Category Archives: Business Strategy

Do You Believe the Legendary Startup Failure Statistics. I Don’t.

This recent piece on startup failure statistics caught me eye on Twitter first, and I followed the links to discover Startups: Conventional Wisdom Says 90% Fail. Data Says Otherwise. | Fortune.com. Here’s a direct quote from author Erin Griffith:

“I recently found myself carelessly repeating a statistic that I’d heard dozens of times in private conversations and on public stages: ‘Nine out of 10 startups fail.’ The problem? It’s not true. Cambridge Associates, a global investment firm based in Boston, tracked the performance of venture investments in 27,259 startups between 1990 and 2010. Its research reveals that the real percentage of venture-backed startups that fail—as defined by companies that provide a 1X return or less to investors—has not risen above 60% since 2001. Even amid the dotcom bust of 2000, the failure rate topped out at 79%.”

I was happy to see this because I’ve agreed, including here and here on this blog and also here in the bplans.com articles, that failure statistics are bogus. Overblown. Exaggerated. And taken for granted.

What drives the startup failure statistics myth

I’m not so sure about Erin’s explanation of why that occurs. She says, in the paragraph explaining the one above:

Yet the denizens of Startup Land continue to cite the 90% figure because it serves a purpose. It comforts failed startup founders who burned through their investors’ money, laid off staff, and shut down their companies. It supports the startup world’s celebration of failure. “Sure, you failed, but that’s the norm,” the thinking goes. “The odds were against you.”

I don’t buy Erin’s explanation there. She’s too kind. I think the 90% myth is driven by bogus would-be experts who clutter the web and even business publications spouting worn-out startup clichés to bolster their alleged expertise. I think it’s a side effect of our everybody-is-a-publisher society. People can get attention with certainty untempered by experience. I did a rant on that subject here, not that long ago: Bogus experts give bad startup advice.

An important clarification

Although it doesn’t quite support my point, I can’t leave the subject without pointing out that the data we’re looking at there is not for all startups. It’s just about venture-backed startups, which are the cream of the crop. Of course they do better than the average startup. They are the ones that get through the investment filter process.

And this also shows that so much of what we value in information depends on the definitions. What’s a startup? To me it’s a new business of any kind. To many other experts, the term startup applies only to high-growth new businesses suitable for outside investment. So we have to look, with any of these studies, on what they are really studying. All businesses, or just high-end tech businesses?

And then, before we leave the subject, there’s the obvious thought that not all businesses, startups, small business, or whatever, are equal. When you start your own business, if you do, your odds are not the same odds as everybody else who starts a business. Your odds depend on what you’re trying to do, how well you do it, how well you plan and manage, and what resources you bring with you.

Last thought: I can guarantee you that your odds of failure go way down when you run your business with good planning process. Start with a lean plan and review and revise it regularly.

 

 

Startup Vision: Paradox of Consistency vs. Opportunity

Startup VisionThe world is full of paradox, like this one. Here’s research on startup vision that shows “The tech landscape is lush with entrepreneurs whose success blossomed only after the founders had modified or even abandoned their original vision.” That makes sense when you see examples and details. But wait – what about the idea that the best startups are driven by clear vision? Doesn”t the one contract the other?

That’s business. Hard and fast rules don’t work often enough. You can’t just follow lists of best practices.

The thought comes from reading The Risk of an Unwavering Vision | Stanford Graduate School of Business. That piece summarizes research by William P. Barnett, a professor of business leadership, strategy, and organizations at Stanford’s Graduate School of Business; co-authored with colleague Elizabeth G. Pontikes of the University of Chicago. They decided to gauge entrepreneurial success rates by researching the early choices made by software entrepreneurs operating in 4,566 organizations in 456 different market categories over 12 years.

Successful founders change the startup vision

For example (quoting from the article above, describing the research) …

“Facebook became something quite different from the Harvard-specific social connection site created by Mark Zuckerberg. Airbnb? That short-term housing rental juggernaut started as a way for people to find roommates. What eventually became the ride-sharing app Lyft originally offered carpooling software for large companies.”

