Archive for July 29th, 2012

By Jim McHugh.

Where Start-ups Get Stuck – and How to Avoid Going There

Between us, my long-time friend (and fellow blogger) Andy Palmer 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. This post also appears on Andy’s blog, The Fundable.

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 below, 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 other tips on how to avoid getting stuck?

Be driven by your mission. The money will follow.

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).
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:

  • They are naive about all aspects of the business model.
  • They don’t understand – or they have chosen to ignore – the specific linkages of their product to their customer’s product.
  • 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.
Have you seen early stage companies that were stuck? What caused them to be stuck, and what did they do about it?

Read Full Post »