Where Start-ups Get Stuck – and How to Avoid
Going There
Between us, my long-time friend (and fellow blogger) Jim McHugh and I have started a lot of companies. We also
advise many other companies and look at even more pitches from start-ups. A shared observation is that while a few
start-ups shine (or at least glimmer) and go on to some success, other start-ups
seem stuck before they start. Why?
Here are our observations on where start-up founders get stuck and our advice on how to prevent Stuck situations, presented Q&A style.
Q.
Jim, where are the most common
places you see founders getting stuck – and why?
In my experience, the two
most common causes of becoming stuck are 1) an incomplete or muddled business
model (see Stuck in the Fog) and 2) directly related to that, not clearly
understanding the specific needs of their customers (see Stuck in a Rut).
 |
Jim McHugh
McHugh & Company |
What do I mean by
an incomplete business model? A well-defined business model (i.e., the “guts of the
business”) states how the company is organized; what products and services it
sells to whom; and how the company “goes to market.” In addition, the whole
company clearly understands the associated operational policies, processes and
needs (both for the supplier and the customer).
Start-up and
early-stage teams become obsessed (as they should) with the product/prototype,
the team, and the market potential. However, they sometimes fall short in three
important areas. First, they are naive
about all aspects of the business model. Second, they don’t understand – or
they have chosen to ignore – the specific linkages of their product to their
customer’s product. Third, they have not solved or put in place key components
of the business model and assume it will be easy to “finish those later.”
The business
model can be pretty straightforward if it is a simple B2C or B2B connection –
that is, “we make it, you consume it.” The linkages become more difficult to
sort out if the start-up’s product becomes embedded in their customer’s product
offerings – for example, as a component.
One striking
example I have seen of an incomplete business model was a food ingredient
technology company that had considerable success raising seed money from a
group of angels. This company had traction:
●
The technically
elegant prototype demonstrated product effectiveness and potential significant
benefits to consumers
●
The company had received
approval from a key regulatory agency
●
The product was
going to revolutionize one segment of the food industry
●
There were
positive (but limited) real-world test applications
●
The expected
market was huge
Then the
company’s traction stalled; they became stuck. How could that happen?
This
revolutionary product was not sold directly to end-user consumers. It was an
ingredient that became part of other companies’ product formulations. The
industrial and consumer target customers who evaluated the start-up’s product
realized they would have to change their end-use product specs, add equipment
and processes to their production line, and change their quality control
testing procedures. They would also have to change their existing descriptive
product information and packaging.
For some
customers that would mean altering (for the better?) very successful, stable
products that were established with consumers.
Were the
customers prepared to take the market and product risk (with a start-up) and
incur the costs and aggravation associated with adopting this new technology?
Having a great product was a prerequisite for the big food ingredient
companies, but it quickly became apparent to the start-up that many other
factors influenced the prospective customers’ decision-making process.
Q. So, what’s your advice for avoiding getting
Stuck before you Start?
To be sure, the
business model for early-stage companies evolves over time. It gets fine-tuned,
even changed. But fine-tuning is a lot
different from having a naive view of the customers’ needs out of the gate.
It’s a cliché,
but how many times does “knowing the customer’s needs” have to be said to
founders?
Q. Any general tips about how to avoid
getting stuck?
Yes, it really helps to have the
right people on the team who understand and have experience in the industry
they are selling into.
Q, Andy, where are the most common places you see
founders getting stuck, and why?
 |
Andy Palmer
Start-Up Specialist |
I see a lot of
founders get stuck at the very earliest stages – by being distracted by fundraising. I’ve said before – over and over again –
founders should focus on developing their business first and not worry about
fundraising nearly as much as they would probably like. It’s natural to be nervous when you don’t
have any money in the bank. But it’s a
healthy discipline to figure out how you are going to create value for
customers who will pay you instead of spending time thinking about how to
extract money from venture capitalists or seed investors. As an angel investor, I’m always looking for
people who are mission-driven and focused on their customers, as Jim says,
instead of worrying about what potential investors might think.
Q. So how can entrepreneurs avoid getting
distracted by fundraising?
Just focus on
your business and your customers. Wake
up every morning thinking about how you are going to create value for your
customers. Go to sleep at night considering which of your customers you helped
that day and how. Be maniacally focused
on your customers’ needs. It sounds
simple – and it is – but executing this when you are starting from scratch –
with no product, no credibility, and no people – is really hard. It requires all your energy
and your concentration.
Q. Any final tips on how to avoid getting
stuck?
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