S7 E49-52 Jeremy Gray (Practical Solutions to Difficult Problems) Be sure your business will make money before you launch. Planning ahead leads to success.
Jeremy Gray – Practical Solutions to Difficult Problems
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Be sure your business will make money before you launch. Planning ahead leads to success.
Episode 49: How to avoid the 7 most common mistakes that lead to startup failures.
When studying serious accidents or incidents it is noted that there is a chain of events that lead up to the ultimate tragedy. After spending hours looking at startups that have failed, I found was firms that went under usually had at least three or more of the following characteristics.
· They scaled up too fast
· They entered an industry which was new to them
· They changed their business model too often
· Their systems were not suited for their growing business.
· They hired the wrong people
· They continued down the path towards failure, even when the writing was on the wall.
· They ran out of money
These were all companies that had initial success but went out of business within one to four years from launch.
Let’s look at some real cases to see what we can learn from other’s mistakes.
Our first example is Quincy Apparel that identified an unmet need for young professional women to be able to find affordable stylish work clothes that fit them well. They identified a solution and developed a minimum viable product, that is a product that is the simplest that will provide reliable customer feedback. The minimum viable product was well received, based on this success the founders quit their jobs, raised nearly $1 million, recruited a team and launched. Initial sales were strong and nearly 40% of customers placed repeat orders. High sales meant high inventories which drained their cash. In addition, production problems meant garments did not fit well and this resulted in higher rate of returns. The company trimmed its product line with the aim of simplifying operations and improving efficiency. But there was not enough cash to see the change though and the business closed 12 months after its launch. Which mistakes did the founders commit?
1. They entered an industry in which they had no previous experience. They did try to find a co-founder with fashion industry experience but without success.
2. They hired the wrong people. The founders did hire some industry veterans. These folks were used to the high level of specialization within the garment industry and were not willing to help beyond their area of expertise. In a startup you need people who are willing to do what is needed to keep the business going
3. I may be being harsh here, but the founders continued to launch the business even when they fell short of their funding targets. They had correctly estimated they need $1.5M to get started but they only raised $950K. As a result, they
4. Ran out of money.
Let’s look at Baroo a pet care business that launched in Boston in 2014. The original concept was to provide pet care services in an office setting, allowing people to bring their pets to work and see them during the day. Baroo’s owners did limited testing of their idea and decided that it would not be viable. So they adjusted their plan to provide pet care services in apartment buildings. The initial launch in Boston was a success and they quickly expanded to Chicago. After raising more capital, they moved into the Washington DC market which proved to be quite different than Boston, apartments were more spread out which increased travel times for Baroo’s staff.
Operating in 3 cities began to put strains on the management team, and the off the shelf scheduling app they used was unable to cope with the demand. The financial performance was not great, in the first six months of 2017 the business lost $800,000. It was time to raise more capital or sell the business. The founder was unable to do either and the business closed in February 2018. What lessons can we learn.
1. The business expanded too rapidly. The founder’s plan was to expand slowly using money generated by the business rather than seek further funding. But the backers encouraged by the early success wanted rapid growth. This tested the ability of the management team.
2. Like Quincy apparel they hired the wrong people. A property management veteran was hired as their GM in Chicago who was a poor fit with a startup culture.
3. Their systems could not cope. The off the shelf scheduling app was not up to the job.
4. They continued to expand when it was clear that the business was not ready.
Our final case study is Dot & Bo a startup launched by a serial entrepreneur with a proven track record. Dot & Bo was going to focus on home furnishings a market not well served by bricks and mortar stores which had a poor selection and long delivery times.
This business also grew rapidly, additional funding was easily obtained. But the rapid growth was putting a strain on the company. To maintain this growth marketing costs soared, In 2014 sales were $15M with an operating loss of $8M. Their supply chain began to break down and service levels fell. It was clear they needed a seasoned manager to run the warehouse and shipping functions.
As the launch team was not experienced in the furniture logistics business they made a poor choice for their ERP system. They were not able to answer simple questions, such as where is my stuff? Delivery problems created more customer enquiries, Dot & Bo were unable to find and train enough customer service representative. Response time to e-mails could be as much as 11 days.
It was time to reset, marketing costs were scaled back to slow down growth, another VP of operations was hired to replace the earlier hire. Progress was made, the number of delayed orders fell from 40% to 15%.
In May 2015 with revenues projected to reach $40M more funding was needed. But market conditions were less favorable than in the past. Investors had become wary of e-commerce companies. Unable to raise capital it was decided to sell the company. An offer of $50M was received, but negotiations dragged on. The came an announcement that a rival that had received $225 million in funding was being sold for only $30 Million. That ended any hope of selling the company. Spooked the bank called in its loan and the company shut down. Lessons learned:
1. Dot and Bo chased growth with massive marketing costs which were not sustainable.
2. Their systems could not support their business model which was allowed to grow increasingly complex.
3. The founders were not familiar with the industry that led them to select the wrong ERP system
4. To fix the issues facing the company the hired a VP of Operations who had no e-commerce experience.
Tags: How to start a business, achieve start up success, agility, responsiveness, hacks, business growth, market penetration, the successful entrepreneur, business common mistakes small business start-up; avoid these common mistakes of business, mistakes in business, IBGR.network, Jeremy Gray, Practical Solutions to Difficult Problems
Episode 50 Do not waste time building a product no one wants. How ensure you will find paying customers.
