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The 3 Biggest Start-up Killers, Part One: Bad Planning

This has been a very busy week of radio interviews for me this week. Of the many things I’ve learned by plunging into that pool is just how darned skilled these radio hosts are. One question, however, that I’m getting continually from them is some form of “What are the things guaranteed to sink your business?” Or “What three things will kill your business?” Radio, unfortunately, does not allow for any kind of extended answer (the first time I was asked this question, I only got through one-third of the answer before the buzzer went off). So let me deal with this issue square-on in a blog post for all our current readers and anyone discovering our modest little blog after listening to me summarily and incompletely trying to answer this question on-air.

As a consultant, I have dealt with literally hundreds of start-ups and, much the same thing, turnarounds. My partner, Steve Monas, has successfully launched several businesses using the outsourcing model we deal with as exhaustively as possible in Shoestring Venture: The Startup Bible. We have seen and experienced a million possible ways to kill a small business or start-up (and I’ve had a front-row seat as a vendor or consultant in the blowing up of major companies or corporations). But broadly speaking, the majority of start-up failures occur across three general categories:

  • Bad planning
  • Bad organization
  • Bad controls

    Bad Planning
    The first rule of business is this: reality is not an option.

    Entrepreneurs are big dreamers and resolute optimists. But successful entrepreneurs rarely opt-out of reality. In business, the only way to opt-in to reality is business planning.

    Too many businesses employ what I call a lottery strategy, which is self-explanatory. Here’s how I described the lottery strategy in an earlier post:

    The lottery strategy works like this: come up with an idea. Throw time, effort, creativity, and a few to many bucks at it. If it fails, then stop. If it works, then great!

    Like the lottery, this strategy actually does work sometimes. An idea may actually be a good idea and fly without any structured planning whatsoever (like, say, pet rocks). Or somewhere between inception and failure, someone raises their hand at a meeting with the bright idea of actually coming up with a strategy and planning accordingly.

    The current fad in business lottery games is Apple iPhone apps, as thousands of people from grade-schoolers to elders scramble to get a piece of that $0.99 pie. But, surprise, because there are now tens of thousands of iPhone apps, success in the business requires more than writing an app and getting it approved by Apple. The business strategy requires some investment in PR, advertising, and social media marketing to somehow distinguish yourself from the (ever-growing) crowd. Just like search engine results, if your iPhone App is buried somewhere down in the ten thousandth ranking, no-one will find it to buy it.

    I’ll tell a story here. Many moons ago, I worked for a medium-sized marketing firm. When the dot-com bubble burst, so did our gravy train. Our firm, however, had worked with one of its clients, a major health-care company, in rationalizing its entire print portfolio. In the process, we ended up saving them $2 million a year while increasing the amount of printing they did. It was hard and involved a ton of consulting work on our part, but $2 million bucks a year is nothing to sneeze at.

    I figured saving people money without asking them to make sacrifices was worth something in an economic downturn. I figured that saving someone $1 a year would be worth at least $1-3 in consulting fees. So, as our marketing work dried up, I proposed we go into the business of print consulting, a blue ocean where there were exactly zero competitors. Charge a low, affordable first-tier fee and then tack on a performance fee equal to or double the savings we put in place. Save $2 million a year, our fee is, oh, $2 million. The first tier fee pays our bills and adds a bit of profit to the coffers. The second tier mints money for the business.

    Great idea, right? Blue ocean and all — no-one in that space. Recession — people cutting back on their printing budget. Risk-adverse friendly — small downside for the client with a potentially huge upside. Sounds like a winning lottery ticket, right?

    So we started-up a subsidiary business. Our budget? Next to nothing. Our strategy? Sounds like a winning lottery ticket to me. Our planning? The first thing we did was develop a Web site, brochures, sales scripts, presentations, case studies, and we hit the phones making cold calls.

