Why Startups Fail
5 early-stage assumptions that can hinder your startup from becoming a huge success
The critical mistakes of startup entrepreneurs are often costly assumptions. The assumptions discussed in here are about the market, product, investors, and sales. These are assumptions that have taught several entrepreneurs bitter lessons. You can avoid the bitter experience by knowing them now and avoiding them.
An entrepreneur is different from a business owner. A business owner is tied and devoted to his business. An entrepreneur is not tied to any particular business. A business owner has to make the business work. Meanwhile, the entrepreneur can move on or set up the business in a completely different way.
This is why entrepreneurs are better positioned for business success. But they are also more susceptible to a drastic and tragic fall.
The pitfalls are from assumptions made at the early stages that come to bite back at the cusp of success.
Here they are:
1. “I like it” equals “I will pay for it”
This is a common pothole that a lot of entrepreneurs fall into. This mistake is made when surveying the market. After showing a prototype or the finished product (or service), entrepreneurs tend to test for validation instead of sales.
“What do you think about this product (or service)?”
A lot of people would say they like it. But it would be out of politeness, respect, and concern. Then, ask them if they would pay for it and you will see the true reaction.
People pay for things they don’t like because they want or need it badly enough. The “like” word is considered a very negative response by successful entrepreneurs. The market should ask how to buy or how to pre-order if the product (or service) is so good. Just because they like it doesn’t mean they would pay for it.
2. People will buy it because they need it
This makes entrepreneurs come up with a false projection as the “potential market”.
Here is an example of this assumption:
The potential market for cars in this city is the number of the population above 18 years that do not own a car.
Everything is wrong about this.
Just because they need the car doesn’t mean they will buy one. In fact, even if you make it so easy to afford, you may find it hard to sell 1 unit.
People must be willing and able to buy it. They must have their reasons to buy. If they don’t say they will, it is safe to assume that they won’t.
3. Legal is important after the product is ready
Many entrepreneurs have suffered agonizing losses as a result of this mistake. This is not a mistake that shows up immediately. This is a mistake that shows up at any flicker of success.
The legal framework for the business should be set up from day one. Some successful entrepreneurs do advice to seek legal counsel before even starting out.
Laws change. And there are different kinds of laws that affect different kinds of businesses. There is probably a sensitive legal issue that affects your kind of business that you don’t know (if you haven’t sought legal counsel).
4. Our potential investors will invest because they sound positive and excited
Potential investors are not investors until they have invested. Excitement and interest are nothing more than excitement and interest. You should be 0.1% sure they will invest as long as you are having talks. Talks are just talks.
Don’t be misguided by promises and empty hopes. If they keep delaying, they are probably not going to make the investment. Their tone during the talks doesn’t say anything about what their decision would be.
5. More sales equal more profit
More sales are supposed to equal more profit. But it is not automatic. The cost of production matters. There are several overhead costs also. The cost incurred in serving larger quantities and other cities could actually shrink profits.
The cost of hiring and managing more people can also prove to be a profit-shrinker. In fact, it takes great leadership and managerial skills to remain just as profitable or more profitable during business expansion.
Unless you really check and make the calculations to see that you are making profits, never assume that more profit is guaranteed because you are making more sales.
The root cause of failed startups can be traced to one or more of these assumptions. To avoid them is to stay on the path of success.