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Monday, April 12, 2010

Common Startup Misconceptions and Mistakes - Assessment Of Time And Money Requirements

The old adage that veteran investors and entrepreneurs will tell you is that it will always take more than the expected time and money to achieve milestones in a young company's life cycle. The biggest misunderstandings occur in association with business launch and profitability milestones. There is wisdom in this pronouncement. However, entrepreneurs very rarely get the needed advice to avoid the frustration of missing dates and having to raise more money to get their companies off the ground and at break-even levels. The following are a number of reasons why entrepreneurs miss the mark and how to avoid this happening to your business.

Investor Pressure - Ironically, investors are usually the ones forcing entrepreneurs to provide then with dates and numbers that are most likely not going to be met. It may be that an entrepreneur has to cave in and give investors the dates they want to hear. However, the mistake entrepreneurs make is not acknowledging to their team and themselves that these are not the expected delivery dates. This cascades into a potentially dysfunctional situation where dates are never made and team morale drops. The best advice is to craft a realistic time line and expenditure guidelines for your team and create an operational model around them. Even if investors are pressuring you to deliver faster it is of no benefit to your business if you consistently miss these dates. In the end a savvy investor is more interested in the truth and not about being placated.

Overly Optimistic - Entrepreneurs are naturally excited and enthusiastic about their companies. This comes with a feeling that anything is possible and a get it done attitude. This is great from a motivational perspective and it does result in pulling in dates that would otherwise be extended in a later stage company. However, optimism and drive should not overshadow the real picture. Listen to your team! If your team is giving you a good reason for a date of delivery, or you do not have the resources to accomplish what you would like in a certain time frame, you should acknowledge it and plan accordingly. Pushing a team to deliver on unrealistic dates has all kinds of consequences.

Lack Of Experience And Expertise - You can't know what you don't know! Face it, entrepreneurs commonly encounter challenges that they and their teams have never faced before. This is a natural part of the fun starting a new business. However, do not be naive in believing that you have any idea of what it will take to get something done until it is actually completed. The real danger of continually predicting aggressive completion dates and not achieving them extends far beyond the external perception of investors and the marketplace. It can also have a devastating impact on the morale within your company. No one likes to repeatedly miss goals and objectives. If a business is missing dates or delivering low quality product it could be that the business does not have the right skill set mix. This is very common and is easily addressed by focusing on the skills that are missing and bringing them into the company as soon as possible.

Cost Estimation - It is difficult to get a handle on cost until you have had some experience engaging suppliers, buying various items, using contractors and adding employees. Market conditions and the economy change making some items cost less and others more than expected. Before you go to far down the road creating or pitching cost estimates get some operational experience with the business and then back those into the pitch and business plan.

Sales/Revenue - The best way to predict revenue without any real operational history is to look at your competitors that are recognizable businesses. These competitors do not have to be exactly in the sweet spot of your space. These predictions may not be an absolute indicator of revenue dynamics for your business. However, they will provide real life numbers that are useful to you, your team and to investors. Also be careful of the hockey stick long term predictions for revenue. Keep the number to the first year of actual operations. The future is too hard to predict and investors no longer buy the hockey stick metaphor.

Conclusion - Realistically, projecting completion dates, revenue, operational costs and calculating the bottom line is difficult for a new company. It is best to stick with an investment amount you need to fund the early operational costs of the business and work from there. A knowledgeable investor will get this. Certainly your business has to be game changing in some way to attract attention. Showing potential numbers associated with the upside of your business is great. However, do not over pitch your company forcing your team and yourself into unrealistic goal setting. If you do you will back your business into a corner that will potentially have a long term negative impact on your business and your employees.