This week we get an email from one of our listeners, Peter and Jonathan discuss startup incubators, and our guest Caroline talks to us about the “F” word and 10 reasons why startups fail.
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Listen to Episode 8:
- Charlie’s Email – (:31)
- Startup Incubators – (2:13)
- Read also: Q&A with Business Incubator Co-founder Joe Maruschak
- Learn more about Techstars, a startup accelerator program
- 10 Reasons Why Startups Fail – (9:31)
- View the Slideshare: Top 10 Reasons Startups Fail + How to Pitch and Get Funded
Jonathan: Hey guys before we get started with today’s episode, I just wanted to read an email that we got from one of our listeners. His name is Charlie and he responded to our question last week about whether you should stick to the plan or change it. He says, “Hey guys. Great episode. I’ve been thinking a lot about your question of sticking to the plan or changing it. You can only make decisions with the information you have.
What if you get offered new critical information that will affect your plan? What if something dramatically changes in the market? Or what if a new brilliant idea that you hadn’t considered when you were planning emerges? The solution? Build in fluidity to your business plans. This is exactly what I do and I’ll tell you how it’s worked. I’d implemented a business plan including marketing, engagement, sales strategy and realized a few months in that it wasn’t servicing a key influence or in the sales process.
There was no way of my knowing about this key segment of the sales process when I was writing the plan so I tweaked the plan and built servicing this type of client in. Now, we’re miles ahead of where we thought we’d be and we’ve won huge projects just by calling on and marketing to the segment. Really just to tweak. Not much had to be done. You’ve probably guessed that I advocate changing rather sticking to business plans. Thanks for the podcast and the site and articles. It’s been a great help to my work. Cheers. Charlie.” Well, thanks for that email Charlie.
We appreciate you writing back and letting us know what you thought of the episode, and of course for the rest of our listeners if you are interested in contacting us, you can do that by emailing email@example.com. That’s firstname.lastname@example.org. All right. Let’s get the show started. What if I don’t have those things, I’m not established but I do have a good idea of maybe done a little bit of work but I need to get to the next step and I don’t have what it takes.
Where do I go? What do I do?
Peter: Yeah, that’s a perfect question for a recent article we posted called Q&A with Business Incubator Co-founder Joe Maruschak.
Jonathan: Who’s Joe?
Peter: Well, fortunately I know how to pronounce his name because I felt and that was some of his incubator work but Joe is a local entrepreneurial champion here in Oregon. He’s helped a lot of small businesses succeed. He’s helped startup weekend events here locally. A startupweekend.org is a great one weekend way of testing an idea.
Jonathan: You can go to a weekend event. Take your idea there.
Peter: See if it sticks.
Jonathan: See what happens.
Peter: Maybe build a team. See if you can start developing at that kind of thing.
Jonathan: That sounds cool.
Peter: Joe talks a little bit about this idea of incubators. An incubator, which by the way and not to get this too confusing, an incubator is like an accelerator. Over time, the two have started to become a little bit more similar.
Peter: In probably even five years ago. An incubator was a thing where you would go to a space and people would help you literally incubate your idea.
Peter: Think about warming that egg. Keeping it nice and safe. Your ideas are going to get pierced by arrows. You’re not going to get defunded or run out of town by your investors. Everything’s going to be very safe in the space and by the time you get out, hopefully you’ll be a little bit stronger and ready to face the world. While an accelerator typically meant you are going to start with your idea.
Peter: You’re going to develop, develop, develop and if you don’t get kicked out of the the accelerator, you will get funding of some sort.
Jonathan: All right.
Peter: Techstars is probably the most famous accelerator but the idea of the accelerator versus the incubator because there is living field, because there’s this very early stage fields for them both. They started to get a little bit more pushed together but the basic idea is if that’s you, if that’s your stage, if you’ve got what you believed is a genuinely great idea, if you want to test this, if you want throw the spitballs against the lawns, see if they stay if you have all of the development but none of the business knowledge.
Peter: Or all the business but not the development knowledge let’s say. Or you have a product in a patent but no [inaudible 00:04:36] bring you to market. These are all great reasons to check out your local incubator.
Jonathan: Everyone has a local incubator. They’re all across the country?