The CB Insights tech market intelligence platform analysed why 110 Tech Companies failed. The leading cause of failure was that they ran out of money.
The second most common cause of failure was that there was no demand for the product or service.
How can you avoid spending hours and money developing your business only to find that no one, or at least not enough people, wants your product or service?
To test and validate your business idea ask three questions:
What problem do my potential customers have?
What is the solution to that problem?
Why should people pay money for my product?
Behind these questions are further questions. Who are my potential customers? Will my solution appeal to my potential customers? How much are my potential customers willing to pay?
Are people searching for a solution that matches your product offering?
People searching for solutions often use Google. Make a list of the terms you think people will use when searching for a solution for the problem you are trying to solve.
Use Google’s Keyword planner or Moz’s Keyword Planner to find out how many people search for specific words or phrases.
It is to be hoped that many people are already searching for your solution. If not; then maybe it’s back to the drawing board.
Identify potential competitors using the same key words. Analyse their value proposition. Can you do better? Can you see a gap in the market?
Is room in the marketplace for a new entrant?
Explore the internet
Join appropriate forums where your potential customers may be found. Ask about their problems and current solutions related to your business idea. Are people suggesting work around solutions?
Develop your minimum viable product. A MVP is the first working version of a product, with just enough features to satisfy potential clients and collect & analyse their feedback for the next product version, with minimum effort and resources required. The next, complete product version is developed after elaborating on the initial user feedback.
A minimum viable product is not an MVP until it sells.
Consider a virtual MVP.
Build a landing page – test advertising to direct traffic to your site.
Include a price and a buy now button. This does not go to check out but to a page that explains the situation and suggests the view leaves an e-mail address
Validates that people are willing to part with their cash to acquire your product.
No money to build an MVP or pay for advertising? Consider content marketing. Write a blog with content that your target market might find interesting. Using the knowledge of learned about where your customers hang out – post messages etc directing folks to your blog.
There is no substitute for research. It can be frustrating when you just want to get up and running.
But more haste less speed. The steps covered in this series Is there a demand for my product can help you avoid the second leading cause of failure for start-ups; No one wants your product.
Tags: How to start a business, achieve start up success, Value based, Pricing solutions profit improvement, engagement business growth, penetration, the successful entrepreneur, business common mistakes small business start-up; avoid these common mistakes of business, mistakes in business, IBGR.network, Jeremy Gray, Practical Solutions to Difficult Problems
Episode 51 Hiring the wrong people is a leading cause of start up failure. How can you reduce the risk?
CB Insights puts the wrong team as number 7 on the list of reasons High Tech startups fail with 14% of companies citing this as one of the reasons they did not succeed. As we learned in episode 49 hiring the wrong people is a common contributor to businesses going under. How can you avoid hiring mistakes?
It starts with having a hiring plan. By having a plan you will give yourself time to find the right candidate. If you know you will need a CMO six months after starting, you can develop a timeline that will enable you to have the right person in place at the right time
A start up is different because often you are hiring your executive team first. Unlike an established business that hires to replace gaps or to expand. Take a look at your co-founders, assess your teams’ skills and identify gaps that must be filled before launch. Be honest – you cannot do it all yourself.
Then make a plan on when you will need to hire in outside talent. You may need a full time CMO to drive your business but its unlikely you will need a full time CFO until some time after launch. For skills such as these consider hiring part time professionals. If you bring part time skills such as CHRO, CFO into the business early you can get access to the skills you need at a fraction of the cost. They will learn the business and guide you until you reach the stage that you need full time help.
We have learned that lack of industry knowledge can be a real problem. If this is not available in your team you need to hire it in house. But finding the experience combined with a startup mindset can be challenging.
Startups are hard work. You need folks who are willing to pitch in and do whatever is necessary to get the business off the grounds. Corporate executives who have the knowledge you need may be willing to work hard, but they have been used to having a support network. As a result, they may not feel comfortable working beyond their area of expertise. Assess their willingness to pitch in by offering a lower base plus incentives based on the business success. Consider people embarking on a second career
Sell your business to candidates. Tell them of your business plan, vision, values, and culture. Show your enthusiasm for your business. Bring them along with you. If they have the right mindset they will buy into your vision and be excited to join you.
Do not forget you will need essential workers to produce the goods or services you plan to offer, production staff, programmers, waiters, what ever your business needs. Take the time to understand the availability of these types of workers in your market. Plan your hiring accordingly.
