Unless you are a serial entrepreneur it’s unlikely you will be prepared for the massive shock of starting a new business and if you knew what it was going to entail you probably wouldn’t do it!
However, luckily for the commercial world, lots of people are ‘gung-ho’ enough to give it a try and if at first they don’t succeed they ‘try and try again’. So, following one adage with another, ‘forewarned is forearmed’…
As with any business endeavour it pays to follow the 5 P’s:
Preparation Prevents Pretty Poor Performance.
For Start-ups this means being aware and ready as you can be for the very rough road ahead. Reading about it is no good, you will have no idea until you live it for real but you can draw some lessons from those that have gone before you.
In addition, you should try and match your personal goals, family needs and future ambitions with your new business.
Here, then, are the problems which I believe are most critical as well as must common to entrepreneurs in starting up a business from a chapter by Robert Johnson in his excellent book Negotiating the start-up obstacle course. The final paragraph is critical to your ultimate success…read and make sure you are ready…
Everything takes longer than planned
This is unquestionably the most pervasive problem as it underlies many of the others as well. Despite genuine attempts to "be conservative" in their plans, entrepreneurs always underestimate how long it takes to get things done.
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 actually get 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 time. Entrepreneurs don’t often realise the time it will take them 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.
Often the entrepreneur has come from a larger organisation where such things were simply handled by some else; now he or she has to do everything, from buying toner for the copier, to setting up the price sheet for the product line, from negotiating a supply agreement to franking and posting the mail. The multitude of tasks, big and small, are never-ending and simply take time.
Thus the entrepreneur must be very clear about what deadlines are the most critical and focus on achieving them, because many things will take a lot longer than expected.
Gaining market credibility is very difficult
Virtually every new venture starts out with little credibility. Even people 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 one had to educate the market on 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 up the business. This is one reason why you often hear the advice to stick with products, technologies and markets that you 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.
Forecasts are rarely accurate
In many new ventures one can project costs reasonably well; but trying to forecast sales can be exasperating – no one gets it right. When David Potter introduced the first Psion organiser, there was no way to predict what initial sales would be. There were no comparable products, and it was difficult to explain to people the benefits of a product that they did not know they might want or need. Fortunately, Potter’s timing was right and a new industry was spawned; others have not been so fortunate.
Others have encountered higher costs than expected, particularly when the venture has involved extensive product or systems development. The net result of such problems is that most new ventures run out of cash; and if there is one rule that entrepreneurs must need, it is; "don’t run out of cash".
Certainly profit and loss are important but in a start-up the key is to stay on top of your cash flow. Indeed, for the first four years of our company’s life, we ran the business from a cash flow statement.
Increasing turnover (by itself) does not always solve the problem
Many entrepreneurs are good salespeople; and when things get tough, they do what they do best – sell more. This often helps, but there are some things to beware.
Sometimes sales increase at the expense of margin, and often a business can never regain its higher margins once they have begun to fall. Prices are often set too low initially and margins can get squeezed. Sometimes the focus on turnover leads 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.
Supplier relationships are demanding
Just as a new business encounters credibility problems in the market place, so it will find developing relationships with suppliers difficult. Sometimes just identifying suitable suppliers takes longer than you expect.
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 that 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 good reasons to persuade suppliers they can benefit from having a relationship with your company. Be prepared to spend time on initiating and building relationships with them.
Getting paid is not always easy
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 push their customers to pay. Yet it need not be that way. Establish tight credit and collection methods from the start and you can help avoid unnecessary cash crises.
Building a good team is difficult and time-consuming
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 very difficult. It is hard to find the right people (another reason why one’s network in an industry is so important), and the process demands a lot of the entrepreneur’s time.
One agonising decision for many entrepreneurs involves whether to pay the fees and use a search firm. But for some key positions, outside help is needed. Also, in the end not every person works out well, so the process begins again.
Despite the difficulties, this is one of the most important tasks that the entrepreneur must handle – it takes a real team to build a significant business. Do not compromise on key appointments. If it is taking longer than you want, persevere and go for the best people you can find. It will pay off at the end of the day.
Managing people is the biggest challenge
The entrepreneur finds him – or herself selling to customers, negotiating with suppliers or subcontractors, working with an advertising agency, dealing with banks and investors, and doing a myriad 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.
This is also a test of one’s leadership – the ability to get others to buy into the entrepreneur’s vision, to motivate them and sustain their commitment to the business idea and to get them to work together to achieve the goals set for the company. It involves leading and exerting authority while also 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.
There will be conflicts among partners and investors
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 such conflicts inevitably occur along the way in a developing business, 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, whether individuals and investors share compatible exit goals and many other such matters.
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 communication among all parties is mandatory and where listening skills are critical. Don’t wait until such conflicts occur to ensure that open and effective communications are part of your corporate culture.
The pressures on the entrepreneur are relentless
The entrepreneur often finds him or herself 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. There is no question that the pressures are heavy and constant and decisions have to be made with the reactions of a fighter pilot. I’ve even heard some successful entrepreneurs say that if they had known in advance what they were going to go through, they probably would not have done it. Yet many not only survive, they thrive.
I believe that one of the keys to survival and success is for the entrepreneur to find a way to achieve some sense of "balance" in his or her life. That may sound odd, since everything discussed above suggests that such a goal is not achievable; but think it is essential.
The entrepreneur must maintain a "real life" taking the time (difficult though it may be) to be with the family, to stay in touch with friends, to look after his or her health, to develop spiritually and to find other interests besides work that can jelp sustain him or her as an individual.
If an entrepreneur can do this then he or she will find it easier to deal with the other problems discussed above and helpfully will ultimately enjoy the fruits of success in a business venture.
Negotiating the start-up obstacle course by Robert Johnson
Last 5 posts by admin
- Great post on what people don't like sharing: failure and survivors - July 31st, 2015
- YC video on fund raising that’s worth watching… - October 27th, 2014
- Awesome training session for startups…on YouTube - October 1st, 2014
- A true entrepreneur’s advice: “Go with Your Gut Feeling” - July 24th, 2014
- Awesome video from Vinod Khosla at Startup Grind - February 12th, 2014