Barnett adds

“It’s almost always the case that the greatest firms are discovered and not planned.”

Following the crowd doesn’t often work

The post highlights Barnett saying:

“If you want to find a unicorn, listen for the buzz and run the other way.”

And adds the details:

“Barnett and Pontikes found that entrepreneurs who were willing to adapt their vision and products to find the right market often did the best. They also found that those who followed the herd into perceived hot markets, or “consensus” entrants, were less viable in the long run than those who made “non-consensus” choices by defying common wisdom and entering markets that were tainted by failures and thus regarded as riskier.”

Why is this paradoxical?

But wait. Doesn’t vision drive most successful companies? I’ve written in this space about what I call values, which are related to vision, with the idea that clear and consistent values can drive success. For example, from an older post here titled Build a Mission:

… you and I know companies … driven by missions. People can believe in a mission. It gives the team power and momentum. People are happier when they work on something they believe does some good to somebody.

So my conclusion is – and I’ve written this previously – there is no such thing as universal best practices. It’s all case by case.

Do We All Undervalue Bootstrapping?

In business schools, in popular blogs, in business publications, and in general discussion of starting a business, we undervalue bootstrapping. We teach starting a business as if every new business requires sophisticated venture capital. I understand how this can be educational. It means teaching business planning, which is the ultimate business teaching tool, and investment analysis, ROI, IRR etc. Still, of the 700,000 or so new businesses launched every year, about 5,000 had VC money, and maybe 30,000 had angel investment. The rest were bootstrapped.
Kids with Boots

Outside investment is overrated

I think the investment option is overrated. It’s better to own your own than to land investment, at least if you can pull it off. As the old song says, “God bless the child that’s got its own.” The opportunity itself should determine whether investment is required. lf it takes more resources than the founders can muster, then it needs investment.

The cliché asks which is better, a piece of a watermelon or a whole grape. But what if that comparison is skewed wrong? Which would you rather have, a slice of an orange or a whole tangerine?

I have good associations with bootstrapping. I was on the board as Philippe Kahn took $20K from his father, plus one $90k bundling deal from a PC manufacturer, and levered up Borland International without outside investment until he didn’t need it. He did it with a great product, strong demand, smart management, and cash-only sales instead of the mainstream, working-capital-hungry channels. Borland went public less than three years after it started. Palo Alto Software grew slowly without outside capital. We had to slipstream a larger vendor whose advertising budget was 10x ours. We ended up with 70% share in our niche and owning the company outright.

The luxury of owning it yourself

Bootstrapping isn’t just about owning the whole pie. It’s also about the luxury of being able to experiment and, at times, making mistakes. Philippe was unconventional. Could he have had that freedom if he’d had conventional VC financing?

A few years ago I was judging a major intercollegiate venture competition in which one team looked especially strong, it’s $5 million 3-year forecast seemed as likely as any of the others, but it didn’t need any outside investment. It was the best plan (IMHO) but it didn’t win. The judges, mostly investors, couldn’t figure out how to deal with that plan. It didn’t win the competition. It should have.

(Image: copyright Timothy J. Berry. All rights reserved.

Two Paradoxical TED Talks Every Business Owner Should Watch

My thanks to Hubspot and post author Mike Whitney for today’s two Friday videos. Whitney included these two in his selection of 4 TED Talks Every Marketer Should Watch, from last year. I want to focus today on these two as not just for marketers, but also essential TED talks for business owners. They go beyond marketing into product and business definition. choice, and business data. Neither of these is new, but both are fundamental, and the contrast is important.

Malcolm Gladwell says trust the data

Whitney included this summary:

[Gladwell] tells the tale of Howard Moskowitz, a consultant who revolutionized the way companies align their product with their brand in the 1970’s and 80’s. There is much to be learned from Moskowitz’ example, especially as told by Gladwell, about how to use data driven buyer personas (sound familiar?) to provide the most possible value to your customer base.

Previous to Moskowitz’ research, companies were in the habit of seeing product development as a linear path towards one ideal item, as perfectly aligned with the desires of their customer base as possible. In order to develop an idea of what those desires were, traditional focus groups were used obsessively, rounding up endless groups of sample-consumers, and simply asking them what they prefer in a product.

