EXPERT ADVICE

Avoiding the Crowded Startup Graveyard

A recent study that I just read shows that the startup success rate over a period of 10 years is about 30 percent. This obviously means that about 70 percent of startups are out of business after a 10-year period! There is no doubt that the failure rate of startups is stunning and, in my opinion, will continue to be so into the foreseeable future.

Where do entrepreneurs go wrong when they conceive, then implement a startup? I’ll look at the main issues confronting a fledgling company and what pitfalls should be avoided to assure that your company is not one of the 70 percent of failures.

Business Model

The very first step in conceiving a business model is to demonstrate how your company is differentiated from the competition. It must clearly address what makes your company so special and why customers are more likely to choose your company over others.

The term business model, though coined in the 1950s, really didn’t achieve mainstream usage and acceptance until the 1990s. Some businesspeople still, believe it or not, aren’t sure of its exact meaning. This is somewhat discouraging because the business model, in my opinion, is a critical starting point to the serious consideration of starting a new business.

You must be absolutely certain that what you offer is unique and will be readily accepted in the marketplace. Or you must be certain that there is ample “room” for your new company if there already exists a robust market for its intended product or service.

Additionally, be sure to address corporate culture in your business model. If you recall, one of the phrases in Google’s business model was “don’t be evil.” You may or may not agree about whether Google has followed its motto, but the point is that they were making a statement about how they expected their employees to act.

Business Plan

The business plan is the so-called startup’s bible. It should address just about every conceivable aspect of the future company’s business. The main points that it should speak to are:

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  1. Financial Statements: Include under this category financial planning, budgetary projections, cash flow projections, and the so-called burn rate (this is the rate at which the company “burns” through its startup capital). These financial statements should be highly detailed and conservatively prepared. Keep in mind that the quality and content of these statements will likely be used to convince investors to take the leap and invest in your company.
  2. Marketing: This section should explain in detail what your potential market is like in terms of dollars and market share. It should also clearly articulate how you are going to go about securing your share of the market. Additionally, your investment in marketing should be quantified — you should clearly state how much of your budget is going to be applied to this very important function.
  3. Personnel: Here you should not only show your staffing patterns, but you should also display a flow chart of how the authority of the company will flow from the board of directors to the executive team and, from there, to the various departments, such as accounting, sales, marketing, production, etc.
  4. Proprietary Assets: This section should address what, if any, products or processes your company has that are protected through patents, copyrights, secret formulas and trademarks. This is a very important segment of your business plan in that it could conceivably give investors a high level of comfort as to how your company is unique from the competition. Having patents, copyrights, secret formulas and trademarks can well protect your company from illegal infringement by your competition.
  5. Corporate Culture: Not many business plans include this as a separate item, but I think that it’s of such importance in giving your company that extra edge that it should be listed separately. The bottom line is that the “delivery system” of your products or services is none other than your employees. Every business that I’ve owned or invested in had at its heart people who are willing and able to produce quality goods or services. The corporate culture comes from the top and should be applied evenly and fairly to all associated with the company, starting from the board of directors, right down to the lowest ranking personnel.
  6. Cash Flow Analysis and Plan: Some might argue that this item should be part of the financial statements category listed above. Certainly, a less detailed version of it should be included. However, even if you are funding the project entirely from your own resources, I firmly believe that you should give this topic such importance that you make it a separate and distinct part of your business plan. Many otherwise good companies have failed because they simply ran out of cash. This is a shame because, with proper planning and execution, a closely followed cash flow plan can make the difference between success and failure.

Due Diligence

Before you start a company and even before you create a business model and business plan, you really should do a great deal of research into the perceived and actual need for your company’s goods or services.

Personally, I’ve had a great deal of fun and satisfaction in sequestering myself and performing a detailed due diligence analysis on whether there was even a need for either a new company that I was thinking of starting up or an existing company that I was considering buying.

Though I placed this category last in my listing of important elements that should be considered, it really should take top listing. It was purposely put at the bottom of my list so that it would make the greatest impression upon you.

I’ve written a column on due diligence, Due Diligence: A Must for Every Acquisition. Taking a great deal of time to perform a due-diligence analysis can make the difference between the success and failure of your enterprise.

Good luck!

Theodore F. di Stefano

Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which provides a wide range of investment banking services to the small and medium-sized business. He is also a frequent speaker to business groups on financial and corporate governance matters. He can be contacted at Ted@capitalsourcepartners.com.

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