One of the difficulties in understanding start-ups is that there are few theories that one can derive from studying them. Without experiencing it oneself, one can only examine anecdotal evidence of what the entrepreneur can expect when starting a business.
Yet it is rare for a successful start-up not to have encountered significant difficulties and a number of these problems are common to most.
By understanding what to expect the
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entrepreneur can at least be better prepared to deal with what often seems to be an endless parade of crises that have to be resolved yesterday. The following are the most critical problems as well as most common to entrepreneurs in starting up a business.
It takes longer than planned
This is unquestionably the most pervasive problem because it underlies many of the others an entrepreneur will face. Despite genuine attempts to be conservative in their plans, entrepreneurs always underestimate how long it takes to get things done. (see page 2.)
A common mistake is failing to understand fully the sales cycle for their product or service in the first instance, the time it takes just to get to the real decision maker(s); then the time it takes to close the critical initial sales; and finally the time it takes to roll out sales and achieve more aggressive targets.
Another common mistake is underestimating the time it will take to develop a new product and bring it to market, often involving countless stages, tests and approval processes that can drag on endlessly.
Yet the problem is not limited to the big, obvious areas of risk in a new business, for even the smallest things take more time. Entrepreneurs are often unaware of the time it will take to set up an office, to get communications and IT equipment and then make it work properly, to establish sound operating procedures and many more seemingly mundane things.
The entrepreneur often comes from a larger organisation where such tasks were normally handled by someone else; in the new role he or she has to do everything, from buying toner for the copier to setting up the price sheet for their product line, from negotiating a supply agreement to franking and posting the mail. Thus the entrepreneur must be clear about what deadlines are most critical and focus on achieving them.
Market credibility
Virtually every new venture starts out with little credibility. Even those with lots of experience and visibility in an industry will find their credibility tested when they set out on their own.
This problem is exacerbated when the market has to be educated about a revolutionary product or service. Changing buying behaviour is one of the most difficult challenges any business faces, and it is even more so when the company is a new kid on the block.
Often there are false starts, dead ends and adjustments before the company gets its marketing right and begins to gain the credibility so necessary to build the business.
This is one reason for the advice: Stick with products, technologies and markets that you already know well. Having the knowledge of, and a network in, an industry and then building on that network are important factors in bridging the credibility gap.
Beware of forecasts
In many new ventures costs can be projected reasonably well but trying to forecast sales can be exasperating no one gets it right.
When David Potter, Psions chairman, introduced the first Psion Organiser there was no way of predicting what the initial sales would be. There were no comparable products and it was difficult to convince people of the benefits of the product. Fortunately, Potters timing was right and a new industry was spawned others have not been so fortunate.
Many have also encountered higher costs than expected, particularly when the venture has involved extensive product or systems development. The net result is that most new ventures run out of cash and if there is one rule that entrepreneurs must heed, it is: Dont run out of cash.
Certainly profit and loss are important but in a start-up the key is to stay on top of your cashflow. Indeed, for the first four years of our companys life, we ran the business from a cashflow statement.
The turnover solution
Many entrepreneurs are good salespeople and when things become tough, they do what they do best sell more. This often helps, but beware. Sometimes sales increase at the expense of margin, and often a business cannot regain the higher margins once they have begun to fall. Prices are often set too low initially and margins are squeezed. Focusing on turnover can lead to relaxed financial disciplines and ultimately to credit or even cost control problems.
In my own information business, a premature sales push led us to lose focus on building the supply of our data, which resulted a year later in a lower level of information available to sell and thus even more pressure on sales.
The moral: protect your margins and keep your focus while building turnover. (See page 6)
Supplier relationships
Just as a new business encounters credibility problems in the marketplace, so it will have difficulty developing relationships with suppliers. Sometimes just identifying suitable suppliers takes longer than expected.
