In this age of social media, entrepreneurship is at an all-time high. The time for creating a start-up company has never been more optimal, thanks to recent interest in technology and innovation. Profit valuations of successful start-ups have also skyrocketed in response to a rise in venture capital investors. Creating a start-up also celebrates low-cost entry, making it easier than ever to jump in and play a hand at the game of business. As many as 40 start-ups in 2013 were valued at $1 billion or more, according to a NY Times article.
But as effortless as it is to create a start-up business, the real challenge lies in evolving it. Only 1 out of every 10 start-up companies make it to the 5th year. What are the barriers that prevent the successful fostering of budding companies? And what can be done to navigate through these tricky waters and make it out as one of the 10%? Here are some of the typical weaknesses that start-ups fall prey to:
While angel investors and venture capital firms are more available than ever for start-up sponsorship, that doesn’t guarantee that your business will be granted funding. A shocking 90% of start-ups still has to rely on bootstrapping to get by. Therefore the weight of initial funding usually lies on the shoulders of the founder. This raises the stakes right off the bat, contributing to the already high level of risk associated with starting a business.
However, there are a few options to remedy this financial uncertainty. For starters, your start-up should have recognized potential for future expansion. In other words, you should evaluate your business’ scalability, or ability to thrive with limited investment in time, capital, or labor. You want to cultivate a business that has a clearly defined future, rather than invest countless resources in something with a huge question mark at its endgame. Other options to consider, though not exclusive to start-ups, are factoring and crowd funding. These rely on third party sources for financial assistance, similar to borrowing money from the bank. The key takeaway is to establish a game plan early on and practice fiscal vigilance throughout the investment process.
One of the most common misconceptions regarding a start-up is the belief in the absence of competition. This is one of the most dangerous pipe dreams for a CEO. Even if you tap into a new niche market, bear in mind that potential contenders may not be lurking too far. Even if you obtain initial success from a unique concept, you’re not likely to be alone for long. Competitors with more funding may see value in your targeted niche and take away your market share.
It’s important to keep these threats in mind and construct a plan for managing future rivals. If you’re lucky enough to be the first to capture a new market, you should use time to your advantage. Build up your defenses to buffer potential competition. Take the necessary steps to protect your intellectual property, particularly if you specialize in a technology-based company. When the time comes, you’ll thank yourself for preemptively securing your position in the market. Never assume your idea is entirely unique or you might lose all of your market share to a more convincing competitor.
Don’t obsess over the little details too soon. It may seem more exciting to improve the company logo and motto before working on anything else, but be aware that those things will undoubtedly evolve as your business grows. Streamline the quality of your start-up before you polish the aesthetics. Learn how to perfect your pitch. Communicate the value you provide to consumers and don’t dwell on the fact that your company is still new and small.
It’s important to choose your battles carefully. Cover the bare necessities – customer retention, balance of profit, strong team network – before you venture into the nitpicky elements. Establish a timeline for your company and set benchmarks for your team to follow. Without a clear vision to evolve, you will never break free of the “start-up” mentality. People function much more efficiently with deadlines in place. This is why some managers and group leaders ask for assignments in half the time necessary to complete them. With a greater sense of urgency, your company will push harder and prosper as a result.
Only after addressing the fundamentals, can you start to evaluate the more glamorous aspects of your business.
Promotion is a vital aspect to evolve a start-up into a successful business. Marketing is an integral element of any business. Therefore, a lack of effective promotion can lead to a company’s demise. Waiting too long to focus on attracting customers is detrimental when you’re already racing the fiscal clock to keep up with all of your investments.
It is critical to the survival of your business to grab the attention of consumers and create brand awareness. Promoting your business is a gateway to gaining profit; without it, your company is losing out. Take the plunge in the early stages and expand on brand image as you go. You may lose a few customers along the way, but in the long run, you will learn from the experiences and get your name out there. As long as people know who you are, you can earn revenue and improve upon your flaws later on in the game.
As a start-up evolves, it’s important to recognize which members of your team have become resistant to change. It can be difficult to cut loose employees who have been with your company from the start, but it’s imperative that everyone in your sales operation has the same vision for your company’s future. Your business must be flexible and open to change in order to innovate. Always be sure your staff reflects the ultimate vision you strive to attain.
