Why businesses fail (part 2): they wait until the business opens to build an audience

We’ve all seen it. An entrepreneur opens a new business, but before long we notice it’s closed. The classic example is a new restaurant, often in a location that has been the scene of more than one failed restaurant before. They ran out of money before the business broke even. The time and money they spent is gone, and their lender probably has a claim on their home and other assets.

African-field-cricket-arpingstone-wikipedia-commonsHow does this happen? Second, they waited until the business opened to start building their audience. When they opened the doors or published the book, what did they hear? You know.

What should you do instead

Guy Kawasaki, one of the original Apple evangelists and an accomplished author, had this message for new authors: “The process of building a platform [audience] takes six to twelve months … If you don’t have a platform yet, you need to build one as you are writing your book.”

This applies to everyone. Find ways to build relationships with potential customers as soon as you have figured out who they are. Go where they hang out in the real world and meet them face to face. Meetup groups. Chambers of Commerce. Community events. Conventions. Trade shows (yes, there are still trade shows. Don’t believe me? Check out the convention center in Orlando). Look for opportunities to speak.

Go on-line and look for people who are posting on Twitter about the problems or opportunities you are attacking. Join relevant LinkedIn groups. Do your potential customers upload to Pinterest? Do bloggers write about your industry or your customers? Respond to their posts. Ask them questions. Try to move the on-line relationships off-line.

When you meet people, invite them to subscribe to your email newsletter or your blog. Keep them up to date on your progress. Ask them for opinions. If you have a product or a physical location, share pictures as things get built. Writing a book? Ask people to comment. Listen to them and make changes. Have a contest … give away a few autographed copies of your book, or meals at your restaurant, or tickets to your concert.

On launch day, you should hear more than crickets.

SCORE counselors are available locally or on-line to help you create and manage a successful business. Call us in Pinellas County at (727) 532-6800 or go online  to www.pinellascounty.score.org.

image courtesy of arpingstone via wikipedia commons license

Why businesses fail (part 1): they run out of money before the business breaks even

???????????????????????????????We’ve all seen it. An entrepreneur opens a new business, but before long we notice it’s closed. The classic example is a new restaurant, often in a location that has been the scene of more than one failed restaurant before. They ran out of money before the business broke even. The time and money they spent is gone, and their lender probably has a claim on their home and other assets.

How does this happen?

First, they didn’t have enough industry and management experience. It’s good to have a passion for a business, but if you haven’t spent enough time working and managing in that kind of business, there’s a good chance you will over-estimate your projected revenue and under-estimate the problems, delays and costs that will confront you. And you may not know enough to anticipate and avoid them.

What should you do instead?

  • Start a business in an industry where you have work history and management experience.
  • If you don’t want to stay in that industry, get a job in the industry that interests you. Yes, this will delay the launch of your new business, but it can also delay big financial losses and a lender having a claim on your house. Besides, once you get some experience in this industry, you may not like it either.
  • Recruit a partner who has relevant industry management experience.

SCORE counselors are available locally or on-line to help you create and manage a successful business. Call us in Pinellas County at (727) 532-6800 or go online  to www.pinellascounty.score.org.

Why should startups pay attention to the Lean Startup Method, anyway?

image courtesty of brizzle born and bred under creative commons license

image courtesty of brizzle born and bred under creative commons license

We’ve spent several blogs presenting the most important features of the Lean Startup Method. As a startup business, why should you care?

Lots of startups follow a more traditional path to build their business:

  • Write a business plan using market research (but almost no actual contact with potential customers, suppliers, partners, or sales channels)
  • Get startup money (self funding, friends & family, banks or rarely angel investors or venture capitalists)
  • Spend the money building a business
  • THEN reach out to potential customers to find out if they want what you are selling, and are willing to pay enough for it to let your startup earn a profit.

As Steve Blank reports in his book “The Startup Owner’s Manual”,

the embarrassing fact is that in companies large and small, established corporate giants as well as new startups, more than nine of 10 new products fail

He goes on to say,

Winners also recognize their startup “vision” as a series of untested hypotheses in need of “customer proof.” They relentlessly test for insights, and they course-correct in days or weeks, not months or years, to preserve cash and eliminate time wasted on building features and products customers don’t want.

