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Why Startups Go Out of Business

Category: Startups

 Why Startups Go Out of Business


For many entrepreneurs, the process of launching a company begins with the light-bulb moment when they conceive of a breakthrough idea for a new product or service.   Very often, they are so passionate about the idea that they believe its merits will be self-evident to prospective customers-that the innovation is so obviously superior it will sell itself. start-up-idea
 
Entrepreneurs who avoid that delusion may think of their initial sales as a chicken-and-egg problem.

They realize that getting buy in from potential customers is a top priority, but until they design and build the product (which often requires securing funding, assembling a team and many other tasks), how could they possibly make a sales call?
 
Both attitudes fail to recognize a simple fact. Salesmanship is central to the success of any young company, and entrepreneurs ignore this at their peril.  Yet many still ignore it, in large part because they have little sales experience and have probably not taken classes in how to sell, even if they have formal a business education. For those in search of guidance, the research and advice on salesmanship may not offer much help.
 
The vast majority of techniques, models, and strategies are aimed at large, established companies, not start-ups, which end to face a unique set of objections from prospects.  When entrepreneurs get around to making those critical first sales call, they often make common mistakes, such as not considering the strategic advantages of a particular customer or extending a deep discount just to make sales.
 
In a study conducted by The Harvard Business School of Business of entrepreneurs in Hong Kong, Kenya, Mexico, Nigeria, the United Kingdom, and the United States, they shed light on how they approached the task of making their first sales and spoke with 120 founders more than half of whom had previous start up experience.
 
 In this post, I will examine:

*The mistakes they cited most frequently.
*Explore the objections they faced when they began making sales calls
*And present an alternative sales model uniquely suited to start-up’s circumstances.
 
Sales
 

Five Missteps Attributed To Startups

 
The founders interviewed cited the following five missteps most frequently:
 
1.       Starting late.  More than half of the interviewees fully developed their products before getting feedback from potential buyers.  In hindsight, most viewed this as a mistake, echoing one to the mantras of Eric Rise’s, “leans start-up” philosophy:  Get in front of prospects from day one. 
 
As one CEO interviewed said, “You’ll learn more from talking to five customers than you will from hours of market research [at a computer].”  The goal should be to gauge customer reaction to the general concept you plan to build.  My motto, don’t make anything until you sell it, get people really interested in buying it before you invest too much time and effort. 
 
2.       Failing to listen.  Even founders who started selling early said they were too focused on convincing prospects of the new product’s merits and not concerned enough with finding out what prospects thought of the idea. 
 
Some realized that their passion and ego made them respond negatively to criticism and discount ideas for change that they later saw would have increased the marketability of their offerings.  Listen to the feedback from the customers and reshape your idea and your product to fit what they actually want. 
 
As one U.S. entrepreneur who had approached the task correctly said, “The goal of our demo was not only to explain what we do but also to give the illusion of explaining what we do, while we really tried to extract information about their business and how we could help them.”
 
3.       Offering discounts.  Faced with pressure from themselves and their venture capitalists to make early sales, many founders offered price discounts in order to close initial deals-often establishing unsustainable pricing precedents with those customers. 
 
Worse yet, news of the discounts spread crippling the venture’s long-term pricing power.  In retrospect, they should have free shipping, or a discount on orders placed before a certain date.  And if you are going to offer temporary discounts, it’s smart to put the terms in writing.
 
4.       Selling to family and friends.  Making early sales to family members is especially common among entrepreneurs for those in the restaurant, clothing, and wealth management industries. But you never know why relatives are buying from you-often their motivation is love, pity, or a sense of obligation, not a compelling product or service. 
 
Entrepreneurs believed those sales created a false sense of validation and that they would have been better off pursuing arm’s-length transactions with customers who would have given them candid feedback.
 
 
5.       Failing to seek strategic buyers.  For cashed strapped entrepreneurs with no sales record, the thrill of getting that first sale can “yes” blind them to other considerations.  Can this customer open new doors or provide referrals?  Can the customer supply usage data that could make my value proposition more compelling? 
 
Some of the founders interviewed wished they had conducted a strategic assessment, some entrepreneurs chose their first clients deliberately in order to get feedback, perform beta testing, get referrals, or to guarantee repeat business.  These strategic first sales often led to long-term success.
 

Problems Sartups Face

 
Entrepreneurs have a long series of hurdles.  Many have problems developing lists of prospects.  Once they had identified likely targets, they face obstacles in getting past gatekeepers or securing appointments. Some entrepreneurs have difficulty articulating precisely what made their product or service different from the alternatives. 
 