Sheena Iyengar says put limits on choosing

Whitney followed that with this one, which he describes as “coming at the same problem from opposite sides of the ideological spectrum.” I like that. It fits my view of how much business is full of paradox and contradiction. Iyengar talks about the “choice overload problem”. The following is from his summary.

As a graduate student, Sheena executed a very interesting experiment with a local grocery store which was noteworthy for having a plethora of different options for all of their different product offerings (75 different olive oils, 348 flavors of jam etc.).

Sheena, though, was curious as to whether this actually promoted revenue or was a hindrance to it. To test this, she got permission from the store manager to set up a ‘Free Samples’ table in the store and do two trial runs: one with 6 options, and one with 24 options. She found that about 20% more people stopped when there were more options.

However, when tallying how many people actually bought a jar of jam as a result of stopping, she found that the table with fewer options was more effective as a marketing tool. Why might this be? This goes back to the choice overload problem. Sheena finds that if a consumer is bombarded with too many options, he/she will often ‘choose not to choose.’ For your business, that means lost revenue.

Paradox of Product Persistence

ParadoxParadox: On one hand, to keep a business healthy you have to be able to cut mediocre products. On the other hand, some successful products require sticking to them for a long time, stubbornly, to get either the product or the marketing right. Take a minute and think about it, and you’ll find examples of both cases.

Ruthlessly killing products

I vaguely remember a quote from a computer company chairman (I think it was Lou Gerstner, of IBM) talking about how success depends on being absolutely ruthless about deciding to kill products that weren’t working.

I also remember a chilling moment in my personal past when I listened to a guy who’d been running a sailboat company for 15 years tell me how he’d hated it the last 10 years. It was always borderline failing, but he couldn’t get out because he’d started it with friends and family money and he couldn’t tell his parents, sibling, and cousins that they’d lost their investment.

Sometimes persistence produces success

In my specific business history, with Palo Alto Software, I had trouble giving up on products that didn’t make it. I’m stubborn, and I’m optimistic. Still, for the record, especially during the early growth years we killed a bunch of products. The list includes Business Plan Toolkit to Financial Forecasting Toolkit to Business Budgeting Toolkit, Cash Plan Pro, Cash Compass, DecisionMaker, Incorporation Toolkit, and Systems Continuity Plan Pro. I’ve probably forgotten a few others. , and I’ve probably put others into repressed memory where I don’t have to think about them.

However, on the other hand, I first started productizing business plan financials in 1984, as templates; and did them again in 1988, as more advanced templates; and stuck to the idea of business plan software into the 1990s when we launched Business Plan Pro, which was successful. And Palo Alto Software is a market leader today, with LivePlan, which we introduced in 2011. So that story argues for sticking to it over the long term.

So it’s all case by case

That’s why it’s paradox. You can argue this one either way. General rules and best practices don’t always apply. And you can find experts advocating both sides of this question. And my business experience includes both killing some products and sticking to others.

I was at the pre-competition meeting of the judges of the University of Oregon intercollegiate venture contest a few years ago when we (the judges) were asked to introduce ourselves. One of them, Ty Pettit, said “I probably have the best qualifications for judging this contest because I recently oversaw a company going bankrupt.” That struck me as a very wise comment. Ty has had several successes since.

 

10 Tips for Starting a Consulting Business

Money DetailsAre you thinking of starting a consulting business? Let’s say consulting, engineering, graphic design, SEO or marketing help, something you can do yourself? Here are some tips I’ve garnished from several decades of it. I took my business from high-end professional service to software products, but I’ve never stopped watching the service businesses, and I’m actively involved in several. My favorite, at the moment, is Have Presence, which does social media posting for business owners.