Peter: That’s a great question. They do seem to be popping up all across the country. Certainly, there are some that are more famous than others. There’s some fantastic producers in terms of who the output of those accelerators and incubators have been in Washington DC, Chicago, San Francisco. Here in Oregon, we’ve got some in Portland that are really great and then this article talks about some here in Eugene, Oregon which are doing well but fairly new. Definitely check out your area. If you need to get on a plane and stay somewhere for three weeks or three months, think of it maybe as an apprenticeship, the dedication that you have to that early stage business. If you really want to get some sort of business out of that idea, this might be what it takes.
Jonathan: Okay. Tell us more about Joe. What’s he doing? What’s he found in?
Peter: Joe originally started this organization called the Fertilab Thinkubator which is an incubator that focuses on medical science, that kind of biotech industry focused stuff. If you’ve got an idea for some microchip that will detect some bacteria, it’s the perfect place for you to go. Now, for some reason we have a pretty good concentration of that here in Oregon and we can accommodate an entire incubator that will focus on that which is awesome. The cool thing is with the device like, that with the science like that, there’s a lot of early stage proving ground needed.
Peter: There’s a lot of getting out and making sure people actually want to buy it. The customer validation phase is critical for that kind of thing.
Peter: Meeting with lawyers, meeting with local professionals, that kind of thing are all part of this. That’s what Joe provides in this environment. He will literally have the local small business lawyers come in, not just do a little presentation leave but also meet with those folks in the incubator which is great. The interesting thing about Joe is he also does a local accelerator called RAIN. He’s been running both these things now at once.
Peter: RAIN is a program that is exactly like the traditional accelerator except there is no guaranteed funding. Jonathan, if you had this idea for your … Cold bread store …
Jonathan: It’s going to sell hot cakes but more like cold cakes. Right?
Peter: [crosstalk 00:07:00] the tagline and everything.
Jonathan: That’s my slogan. Nailing it.
Peter: Yeah. If you got the called bread store, you want to do figure out if people would actually be interested in that. You wanted to see if maybe you could pitch some investors. If that’s the stage your idea was in, well then this might be the place for you. What you do in a situation like that is you end up going almost everyday, in this case five days a week, it’s basically a full time job. It’s almost as if you’re working at this future looking company that you will be running or that you will be a major portion of but also, there’s integrated mentoring others, integrated training in terms of like how to pitch your business, in terms of what you need to be thinking about.
If you’re making money, if you’ve got a profit center, there’s going to be some fault coming in and doing some of those initial audits, doing some of that initial double check, making sure you’re doing everything correctly or if you’re building software, it might just be some other folks who have built software that’s similar in the past and just they’re to give you feedback.
Jonathan: How do you get into an incubator? Do you have to prove that you validated the idea? Or can you just go in and kick the tires? What’s the entry?
Peter: Yeah. Great question. I would say if your goal is to get to Techstars or bust, then you shouldn’t be asking that question. You need to be really ahead to your game.
Peter: You need to be the top of game in terms of the technology that you’re presenting. It’s a very specific accelerator. It’s a very prestigious accelerator and that’s why they can guarantee the funding because along with it that said a lot of these local incubators and accelerators that have been popping up are hungry for dedicated talent.
Peter: If you can provide a pretty good idea and a great level of dedication enthusiasm, there’s a good chance that your local groups are going to want you there. Go ahead and do that research. Find those people. Start talking to them. A lot of them will be able to just answer the phone and talk you through the process. Again, set your sights exactly at the level that your idea deserves.
Jonathan: Okay. Awesome. That’s sounds like a great interview with Joe and awesome to learn more about him and also about incubators and accelerators. Anything else we should know about Joe or are we cool to move on?
Peter: I think we’re cool to move on.
Jonathan: We’re cool to move.
Peter: Do you feel like we’re cool to move on?
Jonathan: We’re cool to move on. I feel like we’re cool to move on.
Peter: I think we’re cool to move on.
Jonathan: Ice cold.
Peter: That’s great. We’ve got a very special guest here today, so special we’ve had her on twice.
Jonathan: Yes. Welcome back Caroline Cummings.
Caroline: Nice to be back.
