What Start-ups Do Wrong
(when they do anything wrong)

• They're not market-driven. They focus on their technology and not on finding a market niche for it. When inventors are CEOs, this is a hazard.
• They don't have a strong business plan. The investors look for the strength of the plan first, and the strength of the technology later.
• They don't have mature management. The first thing the investors look for in the business plan is the strength of the management team.
• They don't have contingency plans. Are there alternative sources of income if a contract falls through?
• They focus on sales and not on customer service. The technology may lead to a first sale (maybe), but the support is what keeps the customers coming back.
• They don't know how to recruit or retain competent key personnel.

Why Start-ups have Weaknesses in their Business Plans

We readily see that the business plan is a ticket to the halls of the rich investor. We sometimes forget (though the investors don't) that the business plan is also a map that shows us how the business is run. This means

• We have to *follow* the map once it's made.
• It must include milestones for
  • product rollout
  • revenue streams
  • business processes
  • strategic alliances
  • licensing agreements
  • new intellectual property
  so these things have to be anticipated.
• It doesn't have to have all the details. The details are in the day-to-day operation of the business itself.
• It isn't the plan that makes the start-up successful; it's the overcoming of problems (hopefully anticipated in the plan) that makes it successful.

Why Start-ups have Personnel Problems

Rob Lowe suggested in "The West Wing" that the number one problem small businesses have with personnel is employee fraud: theft, espionage, etc. The IEEE panel had quite a number of views and this is not one of them. Here's what the panel says start-ups are most likely to lack:

• Communication. Start-ups are usually too small for "Mushroom Management" to be effective. (Not that it's really effective anywhere.) Creative workers need to know at all times what's expected of them, and what are the consequences of their actions, as well as those of their management.
• Inclusion. Even if ONE PERSON must make the decisions, that person still needs input, and creative workers need to supply it.
• Flexibility. Start-up workers are likely to wear many hats. Do they have to room to try those hats on? Can they adjust the fit of a hat to their needs?
• Relief. Creative workers lose focus if they are walled off from family, friends, and activities for too long.
• Pleasant work environment. Even a company with low funding can provide something more imaginative than "Casual Fridays." You have to think about workers' feelings once in a while.
• Ethical perspective. There are some things workers can't be expected to do even if it means cash flow relief.

We assume that start-ups are interested in creative, enthusiastic, energetic employees -- people who can "think out of the box" and who have some personality. Despite the fact that all want ads call for these kinds of people, there aren't that many to go around. Yet these are the people most likely to operate effectively with minimal structure, without knowing what's next.

Once you have those people, even if they're there for the stock options they won't stay if they think they're not treated fairly. Decisions made by management call for a balance between quality, speed, and employee buy-in. And if they ARE there for the stock options, here are questions they may use to test management: when can you exercise stock options? What percent of the options? At what price? By when?

Going Under

When a technology start-up goes under, even after having once been well-funded, there are sometimes warning signs:

• careless investors
  • attracted by other impressive investors
  • mesmerized by slick graphics
  • unwilling or unable to grasp the technology, or even the results
• careless management
  • dependent on proprietary technology, or (worse yet) technology that's still on the drawing board
  • conspicuous consumption (e.g. high salaries, bonuses, cool cars, new buildings, club memberships, etc.)
  • lack of knowledge of competition -- what you should know is
    • the names of at least three if they even exist
    • the advantages of your product over theirs
    • how they're funded
    • what their customers say about them
    • how your product (or even your whole market) could be made obsolete
  • lack of understanding of valuation -- a rule of thumb is valuation = 10 x sales; use a number like this to estimate stock value and total number of diluted shares

Signs of a Start-Up with a Chance

1. Business
   • customers for product or service
   • suppliers for materials or components
   • stability of pricing
   • availability of labor
   • response to regulatory concerns (if any)
   • state of the industry
2. Competition
   • doesn't write off competitors or pretend they don't exist
3. Finances
   • likelihood of profitability
   • seasonality of product or service
   • cash flow
   • dependency on uncontrollable market forces
   • ownership control
   • exit strategy
4. Potential
   • for growth
   • for cost-cutting and efficiency improvements
5. Intangibles
   • management strength
   • industry trends

References

Ryan, M. "Digital Debacle." Smart Business, 11.2000.

There was some discussion of risk, which all panelists agreed was fundamental to the start-up environment. There was no universal agreement on how to prepare intellectually for risk -- though several panelists cited works of military history. My favorite works on the subject are

Bernstein, P. Against the Gods. John Wiley & Sons, 1998. ISBN 0-471-29563-9
Vaughan, D. The Challenger Launch Decision. Univ. of Chicago Press, 1996. ISBN 0-226-85175-3
Rippy, D. Sizing Up a Start-Up. Cambridge, MA: Perseus Books, 2000. ISBN 0-738-20353-X
http://www.garage.com/ -- numerous resources