Tony was continuously cheered on by those around him who defaulted to encouragement and support when they might better have played devil’s advocate. They were his “hot circle.” I was the only one throwing cold water on his idea, refusing his entreaties to invest and explaining that a market for his idea would never materialize.
After banging his head against a wall for two years, Tony decided to give up and to enter a master’s program in engineering at Berkeley, planning to concentrate in robotics and autonomous sensor control systems. Before returning to school, however, he needed to save some money and took a job in a marine engineering firm. It was there that Tony discovered that ocean-going freighters were not coordinating their data streams to optimize fuel consumption. This was nearly incomprehensible to him: How could vessels that cost hundreds of millions of dollars and carried many multiples of their value in cargo with each load have no artificial intelligence on board like cars and trucks do? In ships, such devices could help determine the most efficient speed and fuel use for changing weather and ocean conditions and continuously adjust routing. Tony began a period of intensive research and discovered a hole in the technology support of a giant industry, a critical part of the logistics network that makes global commerce possible.
“Tony”—who for the happy part of his story is really Anthony DiMare—is a member of the small club of failed entrepreneurs who decided to take another turn at bat. This time around, he has had the good fortune to have developed a network of really accomplished advisers. (Many aspiring entrepreneurs waste time networking with what might be called “poseur” experts, people—often failed entrepreneurs—who project an image of possessing knowledge and experience that they really don’t.) Fortunately, DiMare’s new network included Bre Pettis, one of the founders of MakerBot. A great network involves important secondary connections, and Pettis, once he was convinced about the potential of DiMare’s technology and vision, opened doors. In 2016, Nautilus Labs was created with $2 million in venture funding and, even more important, a letter of intent to buy its navigational assistance intelligence system for a fleet of twenty-two vessels. DiMare started Nautilus Labs without a business plan.
When I asked DiMare if he had learned anything from his first company that he thinks will improve his chance for success in Nautilus Labs, he considered the question carefully. His reply was interesting. “Nothing that I shouldn’t have known before I wrote my first business plan. Bad ideas can’t lead to good companies. The smartest thing I did was to break it off. I worried, though, that if I went back to school, I’d never have a chance to start a company again. So I put Berkeley on hold. Maybe what I learned is to have a plan if my next startup fails—but it won’t. I hope what I’ve learned is a kind of smart determination, the importance of research and how to quickly size up people who can really help me and tell them apart from those who can’t.”
No One Knows Why Startups Fail
The stories of Franano, Kamen, and DiMare are unsettling. No one wants to think about starting a company that will fall flat. Statistics remind us, however, that success is the exception for startups: The norm is failure. What can you do to avoid it?
A casual search of the Internet will provide dozens of alleged most important causes of startup failure. Many are plausible, but most won’t be helpful to understanding how you can avoid them in your new company. These are called point risks, so named because they identify specific points of failure, many of which have been self-identified by the founders of failed ventures.
Perhaps the most oft-cited reason for failure is that a company couldn’t get to the other side of what is widely referred to as the Valley of Death, the period after its founding where a company can’t raise enough money to finish developing its product. It dies from lack of resources well before it can reach the point where its cup runneth over.
The reason that the Valley of Death looms so large as the putative cause of startup failure is that virtually every unsuccessful entrepreneur believes that he would have been successful if only he had had more time, which translates to more money and more faithful investors. “If only” is the most credible, most easily defended, and least blame-worthy excuse.
But startups rarely ever fail for just one reason. H. L. Mencken’s famous quip applies: “For every complex problem there is an answer that is clear, simple, and wrong.” Knowing that many unsuccessful entrepreneurs believe that they failed because they ran out of money is not particularly helpful and, in most cases, it is likely just wrong. Besides, is the conclusion that you should, above all else, stop working on your business and focus on raising more money? How does that vicious cycle end?
Money surely wasn’t Franano’s problem. From the start, he had the backing of both sophisticated seed and seasoned venture capital firms for a very promising new drug. Their infusion of $109 million, an amount many times greater than the average venture-backed firm ever receives, encouraged public shareholders, many of whom were knowledgeable biotech investors, to provide millions more. Similarly, Kamen’s Segway didn’t fail for want of capital. His reputation garnered him the generous backing of some of the most successful investors in Silicon Valley. And, even if “Tony” had been able to raise money from family and friends, what would’ve happened when he couldn’t sell enough folding sailboats to continue production, much less return investors’ capital?
Another frequently mentioned cause of failure, conflict among the company’s founders, didn’t explain these failures either. Each was the leader of a pack of one. With no co-founders, they didn’t face internal conflict. Similarly, cautions about taking a product to market prematurely can’t explain the failure of any of these companies. The FDA controlled if and when Franano’s drug could be marketed. Had it worked, every dialysis patient would have believed that it was long overdue. Kamen’s product, however, was unlikely to have been any more successful in 2010 than it was in 2001.
In addition to collapsing in the Valley of Death, companies frequently are said to fail because they did not compete competently against others supplying similar products. “Tony” was not outdone by a better folding sailboat any more than Franano or Kamen were beaten by better products or more effective marketing campaigns. They promised one-of-a-kind products, so that wasn’t the problem.
