This week I talked with an entrepreneur (no names; no pack drill!) who isn’t happy with the speed with which their business is progressing (come to think of it I’m not sure I’ve ever met an entrepreneur who was happy with their speed of business progress [superemotions file=”icon_biggrin.gif” title=”Big Grin”]) – and, actually, my conversations were with more than one such entrepreneur.
This got me thinking about weaknesses exhibited in the businesses of first-time entrepreneurs, specifically during the period before they get to revenue. My conversation with this individual covered most of the topics that I’ve detailed below; they are ones that commonly come up in conversations with first-time entrepreneurs (I’m sure you can come up with others!!).
[I’m going to use the term “product” here as shorthand for “product and/or service”.]
While it is important that you understand what your product is, and that you work on developing it (after all, until you have something to sell, you will have no revenue), we often find the first-time entrepreneur totally focused on creating their product and neglecting other areas that they should be focusing on. After all, what use is it developing a product if you don’t understand the market opportunity or problem you are addressing, or the size of the market niches you are addressing, or how you are going to market and sell your product.
Also, it’s not enough to create a good product; it has to be one that you can sell at a profit and in sufficient enough numbers to generate enough income. You can’t understand these things if you’re just focused on what the product is.
Unreasonable Sales Expectations
Picking up where the ‘product blinders’ leave off, if our first-time entrepreneur has created sales projections, they often have unrealistic expectations about how quickly their sales will grow. There is often an aura of “if we build it they will come” about those sales projections – especially if they are the “we will capture x% of the market” type of projection.
Even when the sales projections look like they might have been built up from the bottom, they often don’t meet the “feasible and reasonable” test. For example, in one case I saw, the entrepreneur had predicted that by the end of the first year their product would be in 1,000 retail outlets – but they only had one sales person in their budget. When you looked at it your first question was, “how do you expect to achieve that level of sales with one sales person? That’s 20 sales a day!!”; i.e., they hadn’t really looked at the numbers to see if they were “feasible and reasonable”.
Filing Patents Too Soon
Don’t get me wrong, I’m all for protecting your IP, but too often I see people filing patents too soon.
In one case, this can be when all they currently have is an idea of what the product will be and how it will work. They haven’t started to develop prototypes, so they have no idea if what they will end up building is actually what they are filing the patent for.
In a second situation, they haven’t taken into account the timeline and cash requirements to take something through the full patent process. They think “why not do it immediately? After all, it’s only a few thousand dollars to file the patent.” The problem with this is that you then see people who don’t have the funds to handle the follow-on expenses; especially if they are filing international patents, where the (expensive) in country filings have to be filed within 30 months of the original filing. Now thirty months might seem like a long time, but believe me, for a new entrepreneur, it can be the blink of an eye.
Lack of Financial Projections
Now, I’m not talking here about the multi-year proforma statements that really try to detail out the revenue and expenses of the business (although, in my opinion, the sooner you start working on these the better off you are, because it makes you really examine your underlying business assumptions). Many first-time entrepreneurs don’t even have a budget for the next 30, 60, 90 days.
When first talking with these entrepreneurs, I used to ask if they have any financial projections – nowadays I ask if they can read an income statement, a cash-flow statement and a balance sheet and understand what it tells them about their business. I do this because without that ability, there is often a perception that financial projections are something that you create for other people, i.e., the bank, potential investors, etc., rather than something that helps you run your business.
This problem often flows over into their bookkeeping, where business and personal monies get intermixed and there is no tracking of how much the business has spent. In a classic case, when I asked a potential client for his prior year financial statements he handed me the check register to his business bank account.
Lack of Advisors
The first-time entrepreneur often feels that they have to do everything themselves (often because they can not afford to pay other people). They don’t take the opportunity to build a team of advisors around them who can provide input on subjects where the entrepreneur doesn’t have the requisite knowledge. You can find people who are willing, for an hour or two a month, to provide you the benefit of their experience to help point you in the right direction. Sometimes these can be individuals that you want to later hire in an operational role.
Lack of Funding
This often gets trotted out as the reason why things aren’t moving as quickly as the entrepreneur wants; it gets stated as “if only I had x thousands of dollars, I would be able to …”. I agree that money can be an accelerant, but like other accelerants there has to be something to accelerate. Without the right planning and execution the money won’t help; and might just hurt.
What can I do?
So, what can a first-time entrepreneur do to avoid these and other issues? First, understand that these issues arise due to a lack of expertise or experience on their part. Second, understand that “you don’t know what you don’t know”.
There are two ways to deal with this. Educate yourself or rely on the education (expertise/experience) of others. You should do both. Network with people that can help fill your knowledge gaps; go to seminars and conferences directed at teaching entrepreneurs how to be better business people; take advantage of the wide array of free knowledge on the web (like Mark Suster’s Start-up Advice); surround yourself with good mentors and advisors; and understand that you may have to outsource (i.e., pay someone else) certain functions.
So, why is this important? Because, except for funding issues, all of the other major reasons cited for business failures can be lumped together under the heading “lack of management expertise”.