Peter: Very special. All right. Very special.
Jonathan: What are talking about today?
Peter: Well, what are we talking about today? Well, we’ve got all sorts of topics to cover but I think Caroline is going to talk to us about why startups fail.
Jonathan: The F word.
Caroline: The F word. I’m going to talk about the importance of the F word.
Peter: The F word. Not food.
Caroline: Not friends.
Peter: All right. Not wherein Gordon Ramsay up in here.
Caroline: Not foes.
Peter: All right. The F word that is fail. The four letter F word that is fail. People are scared of failing. Is that right?
Caroline: People are frightened of failing. Unfortunately in our culture, not just in our business culture but in our social culture, people don’t talk about failure. In the business world, that’s where innovation comes from. It comes from failure and I like to say that success is actually a terrible teacher. The reason I’m such an expert on failure is because I’ve had two tech startups and the first one failed. I learned way more from that one. The second when I actually sold and it learned hardly anything from that one, but the first one that I failed I learned a lot.
After that company failed, I went on and interviewed a bunch of investors that I had met and also some other CEO’s who had failed companies prior to their successes now and asked them, “Why did these companies fail in your portfolio?” or “Why did the company you’ve started fail?” And I started to see some common themes that came to surface. I compile these top ten list of the reasons why startups fail.
Jonathan: Okay. The top ten reasons why startups fail.
Caroline: Yes, the number one reason is team, the wrong team. This is so important because investors really invest in people first then idea second. I’ve heard that a lot of times when I was pitching to investors for funding, they first said, “Okay, well tell me about your self and co-founders in your team?” If you have the wrong people leading a company then that’s going to cause a lot of challenges. It’s going to show up in a lot of different ways and a great example is that we were the wrong team. Our business model was Pinterest. Pinterest didn’t exist at the time.
We were doing Social bookmarking around health and wellness products. It was [0708 00:12:00] and then we had the whole crash. It goes to show you that the business model was good but we just … We’re not the right team. The second reason is actually still a part of team but it’s the single founder. It doesn’t mean that if you are one person and you start a company that you’re going to be a failure but the research stud show that when there’s only one founder, the chances of failure increase significantly because of the things you would imagine.
You’re only talking to yourself. You have skill sets that are limited, that there’s never a person I’ve met who can do everything that it takes to run a business.
The single founder is the second reason.
Jonathan: For both of those issues, whether you’re a single founder or you have the wrong team, what can you do to fix that?
Caroline: Well, there’s an exercise actually that I do when I sit down with people who are starting companies and I get them to list out all of the skills that they have on a board and get down to the nitty-gritty like I can program HTML or I know search engine optimization or I can make cold calls or I can write press release, whatever they are and have your business partner do the same thing and then take a good look at that list and see what’s missing to run a business. I’ve done this with lots of founders and we usually glaringly see skills missing like financial management or HR managements or digital marketing or whatever those things are.
That way you at least know who your first or second hire should be in your company. The number three reason that startups fail is having the wrong legal team. It follows one and two which still have to do with team. This is extended team and we have the wrong legal team in my first startup. They presented themselves as business attorneys and they had in fact, worked with other businesses but they never worked with the high gross startup. They never worked with the startup who had needed to raise multiple rounds of financing. They never worked with startups who needed to put together private placement memos for investors, capitalization tables and all of those things. I now have a checklist that you used when you interview a lawyer to make sure they’re the right team member as part of your extended team.
Jonathan: It might be like a checklist within a bigger list but if we’re wanting to get the right legal team, what other couple of factors that you should pay attention to?
Caroline: One of them is when you meet with them, their offices is organized and this is big because it shows that if it’s a mess and there’s paper piled everywhere and a bunch of folders that they’re really busy and they don’t have time for you, you also do want to ask them, “How much time do you have for me?” Particularly, if you’re doing a high gross startup where you need to raise money and you have an investor tomorrow say, “Okay, I’m ready to give you a $100,000 check but send me some docs.” You’re like, “Oh” and you’re lawyers in Hawaii. Right. They don’t have someone else who can step in.
You want to make sure that right out of the gate, you shouldn’t even have to ask all those questions. They should be telling you how they’re going to take care of you. You also want to make sure they have experience in your industry and that they’re willing to share references.
