May 12

How to Decide Whether You Should Establish a Startup Company

Although this blog, Shoestring Advice for Technology Startups, is geared to the hi-tech startup audience, this particular blog posting applies to anyone considering entrepreneurialism and establishing a startup.

The first reality to understand is that it is as hard and as tough as people say it is to build a successful company from the napkin idea. Also, having a great idea is only a part of the equation, and a small part at that. Not to put a too finer point on it – although I feel obliged to share the bad news before continuing with this post – statistics state that 85% of new business fail within 5 years (these numbers are worse in some industries, like hi-tech.) So clearly having a startup is not for the faint of heart and spirit.

However, this statistics doesn't really tell us anything, other than most new businesses fail. That is to say, it doesn't tell as why they failed and are they all failing for the same reasons? Perhaps if we knew why they failed we could avoid the same mistakes and not be included in the future 85% statistic. Better still, if more people read this blog perhaps we can bring this number down altogether.

I think it’s important to understand the sequence of events that bring people to the point where they start considering entrepreneurialism and establishing a startup, at least from my experience working with startups. The events leading up to the conclusion, i.e., to start a startup, differs between industries, but what should and doesn’t happen is universal.

In hi-tech what usually happens is that some event causes the “pre” entrepreneur to say there should be an application for that (whatever ‘that’ be) and then execute on the urge to comply. For example, say an individual is at a restaurant with friends and the restaurant says there’s a 90 minute wait for the next table. And say that it occurs to her that if she gave her mobile phone number to the restaurant, the restaurant could send her a text 10 minutes before her table is ready. This way the individual and friends can either go to a bar to wait or check out other restaurants. The individual shares this moment of brilliance with her friends, who respond with “Wow, what a killer idea, I’d use that app in a second.” 

So now in possession of a great idea, that has been validated by friends and no apparent competition, the ‘ah ha’ moment happens. The individual decides to create a startup company to build the app and sell it to Google or Facebook for billions.

At this point it is typical for the new entrepreneur to make the decision that the first thing she needs to do is find a programmer to develop the app. This act is one of the reasons why so many hi-tech startups fail. Because this is the precise moment that the individual should first consider the following questions, before rushing to spend money:

• Am I prepared to work harder than I’ll ever have to work for an employer?
• Can I deal with constant high levels of stress?
• Am I prepared to do selling, to sell me and my idea?
• Am I prepared to eat Ramen noodles all the time and consider delivered pizza a luxury over the next few years?
• Am I prepared to spend the next 5 years out of my comfort zone
• Can I handle a lot of setbacks?
• Can I learn to ask people for money?
• Am I teachable?
• Can I learn to handle failure but keep going?
• Am I prepared to work through the night with no guaranteed rewards?
• Am I prepared to invest all my savings?
• Do I accept that I don’t know anything but I am hungry to learn?
• Do I want to be a business person? Do I like doing business or could I grow to like it?
• Can I focus and stick to the job in hand?
• Am I prepared to do any activity to achieve success (notwithstanding, maintaining integrity)
• Et al

If the answer to these questions is in the affirmative, the next set of questions and actions should focus on the business that will build and sell the app. Yes, a business needs to be built because ideas don’t make money, businesses make money. The two specific questions that need to be addressed are:

• What is the business model? I.e., how will it make money?
• Is there a market ready, willing and able to buy the idea and is it sufficiently large enough to build a business around?

I would argue that these lists are the minimum questions that need to be answered before spending any money or at least before building the application.

As I mentioned earlier, there ARE many reasons behind failing businesses, such as cash flow problems, changes in the law, new strong competition, people’s needs change, poor quality products and service, no team, no mentor, etc. But my experience is that if the questions listed above were addressed first, before a business was established, businesses that were destined to fail would never have been started in the first place; saving many individuals time, money and heartache.

At this point you’re probably left with the question, well I can answer the first list of questions in the affirmative, but how do I go about answering the second? This is when it’s time to spend a few dollars. Find someone or an organization like KENOVA Technologies, that can help you work through these questions.

If you end up spending a couple/few thousand dollars and a few weeks of your time simply to find out that there is no market / business, or in the restaurant example above, that are already many entrenched competitors, this is money very well spent, because you’ll spend a great deal more money and time building and selling an application that should not have been built.

Related Posts:
You have a business idea? Now what?
Productizing Your Idea
Startup Tactical Quick Reference Guide
How to Start a Successful Hi-Tech Startup
7 Success Tips Startups Should Not Follow


"This article may not be reproduced in whole or part without including the name of the author (James Naylor) and an acknowledgement of the fact the article was originally published in Shoestring Advice for Technology Startups (http://www.KENOVATech.com/blog). Any other use of this material is unauthorized and is a violation of law."

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