The lack of a good business design process is the number one reason why most businesses fail today. Almost everything else, like poor market, running out of capital, unexpected risks and poor sales, is just a symptom of this root problem.
- Where Do Entrepreneurs Go Wrong?
The sad fact is, most businesses should not be run as originally envisioned by the founders for two main reasons:
1) You never, never, ever know enough when you found a business not to make many, many adjustments along the way, and
2) It is highly unlikely the founder has exactly all the right experience for this new business across the many business disciplines needed.
With the many thousands of business models possible for any given product or service, expecting to pick the best purely based on one person's previous experience out of the gate is almost absurd. Only if this business is tremendously simple and the founder has spent decades in that exact niche could this really be possible. However, even then, the odds are many unknowns will be learned early on that will necessitate the business plan and model being adjusted. In fact, one of the traits common to all successful entrepreneurs is lots of flexibility to adjust their business as more information becomes available. Very little is written in stone in the mind of a good serial entrepreneur, and they are always open to discussions with people who know more than them about certain areas. The key here is to accept that you do not know what the business will look like in a few months, and iterate from there.
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I have had the pleasure of working with many entrepreneurs over my career and generally my experience is, they are focused more on the technology or solving some problem (hopefully), more than on the design of their business. Typically, the business model is the result of the entrepreneur's most recent experience, as opposed to the result of a structured and thorough process that can be used to optimize any new or existing business. The idea being that MY IDEA + MY PERSONAL EXPERIENCE = GOOD BUSINESS DESIGN. In fact, this is almost never the case early on. Very, very few businesses have launched and succeeded with exactly the strategies they had when the founder(s) started in their garages. Anyone that tells you otherwise either never did it, or has conveniently forgotten all the major and minor adjustments to the business model they made along the way.
If the entrepreneur's last company used direct sales, and the founder is a technology-focused person, (a very common scenario) then guess what the sales model is likely to be? Yes, direct sales will often be the only one considered until a deeper management team is brought in. Oops! - But who will they hire to run sales with this assumption from the start? A sales VP with mainly direct sales experience of course! And will this person recommend using another type of sales approach? Not very likely is it? Do you see what happens? This is a slippery slope and the business model can actually become a self-fulfilling prophecy based on very early bad assumptions. In fact, this seemingly little slip-up very early on often dooms a business before it even leaves the garage!
If the initial business model assumption is wrong, it is certain to cost lots of time and money to figure out. So, it is actually better to assume almost nothing early on in the business. I have seen so many companies that are completely dead, and they just don't know it yet, because they have a simple bad assumption in their business model design, and are totally committed to that incorrect assumption or model. Some actual examples I have seen presented by smart people with the wrong experience for the business to make these decisions include a company trying to sell an enterprise software product at a $5K to $10K price point with a direct sales force. Unfortunately, it is commonly accepted that anything less than $100,000 price point is the "valley of death" for enterprise software direct sales due to the huge sales cost, overhead, and long trial cycle of corporations using these products. Yes, there may be exceptions, but I wouldn't want to bet a year of my time or any of my capital on being that rare exception.
Another example was a company that wanted to sell a $10,000 product, where there was already a perfectly good $500 solution available in the marketplace. They basically seemed to believe that rich people were idiots and would pay the extra $9,500 for some extra convenience and an unnecessary feature or two. I am sure they are either gone or soon will be. What were they thinking? How did this happen? It seems they hired a technical person with exactly the wrong skill-sets, and he came up with a big Unix box solution, basically because that was his technical expertise. It was exactly the case of the carpenter fixing everything with a hammer. The best solution was more likely a $300 piece of hardware with some customer chips in it.
I actually saw both these companies present at different university enterprise forum start-up clinics. All I can do is shake my head, knowing no matter what I say to them, the odds are they already have their minds made up to pursue a futile business model. I have seen this so many times, and I know for certain they are DOOMED if they follow this plan. It will just take them about a year and their life's savings to figure that out. This is because, by the time they figure this out, they will have burned up six months of their personal funding (which is likely almost all they had), hired the wrong people, and not made any real progress figuring out what their real business model should have been to leverage their idea. Another dead start-up! This is so sad, and so totally avoidable if founders are willing to step back, take a month to investigate the market, and Design the Business properly for that specific market need BEFORE they start investing significant resources. What this means is that they also must be open to listening to others who have been there and done that and/or have different experience sets. That is not to say they should take everything they hear as gospel, many people without the right experience, including most venture capitalists, will try to alter a business model to their liking, but the entrepreneur must get many data points and likely move towards the ones offered by the most experienced, successful people.
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Bob Norton is a long-time Serial Entrepreneur and CEO with four exits that returned over $1 billion to investors. He has trained, coached and advised over 1,000 CEOs since 2002. And is Founder of The CEO Boot Camp™ and Entrepreneurship University™. Mr. Norton works with companies to triple their chances of success in launching new companies and products. And helps established companies scale faster using the six AirTight Management™ systems. And helps companies successfully raise capital.
Call (619) SCALE06 or email info@AirTightMgt.com for a complementary strategic consultation.