Peter: Number four. What’s number four?
Caroline: The number four reason is boiling the ocean.
Peter: Never heard it.
Caroline: Never heard of it? Okay. Well, it’s basically when you’re trying to be everything for everyone like, “I’m the Facebook meets the Uber, meets the Google, meets the coffee shop down the street. All in one.” Whenever you say that to an investor, they’re like “How are you all of those things?” Just pick one thing and do it really, really well. If you’re opening a cupcake stand, just do cupcakes really. If you are launching a website where you’re doing some online marketing, just do that really well. Don’t try and all the sudden add in search engine optimization and whatever else to the mix. Do one thing really well and then you can start to expand from there. Right out of the gate. If you try to boil the ocean, not good.
Jonathan: I get it. If you try to do all those things, it’s like trying to boil the ocean.
Peter: Which is hard I suppose.
Caroline: Which is hard.
Peter: Difficult. It takes a lot of energy.
Caroline: You could take a cup of it and boil that but not the entire ocean.
Peter: It’s a good thermodynamic lesson as well.
Caroline: I would think so.
Peter: Not for this podcast but for maybe another one.
Jonathan: Number five.
Caroline: Number five is not talking to customers. You might think if that is a duh, well of course you need to talk to your customers but I can’t tell you how many companies I’ve coached, where I’ve coached hundreds but I can’t tell you how many of them say, “We’re building this product. We’re working on this.” And I say, “Oh, what do your customers think?” And they say, “We don’t have any customers yet.” “Well, that’s okay. You might not have any customers yet but what about your prospective customers? What do they think? Are you building this all alone on an island by yourself and you’re looking at yourself in the mirror saying this is really awesome?
That’s not really helpful. You need to go out and do some customer development. You need to do some research. You need to talk to real people who will use your product. Taste the product. Wear the product. Use the product. Click on the product, whatever it might be and then build the product with them as supposed to building and then they will come. That only works on field of dreams.
Peter: Right. Is there a problem if you talk to customers too much? You get pulled apart in too many directions. Is it possible to get too much feedback while you’re trying to get company built in that early stage?
Caroline: I think that’s possible. You want to make sure you diversify your customer based. You’re not just picking two in listening to them particularly if ones your mom and ones your neighbor.
Caroline: You want to talk to people who actually would buy your product or use your service and you want to ask them for their opinion and don’t reward them with cash. We learn that the hard way. They actually want to be rewarded and be champions for you. They want discounts. They want to be able to put a badge or something, whatever it is that works for your business model but don’t pay them. That’s the number five reason that startups fail.
Peter: That’s Jonathan’s philosophy on keeping me on this podcast.
Jonathan: Don’t pay him.
Caroline: Don’t pay him.
Peter: Not rewarding me with anything.
Caroline: That’s right.
Jonathan: He’s got to earn it.
Caroline: That’s right. Number six is an interesting one and this mainly applies to technology companies or people who are building products is remaining stealth too long and with that is also being slow to launch. A lot of companies say, “Oh, I just … I can’t put it out there yet. It’s not perfect.” Or “I don’t want to make this live because I’m afraid of what people might say about it.” Well, that’s what beta is for. You’ve launched your beta product. You launched your beta sites or your beta service so that you can get some real feedback from real customers at that point.
Don’t be afraid to take too long. Particular nowadays, if you are doing technology it’s a lot cheaper to launch something and there are a lot of tools out there that allow you to build a minimum viable product and throw it out in some market and test it. Before you spend all the money and later realize that, “Oh, now you’re going to talk to your customer and that’s not what they wanted.” You’re solving a pain that you thought they had but in fact they really didn’t.
That’s the number six reason.
Jonathan: What if you want to keep it more secret because you’re afraid somebody’s going to steal the idea before you can officially launch?
Caroline: I would say ten out of ten entrepreneurs I talked to say that so it’s good that you brought that up because it is a fear that people are afraid someone’s going to steal it and you have to get it out there though. How else are you going to get feedback from it and if you’re constantly worried about people stealing your idea, then you’re focused on that and you’re not focus on building on your product.
