Note: this post was written a few weeks ago, I just forgot to publish it.

Credit crisis, schmedit smeisis, I decided to just not care about it. Life is hard, it may have become harder, but that doesn’t meant that we shouldn’t just get on with it (a little harder) too. One of the issues today is whether it’s a good time to start a business and/or be in the early stages of a business. Because you’re in the money-begging phase and it seems like that’s in short supply right about now. I also decided to not care about that either. “Begging” for money is a psychological game: you present arguments and based on those you either get money or you don’t. If you don’t, you improve your arguments.

One tool to do that is to reduce assumptions to the absolute minimum. An article from my studies that always stayed with me, is entitled “Critical assumption planning – a practical tool for managing business development risk” and the diagram below is taken from it.

What is the point? An assumption is a guess that you make about a topic. I assume that (so many) people will buy my product, or I assume that building this machine for my company will take so many years, or I assume that my medical product will be approved by the relevant regulatory parties. Etc. etc. Each of these guesses, if wrong, can be fatal to your project, you know that and your investors know that. So how do you turn guesses into “truth,” or rather, into a perceived* truth (*: the fact is that nothing can be predicted 100%)?

Somewhat simple: triangulation. Triangulation means that you don’t trust single sources, least of all yourself, but rather place your faith in the power of many. To give you an example, for my current (non-tech) venture, I’ve divided our assumptions into 5 parts:

1. Who our consumer is
2. What the size of our market is
3. Who our competitors are
4. What our value proposition should be
5. And how this should work financially

Each of these are important things to work out and represent different challenges in doing so.

For our customers, I could send out a survey, but how can I be certain that the questions are the right ones and that it reaches the right audience? Instead, I chose for surveys and face-to-face interviews, and, guess what, some of my survey-questions were phrased* wrongly (*: the biggest danger in designing surveys). For our market, I have import-data for our industry from the government, which is itself based on estimates and doesn’t take into account different classes of products. So I have to sanity-check those figures with experts in that industry. And so on…

In the end, you should have the ingredients for a picture of your business-proposition, one you can work out into a number of pages or slides and present to potential investors and partners. And one that can act as the blueprint for what your business should look like. And if someone questions your assumptions, you can tick off, point by point, each of the reasons why you think you are right. That should be a nice feeling!

Does this method of planning apply to all types of ventures? It could be argued that it’s most relevant to projects where the price of failure is expensive, e.g. real-estate. Starting something online may be much cheaper and quicker (perhaps), but I wouldn’t say that the price of failure is cheap. If you want to start something that you want to live off, that your co-founders and employees want to live off, then I’d say that the price of failure is pretty expensive for you and them too, and that having done your homework beforehand is a good thing!

Feedback on my own assumptions in this post are, as always, welcome!

Vincent

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Hi, my name is Vincent, a now-familiar face in Tech IT Easy’s blogging family, and today I’d like to write about my thoughts about startups’ reasons to fail (and as a consequence: reasons to succeed). This is my 3rd non-tech topic in a row, and if you hadn’t guessed it, I have little inspiration to write about tech these days.

So, “why do startups fail?” seems to be a relevant question these days and I guess to everyone running or thinking about running or working in a startup. Depending on who you talk to, no actually pretty much everyone, over 90% of startups fail within 2 years of their launch. The stats vary according to whom the startup works with, it is much lower with venture-funded companies, as well as within certain incubators.

The Credit Crunch

One of the most popular reasons I heard while writing my thesis (which involved me interviewing over 200 tech-startups), is of course lack of money. That seems really relevant today, and is certainly a factor.

To give a personal example of how the credit crunch is affecting our lives negatively, back when I started a bachelor in Manchester, UK, about 10 years ago, I was able to get a student-loan quite easily at a British bank. You walk in with your details, get a 1000 pounds overdraft and a credit-card to boot. This was still the case until a few months ago. My brother, who just left for Lancaster, UK, was counting on a similar deal. But banks had withdrawn that service to non-UK citizen, rather abruptly, forcing my brother to find alternative solutions. Banks don’t care about who needs or deserves a loan, when they cut it off, we’re all screwed.

Fred Wilson pointed out that seed-funding will likely suffer most, and true, banks are, both directly and indirectly, an incredibly important source in that arena, as well as at later stages. The graph below showed my own results, for two measures carried out during 2005 and 2006 on the investment climate for high-tech startups in the Netherlands (a Dutch version of that report can be downloaded here).

What this graph also shows is that even pre-credit crunch, most startups didn’t use or weren’t able to use much beyond their own savings (the turquoise part) at the seed and sometimes the later stage (of course that still includes credit cards and similar bank-related funding sources). No way that this is something that should be generalised across all countries of course, I imagine that the distribution of investors will vary quite substantially from country to country.

Forget funding

I happen to think that funding is not the factor to focus on when talking about startup failure. In a perfect financial market, which, many financial people try to convince me, exists, you get funding if other conditions are in place. Receiving an investment is a validation of your idea, and if you can’t get investors to talk to you it’s either because:

1. Your idea is bad.
2. Your presentation is bad.
3. There are too many similar startups applying for funding.

The key here is then for 1. to improve your idea, for 2. to improve your presentation, and for 3. to stop being a sheep and reinventing the mousetrap. While this makes me sound like an asshole, the point is that none of these reasons have to do with funding, they have to do with the quality of your venture.

Non-financial reasons for failing

A startup is a machine that needs to be built, needs to operated and maintained, and needs to produce sufficient output/income to cover the costs that building, operating, and maintaining require.

