Small business owners need to carefully evaluate and not make assumptions.
For most startups, these nine flawed assumptions are the most toxic of all.
Here are the 9 deadly sins for start ups:
1. Assuming “I Know What the Customer Wants”
First is the founder’s unwavering belief that he or she understands who the customers will be, what they need, and how to sell it to them.
Any dispassionate observer would recognize that on Day One, a startup has no customers, and unless the founder is a true domain expert, he or she can only guess about the customer, problem, and business model. On Day One, a startup is a faith-based initiative built on guesses.
Yet the traditional product introduction methodology has founders take these many business model guesses as facts and go design a product and start spending money to build it on a race to “first customer ship”—all before talking to a single customer.
To succeed, founders need to turn hypotheses or guesses into facts as soon as possible by getting out of the building, asking customers if the hypotheses were correct, and quickly changing those that were wrong.
2. The “I Know What Features to Build” Flaw
The second flawed assumption is implicitly driven by the first. Founders, presuming they know their customers, assume they know all the features customers need.
These founders specify, design, and build a fully featured product using classic product development methods without ever leaving their building. But wait—isn’t that what startups should do? No—that’s what companies with existing customers do.
The waterfall development process proceeds sequentially and without interruption for as long as a year or two. Progress is measured by each new line of code written or new piece of hardware built throughout the process until the product is released.
Yet without direct and continuous customer contact, it’s unknown whether the features appeal to customers.
Fixing the inevitable product mistakes after building and shipping the entire product is costly and time-consuming, if not deadly. It can render the product obsolete by launch.
Worse, it often causes huge engineering waste, with hundreds of hours of work tossed aside, or tons of code cut and dropped to the floor, when customers say the new features aren’t ones they care about. Ironically, startups were often crippled by the very methodology they traditionally used to build new products.
3. Focus on Launch Date
The traditional product introduction model focuses engineering, sales and marketing on the all-important, immovable launch date.
Marketing tries to pick an “event” (trade show, conference, blog, etc.) where they can “launch” the product. Executives look at that date and the calendar, working backward to ignite fireworks on the day the product is launched. Neither management nor investors tolerate “wrong turns” that result in delays. In fact, traditional engineering schedules have test cycles with the names alpha, beta, and release but rarely allow time to improve the product.
They’re still geared to putting out the original product with minimal bugs, though.
The product launch and first customer ship dates are merely the dates when a product development team thinks the product’s first release is “finished.” It doesn’t mean the company understands its customers or how to market or sell to them, yet in almost every startup, ready or not, departmental clocks are set irrevocably to “first customer ship.”
Even worse, a startup’s investors are managing their financial expectations by this date as well.
The chorus of investor voices says, “Why, of course that’s what you do. Getting the product to market is what sales and marketing people do in startups. That’s how a startup makes money.”
This is deadly advice. Ignore it.
Focusing only on launch results in a “fire, ready, aim” strategy that ignores the customer discovery process— a fundamental and generally fatal error. Obviously, every startup or company wants to get a product to market and sell it, but that can’t be done until the company understands who it’s selling to and why they’ll buy.
The forced march ignores the iterative loop that says, “If our assumptions are wrong, maybe we need to try something different.” It shuts off the “build, test and learn” flow and assumes that customers will come based merely on good engineering execution.
Time after time, only after launch does a startup discover that not enough customers visit its website, play the game, bring their friends, or convert to orders. Or it discovers that early customers don’t scale into a mainstream market, or the product doesn’t solve a high-value problem, or the cost of distribution is too high.
While those discoveries are bad enough, the startup is now burdened with an expensive, scaled-up sales and marketing organization—effective only at burning mountains of cash—that’s now trying to figure out what went wrong and how to fix it.
4. Emphasis on Execution Instead of Hypotheses, Testing, Learning, and Iteration
Startup cultures emphasize “get it done, and get it done fast.” So it’s natural that heads of engineering, sales and marketing all believe they are hired for what they know how to do, not what they can learn.
They assume that their experience is relevant to this new venture and that all they need do is put that knowledge to work managing the execution that’s worked for them before.
While established companies execute business models where customers, problems, and necessary product features are all knowns, startups need to operate in a “search” mode as they test and prove every one of their initial hypotheses. They learn from the results of each test, refine the hypothesis and test again, all in search of a repeatable, scalable and profitable business model.
In practice, startups begin with a set of initial hypotheses (guesses), most of which will end up being wrong. Therefore, focusing on execution and delivering a product or service based on those initial, untested hypotheses is a going-out-of- business strategy.
In contrast, the traditional product introduction model assumes that building a startup is a step-by-step, sequential, execution-oriented process.
Each step unfolds in a logical progression that can be captured in a PERT chart (a project management technique that maps the steps and time required for project completion), with mile- stones and resources assigned for the completion of each step. But anyone who has ever taken a new product out to a set of potential customers knows that a good day in front of customers is two steps forward and one step back.
The ability to learn from these missteps distinguishes a successful startup from those that have vanished.
5. Traditional Business Plans Presume No Trial and No Errors
The one great advantage of the traditional product development model: it provides boards and founders an unambiguous path with clearly defined milestones the board presumes will be achieved.
Most engineers know what alpha test, beta test, and first customer ship mean. If the product fails to work, everyone stops to fix it. In stark contrast, before first customer ship, sales and marketing activities are ad hoc and fuzzy, and seldom have measurable, concrete objectives.
They lack any way to stop and fix what’s broken (and don’t even know if it’s broken or how to stop).