    All the while, I kept pushing the same question at the executives. What happens if we get a job? What do we do? What are our systems? How do we price the first tier of service (the part that isn’t pay-for-performance)? Do we have software? How do we do a consulting job and make a profit? Every time I pushed, the executive in charge of operations assured us that everything was in order. “We’re ready. We can do it right now.”

    Everything depended on being able to deliver the consulting service at a modest profit relative to the first-tier fees we were charging. The second-tier, taking a chunk of the savings, was designed to make the business into a money-minting machine. The idea was that only a certain percentage of clients would realize savings large enough for us to take real advantage of our second-tier compensation. But if every consulting job resulted in a.) modest profits for us and b.) at least enough savings for the client so that they would save more than they would spend on us, then the entire business would become a money-raining machine if we scored one gihugic money-wasting client (as far as printing is concerned) out of every ten, twelve, or twenty clients. We didn’t have to save $2 million for every client, just every once in a while, to make a ton of money.

    It’s a pretty smart financial model, if I say so myself.

    You can imagine that we did phenomenally well in selling the service. We were promising major savings in people’s print budgets without any decline in volume or quality simply by rationalizing the entire print-buying process. So once we hooked a major client, the entire executive team sat down and had a serious look at the operations side of the venture. Despite the assurances of the executive in charge of operations, it soon became evident that landing a client would lose us tens of thousands of dollars up front. We couldn’t profitably deliver on the operations end unless a.) somebody accidentally deposited hundreds of thousands of dollars into our bank account or b.) our first-tier fees were commensurate with other major, non-pay-for-performance consulting services (like Bain or McKinsey), thus eliminating our strongest selling point for a risk-adverse corporate world. We tried b. It didn’t work.

    Oops. Turns out the lottery ticket was a loser. End of business. In the meantime, we had spent tens of thousands of dollars in marketing and sales work. The correct planning on the operations end would have a.) allowed us to drop the idea in the planning stage or b.) keep hacking away at the operations planning to make it even microscopically profitable at the first-tier of compensation.

    While this complete lack of operations planning sounds like stupid warmed over, it really isn’t. Everyone in charge, including me, were not operations people. We were marketing and creative people. So, while we did some industry and some marketing planning, we did no substantive operations planning.

    I have seen start-ups come and promptly go precisely and solely because of a substantive deficit in one or more areas of business planning.

    It’s vitally important not to confuse business planning with a business plan (we had a business plan without any operations planning). In the same way “education” rarely includes “learning,” “business plans” rarely include “business planning.”

    Most business plan how-to books and software are simply paint-by-numbers or fill-in-the-blank affairs. While this greatly simplifies and speeds up the process of writing a business plan, it short-circuits the actual business planning process. Instead, I advise anyone starting a business to do all the planning first and then write the business plan. And planning is about thoroughness, about not neglecting substantive risks or opportunities.

    You do have an indispensible tool to help you plan a business — and, surprise, it’s not called a business plan: issue trees. We cover issue trees in exhaustive detail in our forthcoming startup strategy book, so we’ll only give you a taste here.

    If you had a big, fat, overstuffed bank account and, like the elder Karamazov brother, decided to blow your roll of roubles in one fell swoop, you could go out and hire a big name consultant like Bain or McKinsey to plan your business at some $400 bucks an hour. I guarantee you this: they will spend 40 hours (and $16,000) on the issue tree alone — maybe more, since they charge 10 bucks for each photocopy and an hour’s worth of billing for each email. Issue trees are how the biggest and baddest and priciest business experts in the world do business planning of any kind. Issue trees are not easy and involve a fairly steep experential learning curve, which is why McKinsey charges $400 bucks an hour to do them. But that doesn’t mean you can’t do one. And keep working at it in all stages of your business.

    An issue tree has one very simple purpose: identifying all the issues that will sink a business or business initiative or provide opportunities that can make it fly. An issue tree can start with an overarching business issue, such as, “Will this startup succeed?” or a specific business problem, “Should I advertise in the local paper?”