As you grow your team, consider how you will ensure they stay with you. Unwanted attrition is expensive because the loss of knowledge and the hiring of replacements is expensive. One survey I read estimates the cost of hiring an hourly employee in the United States at $1500. The cost of replacing a technical or middle management employee can be up to 1.5 times their salary. Hiring a C-Suite executive can be more that 2X the salary.
Employees leave when they do not feel valued. Whether that is valued by their boss or valued by the organization.
Retention starts with recruitment.
The interview stage is as much about them liking you as it is about you liking them. It’s also about sharing realistic expectations of what the role entails and having a mutual understanding of what both parties bring to the table.
Consider the future: The candidate might be a perfect fit now but what about in two or five years’ time? You’re looking for loyalty and longevity to reduce the likelihood of the right person leaving sooner than you’d like.
And ultimately, whether the individual fits your company culture and will work well with the rest of the team. Are they familiar with startup culture? After all, a startup is a very different beast to a large corp.
The best person for the job on paper isn’t always the right person for the job. What one person may lack in experience, they make up for in aptitude and attitude
Instill a positive Company culture:
Retention is about cultivating an environment where people can do their best work,” Nick Francis, CEO of Help Scout.
A startup with great company culture will not only attract new talent but also help to retain talent. Fundamentally, positive company culture should: Align teams behind a clear mission Drive the business forward. Set expectations for behavior, communication, and collaboration
Invest in training and development: As time passes and the new hire’s contribution increases, be sure to schedule regular catchups to see how they’re feeling, if they’re meeting objectives or if they need further support or training.
Regular one-to-ones are also an opportunity to ask the employee for honest feedback regarding onboarding, training as well as general processes and workflows.
Financial rewards: As a start up you may not be able to match larger companies Employees can recognize potential income – stock options, incentive programs based on success, profit sharing.
Tags: How to start a business, achieve start up success, employee strengths, Task execution, profit improvement, engagement business growth, market penetration, the successful entrepreneur, business common mistakes small business start-up; avoid these common mistakes of business, mistakes in business, IBGR.network, Jeremy Gray, Practical Solutions to Difficult Problems
Episode 52 Your Financial Plan – bringing it all together
Some experts suggest that potential investors will spend over 30% of their time evaluating the financial page of your pi
20 pages long, you will understand that the numbers get a disproportionate amount of attention. It’s probably only secondary in importance to your executive summary. If your executive summary has not caught their attention then they will not read further and never get to the financial page. Of course, your executive summary should include some high-level financials.
4. The fundamentals of a financial plan. Often referred a three statement financial plan
i. Profit and Loss
ii. Balance Sheet
iii. Cash flow
b. All three are inter-related and all three show a different picture of your business. All three are needed for a complete picture of the financial status of your business.
c. Established companies tend to focus on the P&L and the most easily managed aspects of the balance sheet which are the elements of working capital. Business management usually pay scant regard to the balance sheet
d. As I start up I recommend you make your cash flow statement your highest priority with the P&L a close second. The balance sheet should be reviewed occasionally but as time will be at a premium this need not be your focus. Your cash flow will cover the important element of the balance sheet – your working capital.
Key performance indicators of KPIs are an excellent tool for assessing your financial plan and for tracking your business’s performance.
Some KPIs are common to most businesses, some will be more focused on your industry and some maybe specific to your business. These are the crucial metrics for your business. Potential investors will be interested to understand how you will measure progress. KPIs also help your employees know what is critical for your business.
4. Although KPIs will be different for each business some can really help you understand your business value proposition.
a. Customer conversion rate. The number of customers who sign up or buy your product divided by the number of customers who have expressed an interest. If this number is low, potential customers are not seeing the value in your product or service versus the cost. Re-evaluate your pricing model or your offering design.
b. Customer Retention Rate or Churn Rate. These are opposite sides of the same coin. Customer retention rate is the percentage of customers who remain with you. It is often looked at over a year or more. How many customers who bought from you last year are still buying from you this year? Churn rate is the number of customers lost in a given period. Which is appropriate for you depends on your industry. If you are a B2B business retention rate may be more the most useful. Churn rate is maybe more relevant to B2C or SaaS companies. Identify the KPIs that are most important to you. Use them to confirm your financial plan makes sense.
a. If you think your customer conversion rate will be 1 in 10 and your sales cycle will be 3 weeks and you plan on 2 salespeople, then it is unlikely you will have 100 customers at the end of month two after launch.
i. Can be used in reverse to calculate the number of salespeople you need to achieve X number of customers by Y month.
b. Use KPIs as benchmarks against your competitors. Sales per employee for example. If your financial plan shows $500,000 per customer and the industry average is $400,000 it could be that you are being over optimistic.
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I am committed to helping entrepreneurs succeed. I can bring the experience of 30+ years of experience at the C-Suite level in an MNC from Europe, North America, and Asia. Combine this with seven years of helping a diverse range of businesses and I can provide you with practical solutions to any difficult problems you may be facing.
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