Here are those 10 tips:

  1. Find a focus. Be different from anybody offering similar services to similar clients, in a way they can understand immediately and will share with others. Example: Have Presence isn’t a social media strategy firm that advises you; it’s a do-the-work business that does the posting every day for business owners who don’t have time to do it themselves.
  2. Set your goals right and define success well. Service businesses generally take less start-up capital but are also much less likely than product businesses to offer eventual leverage and scalability. There are exceptions, but in most service businesses the assets walk out the door every night. Those businesses are relatively easy to start, relatively easy to survive and prosper with, but also hard to grow beyond small, hard to sell, and hard to attract outside investors.
  3. Look for a business anchor. That’s a former employer and/or a strong client.  For example, before I left a salary position and went on my own, I had Apple Computer, a former client, and Creative Strategies, a former employer, both willing to contract my services from the beginning. Apple remained critical to – and loyal to – my business services from the beginning in 1984 until Business Plan Pro changed the business to product-driven in 1994.
  4. Understand your first client is twice as hard to get as your second. And the second is a third harder than the third. Land those first few clients well. Make sure they’re happy. Give them a huge discount to get the relationship going, and expect to keep your rates low for them, but ask them, in return, to not tell strangers what they pay you. Work free if you have to. You need references and testimonials.
  5. Use social media and content marketing. Create and share content that validates your expertise. Your marketing today is so much easier than it was when I went out on my own; where I had to get through editors and publishers and conference organizers to get my expertise in front of clients (specifically, I wrote magazine articles, and books, and I spoke at conferences), you can do it yourself by posting on blogs and Twitter and Facebook and LinkedIn. And don’t
  6. Spend wisely on your logo and look and feel. Look into 99Designs, I’ve seen some sensational work from them. A professional look to your logo and website (or Twitter or Facebook or LinkedIn profile, if that’s all you do for a website) is really important. It isn’t a matter of business cards or stationery anymore, but it is how you represent yourself.
  7. Don’t ever spend money you don’t have. You’ll get lots of suggestions for ways you can spend money now to make money later; mail lists, marketing programs, they never stop.
  8. Don’t ever lose a client. Repeat business is vital. Keeping your existing clients is way cheaper and easier than finding new ones. Always go that extra mile, when you have to, to keep your existing clients happy.
  9. Know your numbers. If you don’t know the difference between sales and money in the bank, between profits and cash, learn it. It’s vital. Know your numbers like the back of your hand.
  10. Never compromise integrity. You’re going to succeed or fail based on your reputation. Don’t cut corners with credibility.
  11. (Bonus point) Expect to make mistakes. If you can’t acknowledge and learn from and apologize for your mistakes, then you’re doomed. You will make them. If you think you won’t, keep your day job.
  12. (Second bonus point) Do your own simple, practical business plan. Do it for yourself, not outsiders. Make it just big enough. Keep it fluid and flexible and review it often and revise it frequently. Read Lean Business Planning, by me. Sign up for www.liveplan.com. [Disclosure: I’m the author of that book (but I’m linking you to where you can read it free) and I own Palo Alto Software, which publishes liveplan, a web app for business planning.]

Why All Business Has to be More Social

Are trends favoring social businesses over classic “greed is good” businesses? Is all business social business? Or, every day, more business is social? I think so. I hope so.Define_Social_Entrepreneurship

I first heard the term “social venture” in the late 1990s. Back then, social ventures were the odd exception to the norm, making money while making things better for their employees, their community and rest of the world. They sold devices to sanitize drinking water in the developing world for small profits. They sold technology to develop clean energy. They sold goods that protected the health of the less privileged in the developing world.

It’s been about two years since Harvard Business Review published “Every Business Is (or Should be) Social,” an article by Deborah Mills-Scofield. She wrote:

All businesses are social. All companies have people as customers, employees and suppliers. At some point in deciding which supplier to use, in engaging your workforce, and in getting your product into users’ hands, relationships with people matter. Improving their experiences always improves the outcome for your company.

It’s not just random change. It’s progress.

It’s not that people running businesses are more ethical or moral than they used to be. It’s because of changes in rewards and penalties for good or bad behavior. Social and technological changes are real factors.
The big change started with the Internet in the 1990s. Websites gave businesses a new and different way to reach the world. Before the World Wide Web, businesses had essentially only two ways to reach out to get people to know, like and trust them. They could pay for advertising. Or they could go through the media with public relations, events, articles, speaking opportunities and the like.

