I have been involved with start-up businesses for more than 30 years, and certain truths have become apparent on that rollercoaster. I thought it would be worthwhile listing some of the things that founder entrepreneurs get wrong most often.
Raising capital isn’t success. These days, from the way in which entrepreneurs celebrate a new round of equity finance, you would think they had just created a big business. It’s a little like saying that you’ve won the Le Mans car race just because you’ve got a full tank of fuel.
Raising money via angels, venture capitalists or through crowdfunding is an endorsement of sorts, but it also creates high expectations and can be dangerous. Too much money leads to lavish spending, a lack of discipline and over-confidence.
The idea is less important than the execution. I receive plenty of glossy business plans for new restaurant concepts from founders with no experience of the catering trade and little appetite for operating a business day in, day out. Frankly, brilliant new restaurant themes are 10 a penny; what matters is how you carry out the project — the basics of property, service, ingredients, kitchen skills and so forth.
At least five years
Taking the nitty-gritty of operations for granted is a fatal act of hubris by far too many start-up entrepreneurs.
Real businesses take at least five years to emerge. Many entrepreneurs believe their company can be enormous in just a few years with enough backing, but business models need to evolve and be tested in practice — not theory.
I once helped roll out a chain of more than 40 specialist gyms, before we finally admitted that the demand wasn’t there and the economics didn’t make sense. We should have experimented more early on and adapted to the market before charging ahead.
Most successful businesses are started by teams. Solo entrepreneurs can certainly succeed — look at James Dyson — but they are very much the minority.
Even those who we think of as great individual entrepreneurs, such as Richard Branson, Bill Gates and Steve Jobs, all had co-founder partners in the crucial early years. Sometimes they get written out of the glorious histories — but if they had not been there at the start, perhaps the billionaires would never have made it.
Building a big business is so difficult, it needs more than one person fighting the inevitable battles.
Lack of sales
Companies generally fail through self-inflicted mistakes. Lots of start-ups are obsessed about competitors and rivals copying them, but early-stage businesses mostly go broke because of a lack of sales, not competitor activity. Founders should focus on customers and revenue, cash and costs — and other issues over which they can have a direct influence.
The original plan and projections will have to be revised. All founders should prepare a thoughtful business plan and budgets, but whatever they write will be overwhelmed by reality. Quite possibly the initial scheme will have to be changed massively; plenty of their assumptions will be false.
As Darwin well understood, it is the species most responsive to change that is the best equipped for survival.
Innovation matters, but it isn’t everything. You need an economic model that makes sense — it’s no good being original if there is no demand for your product or service at a price that generates a surplus. Lots of start-ups get emotionally involved with their ideas, and fail to see that it isn’t a commercial proposition. Find big opportunities — if you want to develop a serious business, don’t target a small niche. It might promise little competition, but there’s a reason for that — there isn’t much money in it.
Aim for mass markets where you can make a real impact, rather than obscure, esoteric products that will only ever appeal to small numbers of people.
And don’t get carried away by the attention. I receive endless requests from PR agencies to give coverage to their fledgling entrepreneur clients. This is mostly a distraction, feeding their egos in unhealthy ways.
Brilliant new restaurant themes are 10 a penny. What matters is how you carry out the project.
Real entrepreneurs are getting their hands dirty running their companies, not attending conferences about the start-up boom or giving interviews to the media. I know one or two “entrepreneurs” who have made a career of doing the latter but have never actually built a proper business because they’ve been too busy collecting spurious awards.
Domain knowledge counts. If all the partners in a start-up are entirely new to an industry and have no relevant experience, the odds of failure are high. It is much better to gain understanding of the sector working for someone else first, at your employer’s expense.
Achievement happens through incremental steps; giant leaps are the stuff of fiction.
In real companies, the policy should be one of small, relentless improvements, usually initiated from the ground up — rather than dramatic top-down decisions. Success is a long haul, achieved through combined effort.
Luke Johnson is chairman of Risk Capital Partners and the Institute of Cancer Research.
First published in the times.co.uk