 Founders must search for a business model. The best way to search is for the founders themselves to get out of the building to gain a deep, personal firsthand understanding of their potential customers’ needs before locking into a specific path and precise product specs … Getting out of the building means acquiring a deep understanding of customer needs and combining that knowledge with incremental and iterative product development … Products developed by founders who get out in front of customers early and often, win.

Three of the “deadly sins” of the traditional startup method, according to Steve Blank, are:

  • Assuming “I know what the customer wants”
  • Assuming “I know what features to build”
  • Assuming no trial and no errors

Go through the steps outlined in the previous blogs to confirm that there are customers who have the problem you think they have, feel an important need to solve the problem, and are ready to pay you for your solution to the problem. Expect to make several mistakes while you are doing this. When this happens, “pivot” by changing one of your assumptions/ guesses about your customers and solutions.

When you have chosen a customer set and a solution, your next step is to test your assumptions/ guesses about building the business to a successful size. Here you will be testing your assumptions about pricing, how customers will be acquired, and what channels will be used. The test includes asking customers for the order and trying to collect money. Expect to make more mistakes and do more “pivots”. If you continue to get “go” signals from these tests, then you should have the confidence to start spending money and building your business.

SCORE counselors are available locally or on-line to help you navigate the path to a successful startup. Call us in Pinellas County at (727) 532-6800 or go online to www.pinellascounty.score.org.

How to Start a New Business Using the Lean Startup Method (part 9 – costs/expenses)

photo courtesy of NVarchitect under creative commons license

photo courtesy of NVarchitect under creative commons license

Launched in tech university entrepreneur programs in California, the Lean Startup Method is expanding to other universities across the United States. After studying the failures of tech startups, the main goal of the Lean Startup Method is to eliminate all time, energy and money spent on creating products or services that nobody wants to buy. This method is intended for startup businesses, but it can also apply to existing businesses that want to grow.

The Lean Startup Method involves several learning steps. The last step is to identify your costs and expenses. Your costs and expenses depend heavily on the target market, revenue streams, key resources and key activities that you have already selected for your new business.

After you have

  • found your target customers
  • confirmed by speaking to them that they have problems they you can solve
  • let them convince you that they will pay for your product or service by asking for the order
  • identified a cost-effective way to reach the customers and deliver your product or service to them
  • focused on the key resources, key suppliers or partners, and key activities needed to be successful

Then you are ready to go back to these previous decisions and find the costs of product or service delivery, key resources, suppliers/ partners, and activities. Do the analysis needed to be sure you can make a profit in your new business, before you run out of money.

If your analysis tells you that your business can’t be profitable or will run out of money before it becomes profitable, this is another time to “pivot”, go back and re-examine the decisions you made in previous steps. Either you have a bad business model, or your startup is undercapitalized. Test some new ideas.

Before you have reached this point, your goal is to preserve your initial capital while you are searching for a successful business model. Once you believe you have confirmed a successful, scalable business model, you goal changes: start spending to build the business, create end-user demand, and set up a sales channel to turn the demand into revenue.

One of the major reasons that startups fail is that they don’t have enough capital to pay the expenses before the business starts to earn a profit. Don’t let your business become one of them. SCORE counselors are available locally or on-line to help you navigate the path to a successful startup. Call us in Pinellas County at (727) 532-6800 or go on-line to www.pinellascounty.score.org.

How to Start a New Business Using the Lean Startup Method (part 8 – key activities)

computer terminals

photo courtesy of Sonya Song under creative commons license

Launched in tech university entrepreneur programs in California, the Lean Startup Method is expanding to other universities across the United States. After studying the failures of tech startups, the main goal of the Lean Startup Method is to eliminate all time, energy and money spent on creating products or services that nobody wants to buy. This method is intended for startup businesses, but it can also apply to existing businesses that want to grow.

The Lean Startup Method involves several learning steps. The eighth step is to identify your key activities. Like key resources and key partners, key activities will be different depending on what kind of business you are starting.

This step does not have to be the eighth step, following mechanically from all of the previous steps. But it doesn’t make sense to define your key activities if you don’t know who your target customers are, what problems they have that you are solving, how the product or service will reach the customer, and how your company will get paid. Knowing your key resources could be an important pre-step, because obtaining those resources might be a key activity. Likewise understanding your key suppliers or partners might be necessary, because a key activity might be the ability to find and create business relationships with these key suppliers or partners. If you’re building a consulting company, major key activities will probably be problem solving and recruiting experienced consultants. If you’re starting a company to make costume jewelry, your key activities will include jewelry design, supply chain management, manufacturing, and channel management.