The second option depended on getting through gatekeepers: editors, event managers, producers and so forth. By the middle-to-late 1990s, businesses could generate their own website and online options to attract people and help them get to know, like and trust them.

Then came blogging. Millions of people started their own blogs. Experts established their expertise by writing and publishing blog posts and articles. The gatekeepers ceded power to the general public, the readers, search engines and the quality of content. Authors, consultants and assorted business experts established themselves independently of gatekeepers.

The finishing touch was social media. Facebook, Twitter, LinkedIn and other social sites offered publishing for the masses, billions of opinions expressed as likes, follows and comments.

The result of these trends is what we call transparency.

In his book “The Age of the Customer,” small business advocate Jim Blasingame suggests that we’ve passed a tipping point. “You don’t control your brand,” he says, “your customers do.” And that is a shift in centuries of business reality, he adds.

And it’s because of the accumulated power of the customer as publisher in millions of tweets and updates.

Transparency means bad business behavior is more likely to result in damage to the brand. Big corporations still want to spin information toward their favor, but it’s more difficult to do.

United Airlines took a huge hit in brand image when a customer posted a video on YouTube complaining about treatment of a guitar. Clothing brand Kenneth Cole took a huge hit when its founder tweeted that riots in Cairo were caused by his firm’s new spring fashion line. When Volkswagen cheated on emissions tests, the world knew. When General Motors misplayed product recalls, the world knew.

Transparency also means that good business behavior matters more, too.

Markets care about business stories. A new local business is more effectively able to compete against big national brands because buyers know the local firm’s story and care about it. Clean energy businesses are finding buyers willing to pay more for renewable energy than fossil fuel energy. People pay more for healthy food than mass-produced food. People care about genetically modified foods, and local foods. Some customers prefer local coffee shops to Starbucks. Chain restaurants are less attractive to some than local restaurants.

As we look at business today and trends, shouldn’t all businesses be conscious of their impact on employees, customers, the environment, the economy and the world?

Isn’t it a sign of progress that when so many businesses have a social conscience that we drop the distinction between social business and just plain business? Shouldn’t good behavior be a business advantage?

I’m happy to report that I think it’s happening. Slowly and in stops and starts, progress is being made. All business should be social business.

(Note: republished with permission from my monthly column in the Eugene Register Guard Blue Chip magazine.) 

Planning Is Telling Stories and Making Them Come True

You could call this synchronicity. A few years ago I was reading Seth Godin’s All Marketers Are Liars at about the same time that I caught Harvey Cox talking about the power of stories as truth telling in all major religions. I paused to think about the importance of stories in so many different modes of thinking and communicating; and of course, me being obsessed with business planning, I started thinking of stories as building blocks of planning.

Around that same time, people liked my post Let Your ‘Story’ Frame Your Business Plan, one of my columns at entrepreneur.com. This is moving forward with my sense of planning and stories as closely related:

Suspend your image of a business plan as a document, for a while, and think of it as a collection of stories combined with concrete specifics or goals that aim to make those stories come true.

That led to more recent posts including Stories as Business Strategy earlier this year.

As time goes by I see increasing attention to the wisdom of framing ideas in stories. Just to give you the idea, think of your marketing strategy as a story about how a specific kind of buyer solves a problem or gets something he or she wants by encountering your business. What did she want? How did he find you? What made you different? These are all stories.

A sales forecast tells a story. An expense budget tells a story. So does a set of starting costs, and a balance sheet, and a cash flow projection. I don’t know about you, but I can’t think through these numbers without imagining the purchase decision, the channel, the process, and the scale of units, prices, and costs, assets we need, debts we accumulate, and so on. I can’t be the only one who sees stories in numbers. I hope. Maybe this is what happens when former lit majors fall in love with business analysis, but I’m hoping you agree.

The best way to talk about goals is a story:

Think about your long-term objectives story. Are you looking for wealth and fame, or to do what you like? What does success look like to you? Is it getting financed and making millions, or taking off at 4 p.m. to coach your kids’ soccer team?