    Issue trees are an attempt to take the major question involved in your planning (such as, Will we be successful in this startup?) and break it down into the subsidiary questions covering every single relevant issue impacting the main question. An issue tree takes an unanswerable question (“Will my business succeed?”) and keeps breaking it down into other questions that are usually unanswerable (“Will people buy the product?”) until you arrive at an answerable question (“Do people buy similar products?”). You then answer all the answerable questions and, in the process, end up answering your unanswerable questions. See?

    So an iPHone app startup issue tree would start with, “Will my iPhone App business succeed?” (or, if you’re just selling one modest app, “Will my iPhone application sell profitably?”). That would spawn questions like, “Will customers be aware that our iPhone App even exists?” The point of an issue tree is to lay out ALL the issues that contribute to or obviate success in your start-up. Issue trees will often uncover opportunities just as frequently as they identify hazards or business killers.

    For instance, if you have a great idea for building desks and you want to market them to schools, an well-designed issue tree would identify fire codes as a potential obstacle or opportunity, since schools have to meet far more stringent fire codes than offices or residences. If the material you’re making your desks from doesn’t meet the stringent fire codes for schools, then your business is sunk. Better to know that in the issue tree stage than when you have a warehouse full of desks.

    You can search the entire universe of business plan books and software and nowhere — I mean nowhere nohow — will any of them tell you how important fire code compliance is to planning the success of your business if you’re making things like furniture or fixtures (or even computers — fire codes apply to them, as well).

    “How the hell would I know that? How would I know to put fire codes in an issue tree?” You do what the Bain and McKinsey MBA’s do. You ask. You find people who know the answer, who are in the same or a similar industry, give them a ring, talk really politely, and you ask. The entire purpose of the issue tree exercise is to identify as thoroughly as possible every issue you’re going to face. If you’re manufacturing furniture or fixtures and you forget to factor in fire codes, you could get lucky. Or you could come up deuces.

    The most important aspect of an issue tree is that it starts with top-level questions that you can’t really answer (“Can we successfully market this desk to public schools?”) into questions that you can answer just by doing a little research (“Will the product meet minimum fire code requirements?”) The first question is unanswerable all by itself, but the second question, further down the issue tree, can be answered by simply looking up state fire codes for public schools and looking up the fire rating of the materials you use. Question answered. If the answer to “Will the product meet minimum fire code requirements?” is “No,” that “No,” in this case, at least, is sufficient to answer the bigger question, “Can we successfully market this desk to public schools?” (It’s what I call a “make or break” question — a “no” on most questions, however, is simply an obstacle or a competitive disadvantage.) Once you get a “no” for fire code compliance, you must either a.) give up the notion of selling your desk to schools or b.) find fire code compliant materials for your desk.

    And, just in case you think you’ve cleared the hurdle, there are extremely strict gas emission standards, like formaldehyde emissions, that also apply to furniture, fixtures, and building materials, as well. And these gas emission standards are stricter for schools than, say, homes. Which means that you have to pay someone anywhere from $10,000 to $15,000 to test and certify your product. So, the issue, “Can I sell this to schools?” also involves the question, “Can I afford the gas emissions test and certification?”

    Start-ups typically stop at questions like “Can I sell this to schools?” And they answer it with the following process:

    Yes! I think I can because my desks are so much better and affordable than the ones schools are using now! And just to make sure I do all the due diligence and planning, I’ll run it by a few teachers and principals. And, lo and behold, they love it! What a great desk, they say, so much better than what we have and at such a great price, too!

    Then the gas emissions or fire code issue comes up and, darn it all, the hapless start-up is left with a warehouse of moldering desks.

    Why business planning (rather than business plans)? It’s what you don’t know that will kill you. It’s easier, cheaper, and more profitable to handle an issue in the planning stage than later.

    You never want your business planning to be little more than “third star to the left” and a paint-by-numbers business plan.

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