The dedication of Franano, Kamen, and “Tony” to the success of their inventions was unswerving, so distracted entrepreneur syndrome also didn’t apply, either. That’s the name for another frequently cited cause for startup failures—that the entrepreneur is really a hobby jobber who is not fully committed to his project, or someone who has aspirations and initiative but is unable or unwilling to leave a secure full-time job to devote the necessary time to his new efforts.
The problem of analyzing startup failure with notional lists of reasons for startup failures is a snake biting its tail; a too-well-schooled entrepreneur may begin to see success as the product of cautiously steering his venture around potential land mines. The job of the entrepreneur from this perspective becomes one of not making mistakes, of keeping her company from failing. While every entrepreneur faces the task of nurturing her idea, focusing on failure avoidance is not a winning strategy.
Insure Your Own Startup
All startups face generic risks. Knowing this suggests a better way to improve your startup’s odds of success: Don’t focus on the specific risks, but anticipate the generic risks and attempt to mitigate or minimize their impact ahead of time.
The distinction between specific and generic risks becomes clear if you apply an insurance analogy—perhaps a rather dry subject for many of us. But we all understand that, in essence, an insurance company is in the business of risk assessment. Think about buying a fire-insurance policy on your startup’s factory. The insurance company will set the availability, coverage, and price of a policy based on its experience of the likely risk of having to pay a claim. Fire insurance will pay off if your factory is damaged or burned to the ground. So, the first thing that the ins
urance company will do is gather information to assess the risk of fire. Is the factory making dynamite or shoes? Is it built of wood or brick? Does it have smoke detectors and a sprinkler system? How far is it from the closest firehouse? Your insurer also will consider whether you have taken certain steps to prevent fire in the first place, for example, segregated used flammable materials appropriately and fire-retardant carpeting and ceiling tiles. The insurance company will require you to become a partner in minimizing the risk of fire.
Work from this analogy to think about your startup in terms of a loss from which you might never recover. What generic risks can you identify and manage so that, from the very first moment, you can increase the chances of ultimate success? What can you do to mitigate the chances of failure? An aspiring entrepreneur should make the same ruthless assessment of the value of his idea as would an insurance company—as if you could buy “failure insurance.” It is, after all, your investment: your time, your effort, and your money, both in absolute terms and in terms of foregone or bypassed alternate pursuits.
Research Research Research
There is no recovering from an idea that just cannot become a successful business. As we have seen in most of the stories in this book, no startup is certain that there is a market for the innovation it wants to develop. Some ideas, however, are inherently more likely to fail.
Such ideas seem to occupy wannapreneurs, those who go looking for an idea but whose real intent is just to start a company, more than other aspiring entrepreneurs. Had Anthony been more skeptical about the chances of his sailboat appealing to customers, he might have saved himself the three years that he attempted to make a product that no one would likely buy. He might have mitigated his risk, played at being his own insurance company, by doing some critical research.
Unfortunately, there is something about the excitement of conceiving what feels like a great idea that can cause many would-be entrepreneurs to resist having their vision disturbed, no matter what. With a little searching, Anthony could have discovered the major fall-off in sailboat sales, and that the carbon fiber material that he needed would make his boat prohibitively expensive to sell. Perhaps, if he’d been equipped with that information, he might have decided to abandon that idea and search for something more feasible. Or, if a better idea didn’t come to him at that moment, he might have taken a job in an engineering firm and had that better idea a few years later.
Ironically, an aversion to research is most pronounced among college students, the most computer-savvy generation on earth. For them, being able to study the trajectory of technology should be easier than for other entrepreneurs without their access to a university’s special resources. For example, professors with specific expertise generally are just a few buildings away. Yet, time after time, when judging business plan competitions, the apparent absence of critical background knowledge has caused me to ask, “Have you tested the feasibility of making this?” Or, “Have you examined patent filings to see what related inventions might already exist?”3 Or, “Hasn’t someone already tried to convert a similar idea into a product?” Before Anthony entered the business-plan competition, shouldn’t his professor–sponsor have asked if he had done any informal market research outside of his own hot circle of friends? Did Anthony ever ask anyone who wasn’t a friend or a family member or who otherwise wasn’t rooting for his success if they would want a folding sailboat enough to pay $34,000 for it?
The problem of not doing sufficient practical research to prevent a disaster is not limited to college students, as the story of Kamen’s Segway tells. Kamen was captured by the vision of his personal transporter. Given his track record, he raised money immediately. Given his reputation, what investor would not want to be part of the first big Kamen company? They all likely worried that, if they passed, Kamen would go on to other investors and then they’d end up feeling like all of us who didn’t buy Amazon at twenty-six dollars in 2006.
