An Outsider's Look at Startups

Written by Dan Schaefer

The word “startup” is beginning to make itself known more and more these days. I suppose in these deep recessionary times, it’s a good idea to put a startup to the test by seeing if it can survive in worst-case scenario. And if it survives the test, it ought to do awesome when the economy recovers, right?

Whatever the reason, I’m seeing an increasing amount of chatter about startups, and being nearly 50 years old, I feel slightly qualified to weigh in on the topic of startups – particularly startups based on technical ideas. I’ve been in several, lost my shirt in one and did quite well in another. And as a sales engineer for over 10 years, I’ve seen many startups from up close. Over the years, I’ve found a few patterns of success and many more patterns of failure. In this blog entry, I’ll list some of the most significant patterns of failure.

I'll state these patterns by uttering a phrase you may hear yourself saying when considering a startup, and I'll follow it with my own cold, blunt observations.

If I build it, they will come. Not. Building a better product is only about 10% of success. Many products are technically inferior, and yet they do better than their superior counterparts. What most people fail to understand is the psychological process of a customer's buying decision. You need to know your customers and their market. An inferior product can do well if it has the right customer relationships.
I can create a superior product over my competition. So what? Every product can be improved upon, so don’t be seduced by the idea that you can do better. Maybe you can do better, but unless you can sell better than your competition, you’ll fail.
It’s easy. Not. Startups are extremely difficult and can drain you emotionally and financially. Know when to quit. Keep in mind, however, that if you quit after actually shipping product, you may be liable for irate customers who now need support for the product you built. Don’t allow yourself to get into this position. Always have a back door. Did I say that you should know when to quit?
I can do it all. Related to the previous point – sometimes it looks easy to do everything, but in reality it isn’t. For example, avoid situations where you are designer, manufacturer, installer, seller, supporter, and marketer. You can make a business out of any one of these disciplines; don’t try to do them all. You’ll not only burn out, but you may be liable to your customers if they have nowhere to turn for support after you’ve decided to quit.
I’ll spread the work by taking on partners. Taking on partners will almost always cause problems and lead to near-certain failure. Recognize that humans are tribal animals, so there can be only one chief. If the central idea of the startup is yours, then you be the chief. Don’t feel you have to “spread the privilege” of leadership. If you get tired of being the chief, then appoint another one. Tribes can have multiple chiefs, but only one chief at a time. If you are not the chief, then submit as appropriate. Defer to his or her final decisions, even though you may disagree. It’s better to have one tribe going in one direction than splintering members wandering around, often competing with one another. Nothing is more destructive to a healthy work environment than aimlessness.
My accounts receivable will cover my accounts payable. This is a sure bet that you will go under. If you have to wait for your customers to pay you before you can pay your suppliers and meet your payroll, you are in an extremely risky and losing position. You need to have enough cash to pay your suppliers and meet payroll for at least three months. (My own experience: once your suppliers see you stretching your terms to 60 days, they’ll start pulling back.)
I’ll invest my own money. Big mistake. Unless you’re already rich and can afford to lose an entire startup without making a serious dent in your wealth, do not put your own money at risk. Do not mortgage your house to fund the startup. I repeat: Do not mortgage your house to fund the startup. You cannot have your own personal security at risk without losing concentration, patience and tenacity. Sure, your investor will get the lion’s share of the success, but if “success” is 500 million dollars, your 5% will still look pretty good. Did I say not to mortgage your house to fund the startup?
I can go without pay for a while. This point is related to the above. Maybe you can sleep on your friend’s sofa for a while, but for how long? What is your own personal monthly nut? If you start running out of your own personal money, it will color your professional performance and judgment, and that will always bring about ruin.
It will make my marriage stronger. Most likely, a startup will challenge your personal relationships, and if you don’t know when to quit, it could poison your personal life. Wives and husbands may be able to tolerate not seeing their spouse more than 6 hours a day (including weekends) for a few months, but there is a breaking point. It may come after a few weeks, or – more likely – it will come after about 6 to 12 months, and it will come without warning. If you cannot spend more than 6 hours a day with your “significant other,” then you’ve probably hit the point where you should consider quitting.
I’ll be rich! Brace yourself for this one: most likely, your startup will go down in flames. The odds are stacked against you, so you need to have a realistic attitude about things. If you’ve burned yourself out, lost all your money, lost your personal relationships and alienated suppliers, you’ll be miserable for a long time. When (not if) you quit, be sure you have a backup plan. Keep personal and professional relationships healthy, and keep your own attitude positive. You’ll be better for the experience and more qualified to do the next startup. In other words, keep yourself healthy so that after this startup fails, you’ll be ready to take on the next and then the next, until you find the success you’re looking for.