Financial progress is tracked using metrics like income statement, balance sheet and cash flow even when there’s no revenue to measure. In reality, none of these are useful for startups.
Board directors have simply adopted the traditional metrics used in large companies with existing customers and known business models. In a startup, these metrics don’t track progress against the startup’s only goal: to find a repeatable and scalable business model. Instead, traditional metrics get in the way.
Instead of asking, “How many days to the beta test?” or, “What’s in our sales pipeline?” a startup’s board and management team need to ask specific questions about results of its long list of tests and experiments to validate all components of its business model.
If a startup’s board of directors isn’t asking these kinds of questions, it’s wasting time without adding value.
No matter what, directors and founders must stay focused on one financial metric that always matters: cash burn rate and number of months’ worth of cash left in the bank.
6. Confusing Traditional Job Titles with What a Startup Needs to Accomplish
Most startups have simply borrowed job titles from established companies. But remember, these are jobs in an organization that’s executing a known business model.
The title Sales in an existing company reflects a team repeatedly selling a known product to a well-understood group of customers with standard presentations, prices, terms, and conditions. Startups by definition have few if any of these known elements. In fact, they’re out searching for them!
Because target customers, product specs and product presentations may change daily, early-stage startup executives need dramatically different skills from executives who are working in an established company selling established products or line extensions.
The demands of customer discovery require people who are comfortable with change, chaos, and learning from failure and are at ease working in risky, unstable situations without a roadmap. In short, startups should welcome the rare breed generally known as entrepreneurs.
They’re open to learning and discovery— highly curious, inquisitive, and creative. They must be eager to search for a repeat- able and scalable business model.
Agile enough to deal with daily change and operating “without a map.” Readily able to wear multiple hats, often on the same day, and comfortable celebrating failure when it leads to learning and iteration.
7. Sales and Marketing Execute to a Plan
Hiring VPs and execs with the right titles but the wrong skills leads to further startup trouble as high-powered sales and marketing people arrive on the payroll to execute the “plan.” Here’s how it typically unfolds:
Following the business plan and the traditional product introduction model, the board and founders agree to a launch date, a burn rate, a revenue plan and a set of milestones.
The sales VP begins to hire the core sales team, design sales pitches, and make appointments and attempts to acquire early “lighthouse” customers (prominent customers who will attract others). At the same time, the sales team uses revenue goals specified in the business plan to track its progress in understanding customers.
Meanwhile, the marketing VP is busy designing websites, logos, presentations, data sheets and collateral, and hiring PR agencies to create buzz.
These tactics become marketing objectives, even though they’re merely tactics. Marketing discovers whether its positioning, messaging, pricing and demand- creation activities will work only after first customer ship.
Executives and board members accustomed to measurable signs of progress against “the plan” will focus on these execution activities because this is what they know how to do (and what they believe they were hired to do).
Of course, in established companies with known customers and markets, this focus makes sense. And even in some startups in “existing markets,” where customers and markets are known, it might work.
But in a majority of startups, measuring progress against a product launch or revenue plan is simply false progress, since it transpires in a vacuum absent real customer feedback, instead of searching for an understanding of customers and their problems and replacing assumptions with facts.
8. Presumption of Success Leads to Premature Scaling
The business plan, its revenue forecast, and the product introduction model assume that every step a startup takes proceeds flawlessly and smoothly to the next.
The model leaves little room for error, learning, iteration or customer feedback. Nothing says, “Stop or slow down hiring until you understand customers,” or, “pause to process customer feedback.”
Even the most experienced executives are pressured to hire and staff per the plan regardless of progress. This leads to the next startup disaster: premature scaling.
Hiring and spending should accelerate only after sales and marketing have become predictable, repeatable, scalable processes—not when the plan says they’re scheduled to begin (or when the “lighthouse” account is signed or a few sales are made).
In large companies, the mistakes just have additional zeros in them. Microsoft and Google, powerhouses though may they be, launch product after product— Google’s Orkut and Wave, Deskbar, Dodgeball, Talk and Finance; Microsoft’s “Kin,” Vista, Zune, “Bob,” WebTV, MSNTV, PocketPC—on rigid schedules driven by “the model” and the presumption of success.
Shortly thereafter, a lack of customer response delivers a fast, quiet funeral for product and management alike.
9. Management by Crisis Leads to a Death Spiral
Consequences of all the mistakes began to show by the time of first customer ship.
The story usually unfolds like this:
Sales starts to miss its numbers and the board becomes concerned. The sales VP arrives at a board meeting, still optimistic, and provides a set of reasonable explanations.
The board raises a collective eyebrow. The VP returns to the field to exhort the troops to work harder. Sales asks Engineering to build custom versions of the product for special customers, since this is the only way that the increasingly desperate sales force can close the sale.
Board meetings become increasingly tense. Shortly thereafter, the sales VP is probably terminated as part of the “solution.”
A new sales VP hired and quickly concludes that the company just didn’t understand its customers or how to sell them. She decides that the company’s positioning and marketing strategy were incorrect and that the product was missing critical features.
Since the new sales VP was hired to “fix” sales, the marketing department must now respond to a sales manager who believes that whatever was created earlier in the company was wrong (After all, it got the old VP fired, right?). A new sales plan buys the new sales VP a few months’ honeymoon.
Sometimes all it takes is one or two iterations to find the right sales roadmap and positioning to attract exuberant customers. In tougher times, when dollars are tighter, the next round of funding may never come.
The problem is that no business plan survives first contact with customers.
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