Caroline: Just put the stinking thing out there and let people respond to it and if you truly are doing something unique that no one else is doing and you’re solving a pain in the unique way then you’re going to rock it. You’re going to kill it.
Peter: Yeah, also no offense to the people out there but there’s billions of people in the world. If you’re solving a real problem, that’s a good chance that someone else has thought of your solution as well. The idea of keeping it secret is often a bit of a fallacy. Its idea that I’ve got this magic bullet solution. It’s chances are it’s out there already, chance that are people developing at the same time. The faster you can get out to market, the fast you can develop those customer based is. In our experience, we’ve seen from the businesses we’ve talked to the faster you can get early market advantage.
Peter: Cool tip.
Caroline: Yeah. Number seven actually flows in nicely with it because this number seven reason that startups fail is that they’re stuck on their original idea.
Jonathan: What does that mean?
Caroline: You can imagine that if you aren’t launching it and you’re taking forever to do all this iterations of your product to get it perfectly and by the time you launch it, it’s too late because you’re so stuck on that idea. For example, on our first company, our idea was not to do the social bookmarking. The original idea was actually to do the business model that is now Threadless, before Threadless was existing. We were going to do to this fund thing that people can design T-shirts and people vote on it and then whichever one won, it’s like, “Someone has now done that.”
We did the financials on that and we thought there’s really not a there there at least we couldn’t see at that point. We pivot it and we pivot it to do the [OsoEco.com 00:21:29] which was basically the early business model of Pinterest. If you’re stuck on that idea then you may just get in the way of the success of your business.
Peter: It’s interesting. I wonder if it comes from the past that motivation to be focused on getting on that original idea perfect where ideas were more typically invention based or engineering based. If you’re going to build a time machine, right, it’s got to work before you launch it. It’s got to be done before it hits market then you have a beta time machine as the stuff of movies maybe.
Jonathan: That’s scary. I don’t want to beta time travel.
Peter: It just depends on if it’s a comedy movie or horror really.
Jonathan: Right. Yeah.
Peter: Good point but I think maybe that thinking comes from maybe more that physical products perspective.
Peter: A lot of things these days, a lot of small business today’s are not about pure invention, pure products.
Caroline: That’s why it’s important to surround yourself with advisers and mentors, people who can give you sanity checks so that hopefully you’re not doing the things that are on this list.
Caroline: Okay. Number eight. This is something we did in our first company was take down money and by down money, I mean its money that doesn’t work for you. Smart money should bring more to the table than just cha-ching in your bank account. It should also bring network, social network of other investors, should also help bring customers, it should bring some maybe some management experience that you may or may not have, it should bring more to the table than just the money. Now, that’s said there are silent investors that are great but in our situation, we had taken a 300,000 Angel Investment check from individual who … He was worth about $400 millions.
We thought this guys might know something about making money but he had no business investing in a fast growth internet startup because he didn’t have the background but then he was on our board and he was making decisions that he didn’t have a background in. Bigger than that was we had an operating agreement that had a non dilution clause for him and I don’t want to get into the weeds of that. In this Bcast, we could do that in another one. However, he got in the way of taking on additional funding. We had another million committed and because of that clause we couldn’t take that.
It was down money and a lot of times people think, “Here, I want to give you $25,000 for your business.” or “Here’s $25 million for your business.”” it doesn’t matter what the amount of the money is. They really need to bring something to the table and not hurt your business. You want to make sure you interview those investors before you get into business with them.
Peter: That’s great. If anyone wants to hear about some tips on non dilution clauses just like writers at Bcast, love to hear some more about that, but that’s great girl.
Caroline: Great. Number nine is getting this disease called the Founder-itis.
Jonathan: Yikes. What is that?
Caroline: Yikes. Peter, looks like he has it actually.
Peter: You got it?
Jonathan: I don’t want it.
Caroline: You get itchy.
Peter: We have to get separate microphones from now on.
Caroline: Your hair falls out.
Jonathan: I think I tested negative so we’re all clear.
