While you often hear of early-stage companies failing because they ran out of money, it is more likely that they squandered the money they had and failed to make the most of it.
Invariably, early-stage companies are full of very bright, and often very young, professionals. Usually these individuals are the owners and their enthusiasm for their business idea creates the secret sauce that fuels their initial success. And, quite often, they actually have a quality business idea with solid potential.
Early-stage companies also often have good finance and marketing professionals capable of creating compelling value propositions and top-line revenue projections. Good finance pros are able to raise needed development capital on the strength of a good marketing pitch. So, good early-stage companies generally have enough seed money to accomplish something. And yet, the vast majority of early-stage companies fail—90% of technology-based startups, according to USC Berkley's Start-Up Genome Project. This study goes on to say that in most cases, startups fail due to self-destruction rather than competitive pressures.
But these companies have good ideas, compelling value propositions and money. So what are they doing wrong? In my experience, early-stage companies make the same mistakes over and over again: they fail to manage and execute the launch process, they fail to manage and execute the development process, or both. It's that simple.
It's rarely a lack of technical skill that brings down early-stage companies. Rather, it's a lack of product planning, resource deployment and resource management. The fundamental premise of any start-up business is you have a limited amount of time and money to reach your development objectives. How you spend that time and money is the difference between success and failure.
Here are some typical failure scenarios and ways to avoid them:
Failure scenario 1: Beginning at the end
A product roadmap defines the path to the ideal product solution as seen by the customer. That means the final destination on the product roadmap is the coolest, most feature-rich solution the customer can imagine. The hard part for any company is populating the roadmap with interim destinations. Remember, you don't have to hit a home run to score; customers will buy less-than-perfect solutions if the value proposition is there or promised (marketing professionals often get in the way of this process).
So, the first objective on the product roadmap should be to define the minimum viable product (the MVP). What is the simplest product that would sell? Or to go one step further: what's the simplest product that would demonstrate to customers (or investors) that you're on track toward the final objective? That should be destination No. 1 on the roadmap, and that destination is almost always within reach for most start-ups. The most common mistake I see is a product roadmap with only one destination—the ideal end state. Would manned flight have ever happened if the initial product roadmap had been defined by the Space Shuttle? Succeed at "simple" rather than fail at "complex."
Failure scenario 2: No catalogue of technological uncertainties
Early-stage companies often don't know what they don't know. One of the first steps they need to take is to get all the technical people together to populate a technological uncertainty catalogue. It is surprising how often this procedure results in a longer list than had been perceived by the team and how often you hear, "I thought we had that one solved."
Failure scenario 3: Getting development objectives in the wrong order
Once a technological uncertainty catalogue is prepared, it needs to be sorted, and uncertainties that depend on other uncertainties need to be subordinated. Generally speaking, development time and money spent on subordinate uncertainties is potentially wasted effort and can rob resources from the primary development projects.
Failure scenario 4: Lack of a "kill" process
In every early-stage company, there are some development projects that simply don't fit on the roadmap. These projects need to be stopped and killed. Succeeding in an early-stage commercialization project is as much about NOT doing certain development as it is about doing other development well. Inevitably, deciding not to do a development project is essentially telling somebody in the company that their baby is ugly. But it is critical to early-stage companies not to squander their funds on unproductive development.
Failure scenario 5: Seeking perfect over acceptable
Perfect is the enemy of good. Striving for perfect technical solutions can result in no technical solution at all. The goal should be to define the minimum acceptable threshold of performance that will permit other subordinate development activities to take place. Development efforts must be refocused once the minimum acceptable performance is achieved, even if just a little more work will improve performance. Plenty of early-stage companies have gone broke trying to develop the perfect product when an earlier version could have been generating revenue for the company at the same time.
Of course, there are other potential failure scenarios for early-stage companies, but the above represent a key subset that is worth considering. With these five in hand, a startup has the information needed to put together a compelling and doable implementation plan—one that focuses on careful and organized deployment of development resources on the right development project in the right order, prevents resources from being squandered on ugly babies and strives for acceptable, instead of perfect.
Truth be told, these are solid product-development disciplines for companies at any stage. But, in mature companies, the main consequence of poor product development is wasted time. In early-stage companies, however, poor product development can lead to the failure of the business.
Charlie Reid has 33 years of experience in virtually all facets of manufacturing enterprise execution. He specializes in helping small and mid-sized manufacturing companies across Canada optimize operations and develop and launch new products more effectively. Reid, who is based in Kingston, Ont., works with both mature and emerging manufacturing companies and advises private equity and venture capital investors on proposed acquisitions. He can be reached at Charlie@charliereid.com.