Done properly, entrepreneurial startups would adopt a 'ready, aim, fire' philosophy as they ramped up their business.
But too often Texas-based academic, investor, author, consultant and former tech executive Dr Rob Adams sees a 'ready, fire, fire, fire, aim' practice.
This, as worldwide statistics reveal results in a 90 percent failure rate among startups.
Talking at an Industrial Research Ltd Innovation Showcase at its Gracefield campus, Adams says if a startup is unconstrained by capital requirements, this drops to 80 percent failure.
Based on anecdotal evidence, if startups adopt a more rigorous and meaningful market validation before entering the market, this rises to a 30 percent success rate.
Adams is giving a series of lectures and workshops around the country on a whistle-stop tour, in which one of his main messages is to avoid a technology push for a new product. He is author of the book If they build it will they come?
Just because someone has a technical solution – and he gave the failed US$8 billion example of the Iridium satellite cell phone company of the early 1990s – doesn’t mean people will buy it.
“Before you go pushing a technology to the market, understand the market,” he says. “What’s the problem and who has the problem?”
Too often great technology goes looking for a problem, rather than the other way round, the Austin resident says.
It should only take 60 days at the most to determine whether there’s a market problem and need, and Adams says there are three main indicators this exists.
- There’s a ubiquitous or consistent demand (of people talked to)
- There’s a high sense of urgency among consumers or businesses for the solution (the ‘pain’ is in their top three)
- People have to be willing to pay for it
He says startup entrepreneurs can carry out most market validation themselves. He recommends that 5-10 percent of a product development budget be devoted to ensuring that there is a market opportunity.
“If not, you can fail fast, and then start again without too much money being wasted in developing a product that no one is prepared to buy.”
Startups also often underestimate the cost of promoting and distributing a new technology solution. The rule of thumb is that just as much budget should be devoted to marketing in its wider sense as to product development, says Adams.
“About 85 percent of business startup failure are market related issues,” he says.
“Firstly, companies often underestimate the amount of competition out there. Startups also often don’t understand economic value. A customer has to see a 200-300 percent increase in value before they’ll change to something new.”
Adams says it is human nature to wish to, and attempt to push a new technical idea that has been created or invented.
But, instead of this approach, “an entrepreneur’s job is to understand what the market issues are and figure an elegant solution for it".
As well as seeing new technically elegant ideas, he is able to mix with enthusiastic people on both the entrepreneur and investor side. One of his current roles is teaching the University of Texas Austin's Venture Laboratories MBA course.
“From the entrepreneur’s side, it is all about validation,” he says. “For investors, it is what to look for and aspects like reporting mechanisms.”
Investors and entrepreneurs need a balance.
“You don’t want to overburden entrepreneurs with things they could do,” he says. “You certainly don’t want them to be doing busy work. Investors should be thinking about what is efficient for an entrepreneur to be doing.”
Adams is keen on an annual plan being written before the start of a new financial year. Board meetings can then be a report against the annual plan.
“This provides a consistent view of what is happening. It is an efficient use of time,” Adams says.
He says his emphasis to validate, with clearly identified market pain, any startup proposition is complementary to the Lean Startup methodology.
Lean startups are often encouraged to pivot to a modified offer if a particular market isn’t showing promise.
“The pre-market validation is deliberate, instead of being forced to pivot,” Adams says.
“Validating beforehand is more measured, less spontaneous.”
Peter Kerr blogs at sticknz.net