Entrepreneurs are often surprised to find a supplier with whom he or she had regular dealings in their former company taking a tougher stance now the entrepreneur is running a new business. It is not easy to establish credit-worthiness and securing favourable terms usually comes only with time. Likewise, ensuring quality and timely supply requires diligent oversight. You will need to convince suppliers that they will benefit from having a relationship with your company. Be prepared to spend time on initiating and building relationships with key suppliers.
Getting paid
It is no secret that small businesses are often the victims of the credit payment policies of larger companies. But in many instances the real problem lies inside the new business itself. Credit control is often ad hoc and lax, pressures to build turnover lead to poorer quality customers and people find countless reasons not to push their customers to pay.
Yet it need not be that way. Establish tight credit and collection methods from the start and this will help to avoid unnecessary cash crises.
Growing pains
Businesses rarely have enough space to expand, yet they cannot afford to take on excess space. Thus the entrepreneur has constantly to struggle with how to plan and provide for space needs. It can lead to long-term commitments, involve requests for personal guarantees (which should be resisted) and tie up valuable cash.
The best solution is to be wary of long-term commitments in the early stages and even pay a premium, if necessary, to retain flexibility.
Team building
The quality of the management team is crucial to the success of any business, yet few new ventures start with more than one or two people, let alone a complete team. Building and developing that team is extremely difficult.
It is hard to find the right people (another reason why a network in an industry is so important), and the process demands a lot of the entrepreneurs time. (See page 4.)
One agonising decision involves whether to pay fees and use a search firm. For some key positions, however, outside help is needed. Nevertheless not every person fits in well in which case the selection process will have to begin again.
Despite the difficulties, this is one of the most important tasks that the entrepreneur must handle. Do not compromise on key appointments: persevere and go for the best people you can find. It will pay dividends at the end of the day.
Managing people
The entrepreneur has to sell to customers, negotiate with suppliers or subcontractors, work with an advertising agency, deal with banks and investors, and do a myriad of other things outside the company.
Yet the toughest task and indeed the most time-consuming (at least mentally) is managing people. This is the true test of an entrepreneur in trying to build a significant company.
It is also a test of leadership the ability to get others to buy into the entrepreneurs vision, to motivate them, sustain their commitment to the business idea and get them to work together to achieve the companys goals. It involves leading and exerting authority while learning to delegate and empower. It means welding together and moulding the team while also addressing conflict head on. It also involves painful decisions and lots of time spent talking with people.
The message is simple: be prepared to spend the time required on people issues and be prepared to make difficult people decisions.
Family conflicts
Entrepreneurs often are so committed to their business idea that they see their company as a kind of family. So it can be devastating when conflict arises with one of their key partners.
Yet these conflicts inevitably occur in a developing business. They are centred on such issues as whether people share the same vision and sense of purpose, whether key executives are growing with the business and bearing the load equally and whether individuals and investors share compatible exit goals.
These are not easy problems in the best of companies and it can be even more difficult for the entrepreneur who thinks of his team as a family with common goals.
This is where communications among all parties is mandatory and where listening skills are critical. Do not wait until such conflicts occur to ensure that open and effective communications are part of your corporate culture.
Constant pressures
The entrepreneur becomes immersed in every aspect of the business, often fire fighting at the expense of planning, feeling responsible for everything and everyone, and living the business to the exclusion of nearly everything else.
The pressures are heavy and constant. Some successful entrepreneurs say that if they had known what they were going to go through, they probably would not have done it. Yet many not only survive, they thrive in that environment.
I believe that one of the keys to survival and success is to establish a sense of balance in life. That may sound odd, since everything discussed above suggests that such a goal is not achievable for an entrepreneur, but I think it is essential.
The entrepreneur must maintain a real life, taking the time (difficult though it may be) to be with his or her family, stay in touch with friends, look after his or her health,
develop spiritually and find other interests besides work that can help sustain them as individuals.
If an entrepreneur can do this, then he or she will find it easier to deal with the other problems discussed above and hopefully will ultimately enjoy the fruits of success in a business venture.