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Market conditions are volatile and companies are laying off workers - it would appear that this is not the economic environment in which to start a company. Whilst times are definitely tougher, I would argue, however that early stage companies may be the most adept at survival in these troubled times.
Emerging businesses are already in survival mode. Data from the U.S. Small Business Administration (SBA) indicates that only 75% of new businesses survive the first year of operation and only 50% make it through the first four years.
There are a number of key factors that can propel start-ups through the first few years and through a financial downturn.
How much pain can you solve?
If your product or service tackles a key ‘pain’ among your target market, it is more likely that you will have eager customers who will buy from you.
In difficult economic times, people will forgo buying things they would ‘like to have’ in order to buy those things that they ‘need’. The more pain that your company eases and the more value you offer your customers, the more you can charge.
Know your customer!
Too often, entrepreneurs are more infatuated with their product or service than their customer. Many start-ups fail because they spend precious time and money perfecting a new technology only to find that their product does not meet their customers’ needs nor is there a sizable customer base to sustain the business.
Entrepreneurs must prioritise market research and talk to as many potential customers as possible to understand their needs, their price sensitivity, how they buy, the size of the market, competition and substitutes. Only after extensive market research is it possible to develop and fine tune a product or service so that it will be crafted for a particular target market.
Sell, sell, sell!
An entrepreneur is a sales person. You have more passion and knowledge of your product than anyone else. You need to be in front of potential customers selling your product. You cannot delegate this crucial role when you start your company.
Show me the money!
Many aspiring entrepreneurs are postponing the launch of their ventures because it is so difficult to obtain debt and equity capital in the current market.
However, even in good times, most entrepreneurs rely on personal savings and friends and family for the initial capital. According to US SBA data, only 2.4% of small businesses obtain financing from venture capitalists, 5% receive funding from angels/wealthy individuals, 20% obtain bank loans and the rest rely on personal savings, friends and family, trade credit, credit cards and other non-traditional sources of funding.
In this economic climate, the most important source of cash for the business is revenue. It is imperative to generate revenue as soon as possible. Seek out ‘beta’ customers who will work with you to develop your technology in exchange for some early pricing discounts. Instead of developing an entire suite of products, start by selling a core product or service and add other parts of the ‘line’ later. And once again, get out there and sell.
Stay lean and mean!
In the days of the dot.com boom, early stage entrepreneurs were receiving excessive amounts of funds from venture capitalists. A significant portion of this funding went to futuristic office space packed with cool furniture, game areas and an abundance of employees. These firms quickly disappeared when the ‘bust’ hit.
The firms that started after the bust were very conscious of minimising expenses through virtual offices, off-shoring development and using social networks for marketing.
Starting a business in this financial downturn will force businesses to be disciplined in financial planning, frugal in spending and creative in negotiations. Building this culture into the business at the very beginning will serve the business well in years to come.
Innovation must continue! We cannot afford to hibernate through these tough times. A parallel downturn in innovation will affect future economic and technological successes.
Now more than ever, entrepreneurs need guidance and mentoring from successful and seasoned entrepreneurs and professionals who have helped launch businesses. Mistakes and false starts are too costly in this environment . Innovations that will lead to tomorrow ‘s successes must be nurtured today.
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