Seven start-up myths

Starting up a new venture, or launching a new product, is fraught with danger – and ripe with myths – for both greenhorn and veteran entrepreneurs. Those who survive and thrive have learnt from their mistakes.

Before Christmas my phone rang. It was a young entrepreneur, launching his third venture. It was a web-based publishing business that was reliant on advertising revenue, and he wanted to pick my brains.

I quickly pointed out a major flaw in his model. He only planned to publish every few months. “You will need to publish a lot of content regularly to build the traffic to ensure advertisers get a return on their investment,” I told him (harshly, I thought). I could not really see the business working with the business model he proposed.

Imagine my surprise when he rang a few weeks ago to say he has built the website and could I tell him what email marketing technology I was using? He has mortgaged the house, has moved into an office and worse, he expected me to be pleased. I felt dismayed. He had made a number of crucial errors.

As the economy tightens, it is going to get harder to launch a business or new products and services. But people should not be deterred. Great businesses are born from hard times and innovations are spun from the need to do it better, cheaper, faster.

But don’t get caught. If you go in with your eyes wide open, you will have a much greater chance at survival.

Here are 20 misconceptions I have observed entrepreneurs make when launching a new product or venture, and some examples – and some advice about what they should do at each stage.

1. “It will work. There was a real need in the market for my product.”

Really? Says who? Many entrepreneurs start with a great idea for a product or a business. When the business doesn’t work they blame lack of money, wrong people or claim the market doesn’t get it. But most times they have simply not done a proper plan.

They are so enthusiastic, might have great networks, can give you a long list of potential customers. But their assumptions are flawed. And often important issues are not even considered.

Why? Two reasons. Enthusiasm gets in the way of reasonable planning. Secondly – and I believe more often – the entrepreneurs do not know all the questions to ask. They then find out the hard way.

To circumvent this problem, sit down with more experienced business people who will question your assumptions. You also must do a business plan. Why? The main reason is that on there somewhere will be an element of the business that you have simply not even thought about, and can then change your business model.

2. “It’s a billion dollar market! If I sell just one pair of shoes to just 1% of all the Chinese, I would make millions.”

I call this The China Syndrome. As soon as anyone tells me they have found a billion dollar market, I challenge them. Broad statements like this mean they do not understand the much smaller segments that make up every market and the costs of reaching that market.

Many entrepreneurs try to sell to the small business market. In Australia there are 1.8 million small business operators. Sounds like a lot, but there are the highly ambitious entrepreneurs who have more in common with a CEO of BHP Billiton; then there are the happy hobbyists, just working towards some pocket money for the Gold Coast holiday. Chalk and cheese.

There might be a billion dollar market, but you will only get a slither of it. So which slither are you after, and how much will it cost to reach it?

3. “I know who my customer is!”

No you don’t. Many entrepreneurs design, brand and market a product at a particular customer base.

But the problem is the customer is not the buyer. Take a lawyer as an example. A lawyer may set up a publishing business to provide content to other lawyers. The lawyer knows what lawyers want to read. But the lawyer is counting on advertisers for income. So in affect the advertiser is their customer. Yet the lawyer knows nothing about the advertising market.

Or take companies which design products for the children’s market. The customer is the child right? But who are the buyers of these products? Mums and dads.

Martin Chimes, founder of Unistraw, found this out the hard way. He designed a flavoured milk staw to look like a lolly candy. Very appealing to children – but has had to be redesigned, and now it looks like a health product and appeals to the real customer; parents.

So don’t ask who will buy my product? Ask where will the money come from to buy that product? That is your true customer.

4. “I have to keep going in the same direction even if it’s showing signs of not working because it might work in the long term and successful entrepreneurs stick to their guns….”

No, they don’t. Look at the stats and have the guts to make the big decisions, and quickly. Many entrepreneurs refuse to believe their strategy could be wrong. And let’s face it – after just a few months it can be humiliating, infuriating and frustrating to sit the staff down and tell them the business model needs a complete renovation. But heed the signs, and be prepared to change strategy radically if necessary.

Phil Ruthven, founder of IBISWorld, was a chemical engineer when he set out to launch an online database. The business world was not interested. But instead of giving up he changed tack and started a strategic consulting firm. “But I soon realised I couldn’t compete internationally against the likes of McKinsey,” he says. “Changing from a consultant in late ‘87 we almost went under, as almost all companies do. It wasn’t all misery, but it was very tough.”

5. “Want to be my investor? I just need your money, thanks.”

It’s not so simple. In my experience there are three types of venture capitalists – lazy investors, smart investors and crooks. Lazy investors expect a big return on investment without lifting a finger. Crooks will wait until you need some promised capital, refuse to give it and then swoop in to buy the company in a fire sale.

Best are the smart investors, who sit on the board, give you great advice, introduce you to their networks, are supportive, understand your industry, and hold you to account – and who give you money when you need it. These type of investors are gold.

6. “Selling is easy. You pick up the phone…”

Sure – but it might not result in a sale. Companies are complex beasts. They spend at certain times of the year, buy in certain volumes, buy from different parts of the business – in fact have all sorts of requirements that could confuse you.

Software manufacturer Aconex learnt the hard way. It set out to develop document management software. But the procurement software was a big purchasing decision for companies, and a very hard sell. So Aconex changed direction. “Fortunately software for storing and exchanging documents was an easier decision for companies to make,” says founder Leigh Jasper.

Map out the buying patterns and habits of your customers. Understand the tricks of the trade. Can budgets be split across departments? Can a deal be restructured so the executives at the top do not have to sight it and juniors can sign off? It’s insider knowledge, so seek out experienced players and ask for advice.

7. “I love my business partners!”

On day one, you might. But often the biggest regret of entrepreneurs is the business partners they chose. Often companies are started by a couple of mates throwing some spare change into the biscuit tin. The roles are never clearly defined.

As the business grows, usually one partner emerges as the clear leader. The others need to accept this and fall in behind. But usually the opposite happens.

John Randell, who runs A1 Rubber, says the biggest problem in his first business was business partners. “Everyone puts their hard earned money into it, they all expect to run it, and therefore there wasn’t a clear management in the business. Removing partners is actually far less frustrating. You’re only responsible to yourself,” he says.

The other major trouble with business partners is a difference in ambitions. One wants to reinvest in the company to grow fast, the other wants to pull the money out to support a lavish lifestyle. Or one wants to build a juggernaught and the other wants to pick the kids up after school. How do you suss out your business partner? Lots of meetings before a formal shareholders document is signed.