Warning! Early Success Reality-Distortion Minefields Will Destroy Your Startup: Part II

Read Part I here.

According to the Startup Genome Project, 74% of high-growth Internet startups, with serious star potential, fail.

Many of these tragedies are the consequences of the leadership drinking their own Kool-Aid, and refusing to move more slowly and cautiously when ramping up. They mistake early indications of traction for “a sure thing,” and start investing in people, marketing and R&D before they have a repeatable business process.

This problem was discussed in Part I. This article provides you a list of typical symptoms that accompany the reality-distortion malaise, and help you, good doctor, to see if you, or someone you know, is infected with this malady.

Creativity loves constraints and hunger focuses the mind remarkably. Remove the resource constraints, lay out a feast of dollar-fueled choices, and there are dynamics that begin to work against startup successes. Some recurring issues include:

1. New Hires. You have hired specialists, but don’t have enough customer validation or market insight to leverage their capabilities. This new staff is talented and yet insecure. They will stick to their comfort zone, and build a massive fort (or silo) located in “their territory” to justify their continued and paid existence. Unfortunately, their efforts may not be driving your firm’s success.

Solution: only automate processes, and commit resources to activities, that you are already doing. Improve what you have; post-funding is not a time to reinvent the corporation.

2. Excessively Ambitious R&D. Your innovation processes are moonshots; massive projects that are significant resource and time sinks, in which there are lots of unknowns and significant technical risk.

Solution: there is a difference between “dead reckoning” and”clutching at straws”; the first will help sailor find a safe harbour, the second will convert them to fish-food. Be innovative, but don’t bet the farm on it; carry out pilot projects to establish viability and customer interest, and have a show-me-it-works attitude before you go with the latest fads. Build skunkworks, and stay away from any literature that has Steve Jobs in it. You are not Steve Jobs, and won’t be until you’ve experienced the big failures and turbulences that he survived to get to his greatest successes. By that time, you are you, and are still not Steve Jobs.

Work with universities to get the high-risk R&D implements. The Ontario Centers of Excellence has a number of programs that can help you attain your R&D goals at minimal cost to you. Other provinces have their own programmes.

3. Over-Engineering. The firm is spending lots of time and resources solving traditional big-company problems. You’re worrying about tax-strategy, in-house automation, record-keeping, communication, or any other issues that arise with normal employees.

Solution: Be customer-driven; apply the customer validation methodology of the Lean Startup framework to really nail down the target customer segment, find their unserved needs, and have a laser-like focus of only carrying out work that meets these needs. Also, don’t hire for academic/corporate pedigree, instead hire for resourcefulness, passion, and a desire to serve. You want MacGyver on your team, and not a gaggle of corporate literalist who stick to “this is always how it’s been done in our field.”

Any employee who works based on playbooks or templates they find on the internet should be viewed with a healthy dose of suspicion. They are being intellectually lazy, and lack confidence in their ability to deliver.

4. Ineffective Advertising and other Unsustainable Customer Acquisition Costs. Your marketing expert who comes up with an elaborate (and expensive) paid-advertising-driven campaign to drive traffic which is not properly targeted, and which the organization is not prepared for.

Solution: Marketing and sales are a function of understanding the sales funnel, the customer acquisition cost and effort requirements. You need to find sources of leads, and figure out how to increase customer retention, satisfaction and engagement. This may involve some traditional forms of advertising, but they may also involve some more creative approaches.

Although every customer is unique, the system is remarkably mundanely the same each month (due to the harmonizing influence of the law of large numbers). Misquoting Mr. Micawber from David Copperfield, you have a simple formula:

Profit = Customer Long-term Value – (Cost of Customer Acquisition + Cost of Customer Support)

You job is to face reality, figure out what needs to be done, prove it on the cheap, and build an awesome team that can deliver consistent results. Leave failure to the other 74% that are busy posturing, and playing in the reality-distortion mine-fields.