When they do make a sale, several suffered because no one in their venture was responsible for accounts receivable.  They come to realize they had to collect when they ran out of cash.  At times, three of four months can go by without any invoices being sent to customers, because they are not well organized in back office procedures.

 
Overcoming Sales Objections

The biggest problem with the actual mechanics of selling, however, is handling objections of potential customers.  There are five categories of objections that start-ups encounter, most of which are different from those faced by salespeople from an established firm. 

 
1.       Efficacy.  Potential customers were consistently skeptical about the ability of new products or services to deliver on their value propositions.  Some entrepreneurs could show results from beta tests or independent lab results, but that wasn’t possible for all products and services.  In those cases, offering samples or free trials often prove effective. 
 
One client, the founder of a furniture reupholster business in Cincinnati, made an early sale by eating lunch in one of his market’s largest hotels.  At the end of the meal, he asked the restaurant manager to introduce him to the facilities director, who came to the table.
 
The client showed him the worn fabric on the chairs and offered to refurbish two of them for a small fraction of the replacement price.  Once the facilities manager director saw the finished chairs, he talked the about the quality of the work done at meetings of his professional association, leading to other big hotels to place orders.
 
2.       Credibility.  Prospects also express doubt about a new company on the basis of the founder’s age, gender, personal background, or experience level.  Founders with relevant experience highlight the fact that those who lack the experience or expertise find partners or board members with solid industry experience.
 
Prospects can look at the board composition and learn about the director’s credibility and gain more confidence in a smaller start-up company.  It gives a client the confidence boost to say, “OK let’s try your product or service”.
 
3.       Price.  Salespeople from established businesses often field complaints about price but the start-ups customers’ push back on pricing because they know the entrepreneurs were eager to make a sale.
 
In fact, several prospects I have worked with stated that they expected a significant price cut for becoming an early client.  I walked away from those deals, but some entrepreneurs give discounts, and others push their value proposition.
 
Price objections often stemmed from prospect’s incomplete biased, or subjective cost/benefit analyses, so                    savvy business owners develop tactics to counter these.  For instance, a start-up pitching digital recording to large organizations consistently meet with executives who failed to account for the real estate and labor costs of storing a large amount of poorly organized DVDs in a back office. 
 
Over time, this start-up became adept at calculating those costs to illustrate the value of their service.  For entrepreneurs who believe their prices are fair, a price objection could indicate that they are failing to adequately describe the offering. 
 
Usually when prospects say they cannot afford a product or service, a startup may view it as they didn’t want it or didn’t understand it.  This means you must do a better job explaining your service and how it can add additional value.
 
4.       Switching costs.  To adopt a very new product or service, prospects might need to modify their routines, procedures, systems, or internal or external relationships.  Making such modifications to switch to a new, untested offering can seem especially costly, but buyers do not always verbalize these concerns. To address tacit objections about switching costs, you should ask questions that would lead prospects to talk freely. 
 
5.       A sales framework for start-ups.  Existing frameworks for selling are focused on established companies.  They almost always assume that the salesperson has a fully developed product, and they have a simple goal: to make a sale.  While these models advise reps to listen to prospects in order to anticipate objections or gain insight into the organizational dynamics that drive decision making, they generally do not account for the fact the information gleaned during the sales process can be crucial in designing  (or redesigning) the product or service itself.start-up-idea
 
I have constructed a far more constructive alternative model that’s far more suitable for start-ups.  It calls for engagement with prospects as soon as an idea is conceived-and long before the product is actually created. 
 
The goal of these meetings is to obtain market intelligence not only about product design but also about promotion, distribution, and pricing strategies.  After a round of these meetings, an entrepreneur should ask if the idea really has strong and broad appeal.  The answer to that question should determine whether the entrepreneur jettisons the idea, returns to the drawing board, or proceeds to develop a prototype, obtain more leads, and engage in other traditional sales activities.
 
Research has shown that it’s easier to get people to commit to an idea if they are involved in its creation.  By engaging with prospects early, founders can not only gather feedback to improve product design but also increase prospects thus raising the odds that they’ll purchase the offering.
 
This model may also ease the challenges entrepreneurs face in getting appointments with prospects.  If founders present the appointment as occasions to discuss products that don’t yet exist-not as sales calls-prospects may be more open to them.  In general, people are more willing to give advice than listen to a sales pitch.  Entrepreneurs can use that dynamic to their advantage.
 
Startups face many challenges, and entrepreneurs must wear many hats during the process of launching a new company.  It’s no surprise that they often postpone selling (or otherwise engaging with customers) until they have already created and begun producing their offering.  My research demonstrates that early customer feedback is essential and that founders who fail to consult with customers soon after the lightbulb moment will ultimately come to regret it.  


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