c) are not afraid to question the decisions you are making, and (d) can serve as a totally independent sounding board for you.
This is what a board of directors can do for you. And then compensate them with stock options.
7. You Are Sharing Ownership
Jerry Kaplan said it best: “Equity is like sh*t. If you pile it up, it just smells bad. But if you spread it around, lots of wonderful things grow.” Incent those who contribute to the success of your startup with stock options (or reverse vesting stock), and the company is more likely to grow and prosper. There is little downside, and lots of upside. See You are Not Your Company for more details on this subject.
Starting a company has inherent risks. But some risks are easy to reduce by planning, validating, refining, pivoting and then doing it all again!
I recently visited JoJo, a young woman in Kigali, Rwanda who started a Jibu water franchise. During my hour-long visit with her, I asked her a dozen or so questions. I was impressed by the fact that although she had little formal business education, she had tons of business common sense, understood what her biggest risks were, knew how to reduce those risks, and understood which levers influenced the success of her franchise.
I have no doubt that she will be one of the long-term survivors. JoJo knows how to make a startup succeed! In her case, she knows her competition, knows her financials, has room for error, knows exactly how she is going to sell water, and is constantly running marketing experiments. Although she does not have an external board of directors, she has surrounded herself with individuals with lots of experience.
If you want to learn how to generate pro forma financial statements automatically from your lean business assumptions, check out www.offtoa.com.
About the Author:
Dr. Al Davis has published 100+ articles in journals, conferences and trade press, and lectured 2,000+ times in 28 countries. He is the author of 6 books, including the latest, Will Your New Start Up Make Money? He is co-founder and CEO of Offtoa, Inc., an internet company that assists entrepreneurs in crafting their business strategies to optimize financial return for themselves and their investors. Formerly, he was founding member of the board of directors of Requisite, Inc., acquired by Rational Software Corporation in 1997, and subsequently acquired by IBM in 2003; co-founder, chairman and CEO of Omni-Vista, Inc.; and vice president at BTG, Inc., a Virginia-based company that went public in 1995, acquired by Titan in 2001, and subsequently acquired by L-3 Communications in 2003.
If you’d like to learn if your great business idea will make money, take a look atWill Your New Start Up Make Money? If you’d like to verify that your great business idea makes financial sense, sign up for www.offtoa.com.