Sometimes, this may mean the CEO himself/herself should step aside. There is a point in some companies’ growth where the best route of expansion is a shift in leadership. This can be challenging to recognize as founders become emotionally attached to the business they have created. However, a lack of change in leadership could be what’s hindering your company’s growth. New leadership could mean a fresh perspective and further knowledge to allow your business to progress. It’s critical that if you recognize this stagnation in growth as a by-product of leadership, you must take the necessary steps to ensure a peaceful transition of power. Smoothly integrate the new CEO with your team and make sure they are a good fit. Appropriately transfer the knowledge you have gathered as the founder and make the transfer as quick and painless as possible.
On the other hand, there are companies who have had the same CEO from the get-go and a shift in leadership could have actually hurt their business. Therefore, it is entirely your call to make and simply a suggestion for something to look out for, given that it has worked for some companies in the past. There is no right or wrong answer to this question.
These are the most common trigger points that cause start-ups to fail and tips for how to avoid them. However, there isn’t a definitive line for when a start-up has crossed the border into a fully evolved company. If you’re a couple of years into a new business and having an identity crisis, here are some typical benchmarks that companies use to determine if they have surpassed the start-up label.
While this criteria can assist founders in determining whether or not their baby has outgrown their “start-up” status, this topic has a tendency to be a gray area.
A common determining factor that tends to set apart start-ups from other traditional businesses is their growth rate. The U.S. Small Business Association defines the term start-up as going “beyond a company just getting off the ground… associated with a business that is typically technology-oriented and has high growth potential.”
Start-ups are geared toward growth and are designed to evolve at a rapid pace. Therefore, a business’ growth rate should be viewed as less of a threshold and rather, more of a standard to hold themselves accountable to. Growth rate is a measurable value that is important to track in all stages of a business, but can be especially useful in determining whether a start-up has leveled its growth rate past the initial “rapid growth spurt” stage. As long as a company’s growth rate is increasing, however rapidly, they are considered to be successful. Therefore, a business leader could consider his start-up as graduating and successful if his growth rate has leveled off, but is still trending in the positive.
This factor tends to operate in murky territory in terms of defining whether or not a start-up has surpassed its status, however, it can be a useful benchmark to determine whether or not a business has stabilized to a sustainable level of growth beyond initial development.
Another metric that defines a start-up is the number of total employees the company has accumulated over time. Writer for the company TechCrunch, Alex Wilhelm, came up with the 50-100-500 rule that limits a start-up’s label by its revenue run rate (in millions), its number of employees, and net worth respectively. By this standard, Wilhelm claims that once a company has acquired 100 or more employees collectively, then they have the ability to advance their business rank.
This milestone has less traction, however, because it is so heavily influenced by other factors. It rarely stands out as an independent standard to define start-ups. If your company still operates as a “start-up” based on many other characteristics, staff size would hardly impact the stage of the company. Alternatively, if you have an extremely profitable business with a maintainable growth rate and high net worth, having a small pool of employees has less influence and promoting your business from its start-up platform is a good step.
It goes without saying that the main goal of most start-up businesses is to generate a profit. Building off of Wilhelm’s protocol, another defining factor for a company’s status is the measurement of profitability. A company can consider itself above the start-up status when it has also compiled enough profit. On the other hand, companies can remain glued to the start-up podium if they are not earning enough. These start-ups continue to fight a losing battle, by glorifying a product/service that is doomed to fail. Profit is an easy metric to measure a company by. It is the tangible value of your company. Without profit, you don’t have a business.
Start-ups are risky by nature, but when they do succeed, the returns are abundant. For this reason, investors tend to express biased interest in start-up companies over their more stable and reliable counterparts. While probably the most difficult to achieve, a lot of founders consider a successful IPO trade to be the end-game of their business’ elementary period. It is a badge of honor if a start-up becomes a public enterprise. This goes hand in hand with the effort of making your company known. While risky, declaring your first IPO before you think you’re ready may be just what your business needs to grow stronger and graduate into a full-fledged public company.
Finally, for obvious reasons, your start-up business has evolved if it has been adopted by a larger corporation. You have proved your worth to an older, more experienced company and they have expressed enough interest in your business to take you under their wing. While you may not operate as an individual company anymore, your ideas live on to thrive in a more stable environment. It may be hard to let go of your dream of developing your company into it’s own fully-grown corporation. However, merging with another can lead to a more successful company overall. A buy-out can be the ultimate deal and in the end, it can yield the greatest profit.
The status of a company is truly defined on a case-by-case basis and is largely based on perspective. Businesses can champion a variety of labels, whether that’s pride in being a successful start-up or having the right to say they have graduated into a full-fledged, stable company. The time to take that entrepreneurial leap of faith has never been more optimal. With careful deliberation and planning of your company’s vision for the future, you can raise a start-up business from a new business to a full-fledged success.