Posted By Cary Toor

It is a truism that  a very large percentage of start-ups never progress past the early stages, in which founders use their own money and money from friends and family to build a product and try to take it to market.  The Small Business Administration estimates that about half of all startups fail within 24 months.   A total of 70% never become viable, on-going businesses.  I would like to examine why and provide some strategies to increase the probability of success.

Over the past few years, I have worked very closely with a half-dozen early stage start-ups and have been involved in another dozen as an investor, mentor, or consultant.  All of these ventures are focused on using innovative software to disrupt the industries they are targeting.  I define early stage as having a basic product (Minimum Viable Product) and raising money from friends and family but little or no outside capital, which is the type of company I am discussing here. 

I-Corps, the National Science Foundation’s Innovation Project designed to help start-up businesses, believes that the reason many small businesses fail is that they build products no one wants.  I don’t really believe this is the case (although it can be a contributing factor) since this is easily remedied by reaching out to the community of potential customers and users to first discussions their interest and willingness to pay and subsequently show them early product demos and obtain and incorporate their feedback. 

Need to Pivot from Internal Focus to External Focus

Based on my experience, I would argue that the primary reason these startups fail is that they cannot make the pivot from being internally focused to being externally focused.  What I mean by this is that in the very early stages of a startup, founders need to be internally focused: building the product, getting financing from people they know, and working closely with a small group of substantive experts to test the product and get it ready for the market.  Once they have a viable product that customers might be willing to pay for, the founders need to pivot so they are externally focused: switching their focus from product development to customers and activities including marketing and sales, improving their products by incorporating customer feedback, and getting in front of new potential customers and investors. 

From my experience, one of the major reasons why startups fail is because their founders cannot make this pivot – which is admittedly is very difficult.  In many cases, this means that founders have to engage in activities they are not comfortable with or experienced in including: cold calling potential customers and investors, getting rid of staff involved in product development to free limited resources for marketing and sales, and internalizing and fixing negative feedback on their product.

Most founders come out of the industries they are attempting to disrupt as substantive experts in their industry.  Many are more comfortable with product development than marketing, sales and customer outreach. 

Many founders want to continue to direct limited resources into product development and not start selling the product as soon as possible.  A common refrain is “we only get one chance to get the product right and can’t bring it to market until then.”  Although it is important to get a working product with no bugs, it is essential to begin to generate both revenue and customer feedback through sales and customer usage.  For that reason, a minimum salable product should be the initial goal, with features added after the product introduction.  In fact, no one gets it right the first time and getting it right means incorporating feedback from customers.  Product development is an evolutionary, never ending process.  Money needs to be redirected toward marketing and sales as quickly as possible, however, product development can never stop.

One of the keys to success is to begin to generate revenue as quickly as possible.  This means (1) as founders talk to their community of potential customers and users, continually ask them whether or not the product as it currently exists is enough to begin to solve their problem (along with promises of future features) and will they begin to use it, and (2) give significant discounts for early adopters to speed up the feedback loop. 

Increasing the Probability of Success

This problem can be mitigated if one of the members of the founding team is responsible for marketing and/or sales.  Alternatively, while talking to the customer community, it may be possible to find a sales champion who can be added to the team gradually, first as a mentor, then part time, then finally full time when a product is ready for customers. 

In any case, the pivot from internally focused to externally focused has got to be gradual, it cannot be a hard cut.  From a tactical perspective, there are a few of strategies I have suggest, which definitely help:

  • Ensure that Founders commit to spending at least 2 days per week (or 4 half days) talking to potential customers and investors during the product development stage, starting on day one!  You would be surprised have few founders actually do this since building the product is typically why they start the business in the first place. 

 

  • Develop a list of every potential customer and investor the start-up gets has contact with and send them a short, blog-type email each month talking about the company, the product, and the current status.  This keeps everyone warm and I really believe shortens the sales cycle for both product and investment when the time comes.

 

  • Put together a small group or community of customers who are likely to be early adopters of the product and obtain their feedback on a regular basis. This group can also be used to answer questions about necessary product capabilities and features.

 

  • Even before the product is build, develop literature (web site, white papers, etc.) on the products planned capabilities and features.  Use this to get the founders selling.   Have the founders get non-binding letters of intent from potential customers before the product is completed.  This helps (1) identify customer objections to purchasing the product early and (2) improves the case – and valuation – for investment.

 

  • Structure product development so you have a demo or working prototype as early as possible (even if this lengthens the development cycle).  Once there is a demo or prototype, the founders will typically feel more comfortable getting out to sell to customers and investors. 

 

  • Structure conversations with customers and investors in a way that allows founders to express their passion.  This makes sales calls easier!

In addition to making the pivot from internally focused to externally focused, these strategies serve to validate the product and give confidence to investors, which will ultimately provide a better valuation and generally increase the likelihood of success.