Caroline: Founder-itis is actually when the founders of the company … Their ego gets in the way of the future of the company. For example, in my first company, I had investors say to me, “Okay, Caroline, you’re the CEO of the company right now and you’re raising a million dollars in this first round, what if two years from now … What if we put money in the two years from now? We don’t think that you’re the right person to be the CEO.” That’s when I said, “Well, you guys probably should have read my full business plan because you would see in my business plan that I have a succession plan in there and that I’m a starter.
I like to get things rolling and then after two years, I would want to move into maybe the chief marketing officer role or take a board seat or do sales. We would need someone who’s as scalable CEO.” That really shows that I didn’t have Founder-itis, that I wasn’t getting into the way of I mean that had the ego to be the CEO of this company.
Peter: Founder-itis. Being too much of a founder for too long.
Caroline: Right and not being … Not wanting to move out of the role for someone better.
Peter: Websters dictionary. The funds founder [crosstalk 00:25:47].
Jonathan: Don’t start that again.
Caroline: I might add it to … What’s the other dictionary? The Urban dictionary. Might be in there.
Peter: Oh yeah, do not knows [crosstalk 00:25:57].
Jonathan: Don’t look that up.
Peter: Casually browser for dictionary.
Caroline: Okay. Number ten. The number ten reason why startups fail. Most people think this is actually the number one reason but it’s not. It’s spending too much money. I don’t say running out of money because that’s the effect. Right. The cause is just like sometimes when people have a heart attack that’s one of the reasons that led up to that.
Peter: Spending too much money.
Caroline: Spending too much money, probably the same thing.
Peter: In most cases.
Caroline: Yes. This is why it’s important to have a very well documented business plan that has your financial plan in it that talks about your budget and your sales forecast and that you are tracking what you said you were going to spend and you give the sales quotas to your sales team which in the beginning is you. If you are spending too much money then you obviously are going to not have a long, what’s call a runway in the Startup world. You need to make sure if you say, “I’m really going to spend $12,000 a month.” That you are only in fact spending $12,000 a month.
Peter: Caroline. All these lean businesses, all these wants who want to take as little time as they can to forecast these financials, we’ve talked about this a little bit on the podcast before. Any time spent doing that maybe is a waste of time is what some might say. How do you balance getting that runway work out making it applicable to your business, figuring out what kind of things you need to forecast and how much you need to forecast and then actually applying it to the idea of not spending too much money.
Caroline: If I was an investor and a company told me that it takes too much time to sit in right down a budget and forecast, I would run. That’s a red flag because guess what? That’s what it means to run a business. It’s ultimately the end of the day. You need to make money. How do you know what the gross margins are? How do you know if you have net profit or not? How do you know how you benchmark and compare to competitors unless you’re actually looking at it on a daily basis. I walked in to different retailers here on our town in Eugene and I asked them, “What are sales goals for today?”
They can answer me and I hate it because I then predict in mind. I’m like, “Oh no. This ones going to close in 18 months. I’m sure enough they’re closed.” Because they’re not focused on a goal, on a financial goal and they probably don’t even know how much they’re making per sales person. These are things that are really important to focus on. Otherwise, if you’re not paying attention to the money, the money will leave and then you will fail.
Peter: Caroline, we know the statistic that 60% of the small businesses that failed last year did so because they run out of cash but were profitable at the time that they ran out of cash. [inaudible 00:28:48] before. How heart breaking is that? You said you’ve got this cool corner store with fancy [inaudible 00:28:56] or a nice new Crossfit gem and they’re all acting crazy in there whatever a Crossfit is. I have never understood it but it’s nice that these small businesses are trying. It’s nice they’re opening and the fact that they’re profitable should indicate that they’re going to stay up and up in running.
Peter: How do you … Do not stay up and running if you’re profitable? The answer is you just run out of cash. It’s sounds like you’ve got a good tip there for everyone to think about if you’re just starting up.
Caroline: Yeah, I would say depending on what your business is, is come up with what your top five KPI’s are or key performance indicators. What are those five levers that if they move up or down they change your revenue or your expenses? What are those things? That’s what you need to focus on and if you don’t have time to do that then you probably will fail. There are a ton of businesses out there who are surviving but they’re not thriving. These are the top ten reasons startups fail and this doesn’t just apply to high growth fast startups like tech companies. This applies to any kind of startup.
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