Therefore, startup-failure is related to:

• Too expensive a building-process (both in money, people, and time), which comes out of bad planning and insufficient skillsets to get results.
• Improper operation and maintenance, which is really to do with bad HR-practices.
• Insufficient output/income, which can be related to the quantity produced (bad planning, skills), bad pricing, and of course a bad market.

The “bad market” factor is an interesting one, because it seems very related to the credit crunch problem. My brother, who is forced to look elsewhere for funding, will be less likely to buy a laptop from the start now. Everything ties back into funding somehow.

Bad market or bad business-model?

The top business models, in my mind, are built to withstand recession. Some could argue that they are built during a recession. An example of this is discounters like Aldi, which was built in a poor Germany, many years ago, and has caused a revolution in European retailing. Im not 100% sure, but I think that the strength of European discounters here has even prevented monsters like Wal Mart from taking over the place.

Other streams of thought about this take you into “blue ocean” or “long tail” territory, both somewhat hip ways of saying that you should think outside the box.

A bad market can be a lack of desire on consumers part to pay for your product. And it can be that the market is simply to small, suggesting that it may be a good idea to think globally from the start. Certainly, investors like the idea of entrepreneurs thinking (realistically) big. Also when you see some of the industry-growth-stats in emerging economies, it makes sense to target those markets, instead of the many 0-2% growth economies in the Western world.

I guess what I’m saying is that a bad market is just an excuse for failure. If your business is advertising dependent, you should be aware that most advertisers cut their spending during recessions, a recession that has been predicted for years now. The same applies to certain luxury goods, etc. So, perhaps the market isn’t bad, perhaps the business-model is bad too.

In summary…

Yes, the credit crunch is scary, as are all recessions. Yes, we would all like our ideas to simply be output – input = profit. But the core of entrepreneurship is to think in opportunities, to not get stuck in ideas, and be market-focussed. It is about breaking rules and making new ones. And, while it is a harsh world where failure is accompanied by a high price, at the core of entrepreneurship is also optimism—the belief that everything can be solved with the right perspective.

So why do startups fail? By setting themselves up to fail.

Vincent out

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Premise: A while ago, Fred Wilson, a (possibly biased) tech-investor, wrote that he was bullish on the tech-industry. Recently, the New York Times reports that e-commerce is up because people want to travel less (fuel costs). And previous stories reported on the migration of advertising revenues from traditional media to online media.

A note: I don’t know that there will be a recession. I know that the real-estate bust in the US is a pretty big deal, and that banks from Europe and Asia have been pretty heavily invested in that supposed goldmine. And any fall-out in the US, i.e. banks shutting down or otherwise, will likely have global repercussions on the banking-sector, and affect other industries also.

With that out of the way, three problems/phenomena I associate with these times are:

• A lack of accountability in investments (e.g. currently real estate and previously startups & Enron), also accompanied by emotions like fear & greed.
• Rising input-costs (the market should normally adjust for that, but the explosive growth in demand from emerging countries + the lack of an alternative for, in this case, fuel, make this a pretty big uncertainty)
• Changing paradigms, such as the rise of webware, the (expected) fall of hardware-prices, the possible fall of software-sales, the continuing displacement of brick & mortar business models, businesses being forced to go & think green, and much, much more.

So, there’s probably a few more symptoms (throw them out in the comments!), but it seems to me that the internet is pretty well placed to deal with some of these problems.

Let’s start with accountability. The strength of the web is that everything on it is digital and, in theory, nearly (*) everything can be measured (*: I am quite sceptical about the measurability of video & audio, though arguable the serious data is still in text). Added to this, there are technology-shifts, like digital television, mobile computing, and E-Ink, which make it easier to have a wider reach as a data-gatherer, not to mention that business are increasingly placing their data online, again facilitating data-exchange in partnerships. This should make it easier for businesses to base their expense on actual data, the same for investors and advertisers. Together with the consequences of the last internet-bust, I think that everyone is pretty careful to base their decisions on information, not hopes and dreams (well, I’m still sceptical about Twitter).

Next, rising input prices. Having blogged on the topic of food and retail for about a year, I’ve obviously had to follow this trend/reality quite a bit. The NYTimes heading I linked to above summarises my feelings quite well, customers are looking at the opportunity cost of fuel (as well as the cost of being green) and alternatives like e-commerce may seem much more attractive. In the long-term, people like James Howard Kunstler are calling for more and more “locality,” i.e. that people will be willing to migrate less for work and, I guess, shopping, which opens up opportunities for e-commerce and ways of working across a distance.

Finally (?), changing paradigms. Well, whatever the new world looks like, a pretty warm place is reserved for the web. Web-apps and -services are maturing, offering more and better features, and providing individuals and businesses with a comfortable ecosystem to operate in. The OLPC, the Asus EEE, and other cheaper systems (when Dell comes in, it will be mass), may be less powerful, but they will be optimised to use the web most of all. Societally, it may eventually become the logical choice for the mainstream to spend less than $500 for a laptop, in which case hardware-makers and, possibly, software-makers will suffer. But the web won’t. Similarly, while I don’t yet see brick & mortar disappearing, it is clear that eventually 99% of B&M businesses will have to have an online presence. About the world going green, I can’t sell everything, perhaps someone else can give the answer to that.

Is the internet recession-proof? My guess is as good as the next guy. But, more efficient use of computing, datamining, search, advertising, e-commerce, and logistics are all technologies I am extremely bullish on these coming years.

What do you think?

Vincent

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