Sunday, July 31, 2016

Your 7 Steps to Business Startup Success Now

Following up on yesterday's post - 

Why do some startups thrive and most fail?  CBInsights reports “no customers” as by far the leading reason. The paradox is startups that fail assume there are customers; those that thrive assume there are not. What do you assume?

Of course you fail if no customers, but odds are you'll make the same mistake, because assuming customers, given the stats, is what you will do too.  It takes more than just mental resolve you won't make that mistake.  Every one of the failures cited were run by people speaking the mantra "customers first" without ever first getting customers.

Markets are grossly divided between commodity and specialty.  A start-up does not have the economies of scale to compete in the commodity realm, so as a start-up that is a non-starter. I've encountered countless people pursuing commodity merchandise as a small business, and they seem to find "customers" rather quickly. In my experience these business failures involve a lot of money too, but it is lost by the entrepreneur being scammed out of the money, not burn rate looking for customers.  Here again, people come to me with questions and my first question is "who is your customer?" In the commodity trade, they have a ready answer.  They can name names.  I look at their deal, and can tell them instantly how and when they will be ripped off.  ("I am buying from Cargill!  Selling to Mitsubishi!..." ... No,  you aren't.)  I can tell them how to structure the deal so they cannot be ripped off.  But alas, by that time, they have been conned, and cannot see what is happening.

In the movie House of Games, David Mamet's study of con artists, the con artist makes the point the trick is for the con artist to establish confidence in the mark himself, not in the con artist.  Then when the mark realizes he has been ripped off, he feels stupid, and is unlikely to complain,  if only because there is no sympathy, everyone says, "how could you be so stupid" or worse, "I told you so."  I can't think of a single person pursuing a commodity deal that ever came back to me with an update. 

But that is commodity business, where no one should start up.  Startups are necessarily specialty, another generation of division of labor.  And here is yet another difference between commodity and specialty: for the startup, the customer cannot possibly be known.  The customer does not yet exist.  The startup, following Drucker in his book Innovation and Entrepreneurship, innovates and creates customers.  As a startup, how can you know you have customers, when necessarily they do not exist?

Yet, our muse, what normally drives entrepreneurial effort, is the vision of the customers.  But that vision is fantasy, indeed, delusion.  How exciting! Build it, and all these people will come. Keynes, the regime economist, cites J B Say "supply creates its own demand."  It is a stupid thing to say, so Keynes attributes it so Say.  Say never said it. "Supply creates its own demand" is taught in all the business schools and assumed in all the business media.  Thus we have several generations brainwashed into believing they need only produce, and the customers will magically appear. Hence many assume customers.

(George Bush senior accused Reagan of advocating voodoo economics.  Bush went to Yale.  Yale's top economists won a Nobel prize, and holds many positions in the commanding heights.  His work centers, following Keynes, on "Animal Spirits" driving the economy.  Talk about voodoo economics.)

So who succeeds? Those who assume no customer.  Those who understand the customer must be created. Now as a preliminary, one more dimension.  You hear to succeed you must have passion.  True enough, but here again, we have deluded ourselves to think "excitement" "commitment" "fun" when we hear the word passion (to suffer.)  Startup necessarily means to suffer, as what you want to do, the solution you offer, meets real customers and requires change to satisfy the customers.  And there is the second part to passion, required for start up, which as far as I know no one else has ever noted.  Passion is the genesis of the startup, but the entrepreneur must also experience joy in working on the solution.  We must have passion and joy, or we cannot compete.  We suffer when those we would have as customers reject our solution, we experience joy as we work on integrating their demands into our offers.  Steve Jobs modeled the first Mac on the Cuisinart (the computer as home appliance) and declared it "insanely great! (passion, joy)" And here is another tricky part of start up, you cannot get to joy without first suffering. Women have a huge advantage over men in start up, since they instinctively know this. Any one starting up a business assuming there are customers is delusional, and destined to fail.

1. All businesses are solutions to problems, and there is no solution that cannot be improved upon. Your offer is a valid improvement, meaning it works for you.  But that is not good enough.  Does it reliably work for others? Assume not, and proceed accordingly.  

2.  Go try to buy your idea from your target customers. This is the first encounter with your target market, with you as a customer, not a seller.  You find out what target customers really think of your offer before you invest a dime or a minute. (If not B2B, adjust slightly for B2C.)  Discover the market then create the product.

3. Compete on design not price.  Contract designers to convert your ideas into specifications.   This is your only true contribution, and the nexus for making money.  You are coordinating a group of people who will all contribute to the success of the effort.

4. Exploit excess production capacity to produce your good or service.  Start with the smallest deals rational, not the largest deals possible.  Think deal frequency, not volume. Almost all anticipated problems are actually solved by this tactic (finance, QC, insurance, licenses, IPR, etc).

5  Create your only offer. You are testing a hypothesis.  Know what you are selling, and test nothing else. Grow thru reiteration, each iteration a new hypothesis, subject to falsification.  Here is where you've made the shift to professional: from your art expressed in your passion and joy to the science of marketing, aka step 7 below.  Here is where you hire that cold-blooded science-based market-feedback sales force, or die.

6. With your offer created in step 5 in hand, ask your customer “May I have your order?” You’ll start your business when you have enough customers to cover a minimum production run, in a workable amount of time, profitably. If yes, then you can start up your business.  If no, the customer will offer you practical advice you can act on. Fail fast fail cheap. Return to step three with your improved design input. 

7. After you have customers, you learn what trade show is optimum.  Leverage your customers into prime exposure at no cost. Guess who runs booths at trade shows?  Some fools, but enough cold-blooded science-based market-feedback salesfolk to launch your business.  Why do they want to work with you?  You have a new product and customers.  Salesfolk want to get more customers.

The entrepreneur is also an impresario, bringing to together talent and capacity and truthfully demonstrating potential.  Humility wins, braggadocio fails.

Done right, this takes little time or money to get to the point you have enough legally binding orders to warrant your first deal. and your launch.

Drucker says entrepreneurs do not take risks.  All those companies cited in the CBInsights report risked all by not getting customers first.  Since they took that risk, they were not entrepreneurs at all. They are Keynesians, and assumed customers are created by production.  It's what they teach at school, it is what the WSJ and all business media assumes, what all bankers promote in their effort to enslave by lending limitless credit, what government assumes.  They are wrong.

Now you know better.

Feel free to forward this by email to three of your friends.


Anonymous said...

I saved a lot of potential wasted time by reading this article. In business school they teach us to do a SWOT analysis or strength, weakness, opportunities, and threats assessment but if we don't have the customers first then what is the point? I agree with Drucker's statement that entrepreneurs don't take risks. This article provides a solid outline to launch a business successfully.