A little research might have revealed that market demand really couldn’t exist. Imagine if Kamen had previewed his idea with even a handful of potential customers. First, he likely would have recognized a prosaic competitor hiding in plain sight, the lightweight motorcycle. These versatile machines are valued by urban commuters around the world for their speed, agility in traffic, ease of parking and storage, and fuel economy. Small motorcycles have never been widely adopted in the United States, however, because our average commutes are much longer and the severe weather in many parts of the country limits their utility. Even if the Segway eventually could have replaced the lightweight motorcycle on the basis of cost, it was not as practical; there was no room for the plastic-encased baby carrier or the crate for purchases that one sees on the backs of motorbikes on rainy days in Paris or Jakarta.
Avoid Technology Traps
Investors sometimes do more research on a proposed business than the entrepreneur ever did. What? How can that be possible? I was totally flummoxed when I encountered this for the first time, and thought that I should rub my eyes to dispel the mirage. Investors not only are trying to assess the potential of a business idea for growth, the idiom of all venture investors, but, just as important, they are assessing their risk, trying to see what could go wrong. What are they looking for?
By their very nature, startups exist to bring new ideas to the market. In their quest for unique products, however, many entrepreneurs fall into what might be called the “technology trap.” Because technology permits something new to be accomplished, the entrepreneur presumes that a need for that something new will emerge. This often appears to be the “logic of invention.” The cell phone comes to mind. We didn’t know we needed it until it appeared.
But, the logic of invention is not absolute. Many inventions appear for which there is no need at all. Thousands of products that are invented every year solve problems that don’t really exist. No one needed the patented device to hard boil eggs into squares so they would be easier to slice, or a cell phone with the built-in razor.
The Internet of Everything, an historic point in the evolution of digital technology, allows for new syntheses where smart devices communicate with one another, thus permitting new products to emerge. Those products reveal latent needs that didn’t become clear until a solution appeared, one that was dependent on devices communicating among themselves. Anyone who has lost a dog thanks his lucky stars that Max is wearing a GPS collar that can pinpoint him in seconds. Millions of people now remotely monitor their home’s security and energy use from halfway around the world. Amazon has taken us one step closer to merely speaking to make things happen; instead of rummaging through the CD drawer, I ask Alexa for my favorite album. Google’s Home will do the same if you say, “Hey, Google, get me . . .”
Other applications are interesting but without much value. FlightRadar24 can tell you that the shining speck five miles overhead is Delta’s flight 234 from Frankfurt to Atlanta. That’s fun to know on a clear starry night at the beach, but, practically speaking, it’s mostly useless information. Some so-called discoveries are actually counterproductive. As a business plan competition judge I have encountered smart frying pans on three different campuses. By building sensors into a pan, the would-be entrepreneurs then designed cell-phone apps that tell the user when his eggs are ready. Never has frying an egg been so complicated. Just because it can be made doesn’t mean it’s likely to be useful.
Investors try very hard to assess the actual utility and marketability of proposed products and services in deciding if they’ll make a bet. Aspiring entrepreneurs should do likewise. “New” is not enough. Not everything is the Internet, or even a better vacuum cleaner.
Beware Regulatory Trip Wires
Proteon was felled by the regulatory process at the FDA. Like it or not—and a lot of critics make a credible case that the process is deeply flawed—Franano and all of his investors, both private and public, knew the rules and set out, at considerable expense, to run the marathon.
Other kinds of regul
atory risks, much less likely to be foreseen from the outset, also can bring down a new venture. Today, if a neighbor got a whiff of the toxic fumes that Howard Head was cooking up in his unventilated garage workshop, Head likely would be shut down and probably fined. These kinds of risks—zoning violations for manufacturing in the wrong area, improper disposal of waste from your production process, failure to properly calculate payroll taxes, even a neighbor reporting that there are too many cars parked outside your house or too many courier trucks pulling up in your residential neighborhood—can stop a new and thinly financed startup dead in its tracks, or at least distract the entrepreneur while he cleans up a bureaucratic mess.
Not all regulatory agency rules are easily ascertainable, but startup founders should stop for a few minutes to consider what might apply, then do some basic research to see what they can do to minimize these risks. Federal, state, and even municipal employment rules get more complicated as a business scales up and brings on more workers, and the ability of agencies to shut down businesses and freeze or even seize bank accounts is very real. Not that every startup needs a fancy corporate lawyer to assess which rules might apply, but it’s a good idea to do some basic work on this front.
There’s an intersection between regulatory traps and the need to do research. Just a few years ago, two student wannapreneurs came to see me about their great idea, complete with diagrams, spread sheets, and enthusiasm about the improved health outcomes that would result from their startup. They wanted to set up an auction exchange entity that would match buyers and sellers of human organs, which they asserted would make the matching process much more efficient and transparent than the current registry system and would thus save the lives of more people in desperate need of replacement organs. They thought that any negative perception that the exchange would favor wealthy persons could be dissipated by crowd funding or by insurance companies purchasing organs for their insureds. Their exchange would make money through fees paid by buyers and also take a piece of the spread between the bid and the ask, like the financial market makers in the old days. I listened for a patient five minutes before I interrupted, “Have you checked the federal laws about the purchase of human organs?” I turned in my chair and typed the term into my computer, and the answer was definitive in about ten seconds. The business they proposed was illegal. They were dumbstruck.
Burn the Business Plan Page 17