From Scratch

We increasingly encounter companies started from scratch by first time entrepreneurs. Most of them have little or no experience with startup companies, many of them have had jobs but never run a company, many of them believe they have a great idea, a great technology, or something else that makes them worthy of funding from others, and many of them are right about some of the things I just identified.

But few of them have experience in all of these areas or a team with that experience, and few of them seem to realize that it almost always takes all of these things and more to succeed in creating and growing a business.

That's why we always start with metrics and check them for consistency. It's not really about culling one company from another. It's really about getting a real picture of the situation, not just for us, but for them to understand where they are, where they need to get to to reach their desired level of success, and how they will be viewed by others once the facts come out.

What do we measure?

We measure with our GWiz™ application, and it measures:

• Governance and Management: The board, executives, advisors, structure, and ethics
• Marketing and Sales: Who sells what to whom and how
• Execution and Fulfillment: Who does what to fulfil
• Intellectual Property and Special Sauce: Expertise, copyrights, patents, trade secrets, trade marks, IP of others, and monetization
• Financial Situation and Path: Financial situation, investments, and projections
• Legal Situation: Foundation, contracts, regulations, and legal requirements

These are the operational requirements of success we have come to believe are important over the years, and by correlation and regression analysis, we have developed metrics relating these to valuation (what the company is worth), and to a lesser extent, the chances of success depending on what the objectives of the company are.

Sort of...

Our goal is to help grow companies. As such, the first, and we think the most important, step is to get a realistic picture of the situation. One of the things our metrics do is take the self-assessed metrics provided by the CEO and compare them to our internal automated analysis to find internal inconsistencies within their metrics. The basic inconsistencies we look for in pour automated analysis, which we present to the CEOs as they complete the metrics, so they can make changes as they learn more about themselves and their companies are:

• Stage of development vs. financials: When CEOs see their view of their stage of development against the reality of their financials, many of them are ultimately confused or disappointed at their performance vs. their expectations. They don't seem to understand why they are not already more successful because they believe they have done something excellent and it is nor reflected in their progress. The reality of this difference is quite stark in the automated analysis, and the conversations we have with them as they try to update their self-assessment is revealing to them and us.
• Growth pattern vs investor expectations: Most CEOs in this situation have unrealistic views of what investors want and how they are going to meet or beat these expectations. For main street companies or companies not seeking investment, this doesn't matter as much, but most are shocked at the high expectations of early stage investors, and when they try to adjust their numbers to meet expectations, they are unable to explain how they will actually meet these objectives. That's when they start to realize that their planning and projections have big problems.
• What they have done vs. what they may believe they can do: Most people who are doing something they think is important don't really understand that what they know they can do is something others will be skeptical of, because they are confident in it. But the reality of what they have accomplished in the context of the overall set of issues in success for rapidly growing companies is usually far less than they imagine they are capable of. As they see the difference, in some cases, they see how far they have to go, and this points a focus on what they need to do.
• Their view of the market they address: Many CEOs in the startup world identify total addressable markets by some generic term or don't understand how to characterize their market, so they simply as the Internet. Some underestimate it and others overestimate it, and in doing so, usually by orders of magnitude. It might seem simple, the market today for the next generation of lasers would seem to be the market for today's lasers. But if you actually try to understand that market, you likely find that there are different lasers for different purposes, at different cost points, and with sunk costs for current processes of manufacturing. They may last for 50 years, and the market may run out in 10, meaning that by the time you reach it, there may be no new sales left and only 2% of the market can be sold per year to replace the embedded lasers. My point is not about lasers, it's about understanding your market, your actual market, not some imagined future one or some market segment that you do not address. As we go over this, their entire perspective on what to sell and how to sell it often changes.
• Their ability to follow directions: It seems that no matter how carefully we explain things to them, very few people read and follow instructions, so we end up wasting time replying to questions that are already answered. Of course we don't always follow instructions either, which is likely why we are so forgiving in this arena... to a point.

All of these issues with metrics, however, only start the ball rolling.

There are just a lot of things to know

It turns out, starting, building, and running a successful business is complicated with lots of pitfalls and lots of things to know. Persistence pays in the long run, but the length of that run may be more than you can afford to take. So getting help from others is the short cut to success.

Going from scratch, we have helped build perhaps a few dozen companies to profitability, and helped many others identify what they likely need to do to get there. But failure rates are high, at least historically:

• About 80% of startups do not survive the first year. I have looked at this in several instances, including looking at statistics in different ways from different countries and different types of companies. The variance my be substantial, and it's likely only a good number to one digit of accuracy, but it's stunning in that if you tart a new business and are still in business (not just in name but actually selling something and performing it for customers), you are indeed a rare bird.
• For investable companies passing due diligence by substantial angel groups and getting investment and assistance, 92% get the investor to break even. This is a stunning statistic, again, reviewed from multiple sources, and likely good only to one digit of accuracy, but what it means is that the remaining 8% have to yield very high returns to make the investment worthwhile, and those returns don't come for a long time, usually more than 5 years today, and often more than 10 years.
• Most of the successes come on the 3rd or later attempt by an entrepreneur. In fact one of the best metrics that we do not use is number of previous failed startups. With less than 2, you probably don't know enough yet, and even with an early success, the chances are, you were more lucky than good at it, so you are probably over-confident. When we ask people who have had previous exits and are looking for support, we ask them why they need our help or money, and that's when we hear the stories about their successful exits and why they now realize they need more help.

Our own efforts and investments have been fairly consistent with these numbers. And when you think about it, that means that your valuation as a company has to be far lower because of the odds of success than it is worth in retrospect if and when you succeed.

Conclusions

Starting from scratch is hard, and all the harder if you don't have lots of resources to apply to it or experience to help you quickly recognize what might work and what will almost certainly fail. The odds are slim, the punishment along the way real and often severe, and if you win, they will tell you it was luck. But "luck favors the prepared mind", and as the boy scouts say, "be prepared". How should you prepare?

More information?

Join our monthly free advisory call, usually at 0900 Pacific time on the 1st and 3rd Thursday of the month, tell us about your company and situation, and learn from others as they learn from you.

In summary

We're here to help, by being direct and honest about what we see. And we are often wrong, but we think, more often right.