Don’t Get Too Excited: A Lesson for Startups
How early decisions by entrepreneurs cripple businesses before they stand on their feet
A friend of mine decided to open a hotel in a small town. He invested quite a lot of money into it. He bought an unused building and turned it into a haven for guests. The first concern I had with the project was that could it make as much money has he invested in it?
Hotels in the area weren’t making much. However, he believed he could change that. Those other hotels were not of any standard at all. So he decided to equip his with the best he could afford that would be reasonable.
Next time I visited the project he was installing phones in every room and key places within the hotel. Just to give the customers an all-round feel-good experience. My question was always if the hotel would make an income worth the investment.
My friend was building his fantasy, his dream, but the reality of business was different
The hotel started with a fair income traction. But then gradually things started to slow down. The problem was that the income couldn’t sustain the standard that the hotel started with. In about 2 years, the hotel was just a little bit better than the common ones around the town. The phone lines were definitely out of the picture because nobody really cared about it.
The wrong assumption my friend made was the caliber of people who would be visiting the hotel. He pictured a hotel where he would host high profile people, but most of the time the guests were low profile people looking for the cheapest best place to spend the night. He had high profile guests a few times, but it couldn’t sustain the hotel’s standard.
Today the hotel still exists. It’s not even a good source of income for the owner. It’s not the entrepreneur, it’s the town. It’s often about what the street can take, not what the entrepreneur can do. A smart investor once said, ‘buy property where the rich love to play’.
We often forget that business is to make gains or profits. I get surprised when companies that have not yielded profits in 5 years are still supported by investors. My personal benchmark is 2 years. If it’s not making profits in 2 years, then what are you doing? Making sales without making profits is a like running in a circle. Push yourself to make profits.
Excitement is a common thing with startups but it’s often a bad thing. It leads to unnecessary choices in the beginning stages. Just like the phone lines in the hotel in the small town. It is very important to spend on what has a direct impact on profit at the early stages.
As an entrepreneur, you cannot determine the state of your customers or clients. You have to accept the state of your customers and clients. You can’t determine how wealthy they will be, you have to accept how wealthy they are and what they might be able to afford.
The concept known as Minimum Viable Product (MVP) is often referenced in this line of thought. However, most startups do not understand what MVP really is as regards their product. Here is a litmus test for you: Who are the people that will find your product and try it out if you do no marketing?
Test your product in the marketplace with zero marketing
What your product can pull in without any marketing is the true viability worth of your product. Only market what is worth something without any marketing.