After you decide on your list of key activities, the next important question is, how will the company perform these key activities in an excellent way that differentiates us from existing competitors? Will the company need to recruit people with industry experience and relationships? Buy specific kinds of software or equipment? Create a high-powered web site? The team needs to leave the building and confirm that the people, software and/or hardware can be obtained in the needed time frame. If you can’t figure out how to perform these key activities well, this is another time to “pivot”, go back and re-examine the decisions you made in previous steps.

How to Start a New Business Using the Lean Startup Method (part 7 – key partners)

Launched in tech university entrepreneur programs in California, the Lean Startup Method is expanding to other universities across the United States. After studying the failures of tech startups, the main goal of the Lean Startup Method is to eliminate all time, energy and money spent on creating products or services that nobody wants to buy. This method is intended for startup businesses, but it can also apply to existing businesses that want to grow.

The seventh step is to identify your key partners. Like key resources, key partners will be different depending on what kind of business you are starting. Creating a service? Building a physical product? Making a virtual product (smart phone app, computer game, online social media platform)? Different key partners. If key partners are critical to the success of your new business, it is vital to speak to them and confirm their interest before committing a lot of money and time to the startup.

In early-stage startups, the most important key partners are suppliers, companies with which you could form joint ventures, and non-competitive companies who serve the same target market with whom you can create strategic alliances.

The most common key partners are suppliers. If you’re Netflix, movie and television studios are suppliers. If you’re a retailer, wholesalers or distributors are your suppliers.

If you’re Carnival cruise line, you form strategic alliances with airlines to get your cruise customers to the ship, and with hotels, tour guides, and other tourist destinations at your ports of call to give your cruise customers a great experience when they leave the ship. Carnival and its strategic alliance partners combine their offers to give their common customers the best possible end-to-end experience, and if the prices and volumes are right, everyone makes money. Locally, health clubs, chiropractors, and health food stores might form a strategic alliance. Each of them serves customers who want to improve their health, and they don’t compete directly.

Joint ventures are more complex and difficult to execute.  Instead of simply combining their separate products and services into a package, the members of the joint venture establish new financial or ownership arrangements. In the simplest cases, one company may acquire a financial interest in the other, or license the intellectual property of the other, and create a product or service that neither one could do separately.

In the most complex form, members of a joint venture create a separate legal entity. They share control of the entity, as well as revenues, expenses, and assets. An example of a joint venture on a large scale is Airbus Industrie. It is made up of a consortium of French, German and British aerospace manufacturers jointly manufacturing airliners like the A-300, A-320, and A-380.

The danger of a joint venture is that the members are all pursuing their own interests, and depending on their individual costs and contributions, some members of the joint venture may lose money while others earn profits from the arrangement. Negotiating skills are critical to success in a joint venture.

How to Start a New Business Using the Lean Startup Method (part 6 – key resources)

Launched in tech university entrepreneur programs in California, the Lean Startup Method is expanding to other universities across the United States. After studying the failures of tech startups, the main goal of the Lean Startup Method is to eliminate all time, energy and money spent on creating products or services that nobody wants to buy. This method is intended for startup businesses, but it can also apply to existing businesses that want to grow.

The sixth step, after focusing on a target customer, choosing a value proposition, evaluating channels, deciding how you will create and maintain relationships with your customers, and figuring out how your company will get paid, is to decide what key resources you will depend on for success. These will be different depending on what kind of business you are starting. Creating a service? Building a physical product? Making a virtual product (smart phone app, computer game, online social media platform)? Different key resources.

In early-stage startups, the most important key resources are people with skills, and money. The people with skills are searching for a business model. They are spending the money to verify the business model and develop a minimum viable product (or service) to show potential customers and confirm their interest in paying for what you are making. The key resources you will  need later for a successful business will definitely include money and a customer list. Other key resources could be investorscomputers, designers, engineers, programmers, other qualified employees, patents, copyrights, trade marks, proprietary processes, an office, equipment, vehicles, raw materials, inventory, or a warehouse. Outside your business, you should look for trustworthy, experienced mentors and advisers as key resources. SCORE is a good place to look for them.

The process of validating this part of the business model will involve going into the real world and asking which of the key resources your particular business will need and how you will acquire them.