3 Fatal Errors Startups Make

Yesterday someone asked me to tell them what the three biggest errors I see startups making when they come to me for mentoring. It didn’t take me five seconds to come up with an answer, because after over 700 startup conversations and about 1% of that in angel investments, I know this cold.

No Real Product. The Dragon spacecraft is a real product. That’s why SpaceX is a real company that can raise money. It’s not an original product: since the Kennedy era, we've had a space shuttle program run by the government. But the shutdown of that program leaves a void in the market for information and experimentation about space. It’s not a disruptive product, but it is a useful product.

It’s not just a tool or a feature. A tool or a feature cannot make a standalone company for very long. That doesn’t mean you can’t make money with a tool. Instagram is a tool. You just can’t build a company around it.

No Market Knowledge. Most of the time, when an entrepreneur comes into my office and shows me an idea that he thinks is revolutionary, I’ve already seen it done more than once. Often you can find out whether there’s already someone doing what you do by consulting Google. The best example of this is a company I worked with several years ago called Eleanor’s Garden. It makes a portable window garden for people who live in small spaces and want to grow herbs and food. It’s like a kit, and it can be shipped to your home. It’s a neat idea for people in cities who want their children to know where vegetables come from. Eleanor’s Garden has been around for about four years.

A young man came into my office this week with a project called FarmiCulture. Guess what it was? Yep. Eleanor’s Garden. His marketing plan was to distribute it through Home Depot. But he had no idea Eleanor’s Garden even existed, nor whether Home Depot accepted products from startups (it doesn’t, because Eleanor’s Garden tried that).

A little elementary market research or competitive analysis might have given him some time-saving answers. If you plan to enter a market, shouldn't you know something about it?

No Business Model. If the other errors can mortally wound a startup, this one kills it off, because the ability to sell something for a price that will support at least yourself is what changes a startup from a hobby to a business. The last few years have pretty much buried this formerly well-known concept under a barrage of social networks and apps that seem to exist without having any revenue, and suddenly be acquired for multi-millions. That’s only the Hollywood version of the truth.

Being acquired without revenue is not a business model. It’s a stroke of luck that happens about as often as a lightning strike. Not that businesses don’t get acquired: many do. But unless your business reaches a certain scale, you don’t get any money worth talking about when your business is acquired. When an entrepreneur sells her business, most people think "Oh, she got rich." Not so fast. How much did she owe? How much did the original investors get?  How much actual cash changed hands in the transaction.

You can build with an eye toward funding and then acquisition, but I’d much rather see a business model, a way of commercializing a technology, selling a product, or offering a service someone will buy and pay for.

Not that the user needs to be the payer. For the last fifty years, the user of the healthcare system hasn’t been the payer—his insurance company has. This cost-shifted business model has now completely broken down, but that wasn’t because the business model was bad in and of itself; rather, it was abused by waste and fraud. In other industries, insurance works just fine.

There has to be a payer. Money or something similar has to change hands or it just isn’t a business. Even the IRS knows that. Eyeballs, we all found out a decade ago, don’t make a business. We will now see with Facebook’s advertising woes, whether engagement makes a business. The jury’s out, as the stock price demonstrates.

[Image: Flickr user OfficerGreg]

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