And the planning specifics take those stories and break them into specifics required to make them come true:

As you imagine what those stories are, break them down into meaningful, trackable parts. Set tasks associated with those stories, assign tasks to people and give them dates.

The Seth Godin book carries the subtitle: the power of telling authentic stories. I say we go it one step further: we tell authentic stories and make them come true. And that’s a really good path to better business planning.

Business Consulting Suggestion: Make The Small Modules Work First

I knew a man who made a living with complicated mathematical models that he would provide for large companies. He was a professor at the Stanford Business School, but kept his business consulting on the side.

“One thing you want to look for, always, is the simple easy-to-understand model to use at the start,” he said.

“Never propose a big job as a whole package. Instead, always propose a small piece of it as a first step. Assure the clients they can abandon the whole thing if they want after that first step. Make it like a tenth of the whole job.

“Make it something they can see, touch, feel. Make it simple to understand. Make it as visual as possible.”

If that first piece doesn’t work, then you’re better off without the rest of the job.”

I’ve used this tip a lot over the years. That’s with my business consulting, mainly business planning and market research, and with some of the product development I’ve done or supervised. It’s very important.

This applies as well to a lot of business situations. Start with something you can show fairly easily.  Look for something that will make your clients understand the benefit of going on.

If Your Idea is Any Good It Will Be Copied

Good ideas get copied.

Yes, you can read all over the web how to protect your idea. And people are recommending patents, trademarks, copyright, all of which you should do whenever you can. People also recommend contract-like non-disclosure and non-compete agreements too, which is sometimes good advice, sometimes impractical. But eventually all good ideas get copied. Yours will be too. You’re going to have to deal with it.

As I write this I’m wearing a sweatshirt with University of Oregon colors that says “Oregon” on it and also “UO.” But it doesn’t have the logo of the university on it, or the words and fonts that the university copyrighted. And you can’t copyright the name of the state, or the letters U or O. So the university gets no royalties, and the manufacturer owes none.

I should make this clear: I am not saying don’t bother to protect your intellectual property properly. Please don’t misunderstand. Yes, register, apply, take all the steps your attorney recommends. Do what you can. It will help hold competition off and protect your secret sauce for a while. I’m just saying you shouldn’t think you are really protecting from copying, no matter how good your protection is. Smart competitors will get around your intellectual property, even if you manage it correctly and make that as hard as possible. It will still happen eventually.

And here’s my favorite example.

Volkswagen’s new beetle…

Volkswagen Beetle

Volkswagen introduced its new beetle in 1997. What a cool idea that was. It took its looks from the traditional beetle that was immensely popular a few decades earlier, but created a brand new car. What a great idea. And it was commercially successful.

Followed by the new Mini-Cooper…

Mini-Cooper

Not long after Volkswagen’s new beetle, BMW came up with the new Mini-Cooper in 2000. If the old VW was the classic small car success of the 1960s in the U.S. the Mini Cooper S was the darling of the racing magazines at about the same time. It was a tiny British economy car jazzed by John Cooper, famous for formula one racing. BMW bought the British manufacturer and introduced the new Mini.

And then the new Fiat 500

New Fiat 500

So by the time the old VW and the Mini-Cooper had been reborn successfully, Fiat, the Italian auto maker, came up with the same idea for its iconic Fiat 500, which had been the Italian version of the VW during the 1950s and 1960s. That one was released in 2007. It was basically the same idea – take an old standard, a past success, and redesign it for a new car. Buyers like that, and branding is almost automatic. Ride on its history.

The Point is That Copying is Everywhere and All the Time

If you’re successful, people will copy you. You can hold them back with registered patents, trademarks, and copyright, but that’s a delay, not a wall. Volkswagen did not sue BMW for copying its idea, and neither Volkswagen nor BMW sued Fiat. This kind of copying is legal.

In almost any kind of business, from high tech to classic, good ideas get copied. It’s like in fiction, movies, television, fashion, and so many human endeavors. It’s part of life. Laws only protect you so far.

To avoid being run out of time by competitors, you have to stay on top of the business, assume you will be copied, and keep doing what you do well.

(Images from Wikipedia)