A lack of cash, poor research, the absence of a mentor and overestimating the size and accessibility of the market are amongst the key reasons business start-ups failure rates are so high, Irish authors Greg Devlin and Liam Fennelly say in their new book.
Countdown to Launchaims to help entrepreneurs successfully navigate the start-up phase. It offers a rigorous six-week bootcamp process to determine whether a business has what it takes to be successful. According to Liam Fennelly, “the six-week time constraint is designed to give entrepreneurs a sense of the commitment and workload required to get a new venture off the ground. It asks hard questions now in order to avoid tough lessons later.”
Devlin and Fennelly, both former Presidents of the MBA Association of Ireland, bring their own extensive business founder and mentor experience to the process.
With around 15,000 business failures annually in Ireland and a one in three chance of companies making it past 10 years in business, failure rates are exceptionally high,but this need not be the case, they maintain.
“Risk-taking is often viewed as a prerequisite in start-ups but this is not a casino and failure can be personally devastating. An essential element of entrepreneurship is risk analysis and reduction where possible, then making informed decision about how to proceed,” says Devlin. “You need to mitigate your risks by finding out what they are, specifying them, quantifying them and then devising solutions to either eliminate them or manage them,” he adds.
The authorshave adapted a number of existing international models – including Alexander Osterwalder’s Business Model Canvass and Eric Reis’s Lean Canvas Model – and added their own insights to present what they call The Business Model Actualisation Platform or BMAP. This consists of over 60 trigger sheets, checklists and questionnaires to determine the viability of a business idea.
The BMAP has a three-stage process. It starts with a situation analysis looking at the market and competitive environment, assessing present and potential capabilities. The second stage, challenge analysis, assesses the obstacles as well as the opportunities and how they can be tackled while the third phase called solution proposed, aims to identify a range of monthly scheduled, realistic and achievable actions that will robustly navigate the business to a profitable and sustainable position.
The authors favour field-work with customers over desk research where possible and suggest interviewing at least 25 potential customers for a consumer proposition or 10 in the case of a business-to-business one.
When setting targets, achieving Minimum Viable Proposition is seen as a much more realistic aim than shooting for the stars.
“Stretch targets are lauded as drivers of innovation and achievement for both individuals and organisations. However, failure to meet targets can have the opposite effect,” says Devlin. “There can be good arguments for setting them in large organisations and teams where there is a different dynamic of a shared mission and the load is spread. However, in the start-up setting they may represent unnecessary risk to performance. Start-up entrepreneurs and small team have enough coming at them in the initial establishment period without becoming overburdened by unrealistic ambition,” he says.
Moreover, if the business proposition doesn’t add up, promoters should be thankful that rigorous analysis prevented them for making a costly mistake. While each situation is unique, the authors suggest that a typical start-up that fails after one year could easily burn around €100,000, comprised of €25,000 of a bank loan, €25,000 of own and friends and family funds and €50,000 in lost salary from quitting a paid position.
Red lights that should trigger pulling back from a launch include bad feedback from potential customers, the realisation that financial projections are overly-ambitious, no clear line of sight to customers and too high a risk-reward ratio.
“Common examples of where businesses go wrong include situations where there is inadequate research into the size of the market and what way it is trending with regard to your offer. Fundamentally, purchasers buy value and perceptions around this can change. You need to ask yourself what your value proposition is and what does its future look like,” Devlin says.
“Other problems include inadequate finance during the establishment phase and little or no contingent budget to cope with the unforeseen. Poor visibility is a further problem – in other words, inadequate research and understanding of the competitive and developing environment and what that means for you or your product or service offering.”
The authors caution against ‘tick box’ exercises in planning and say that what is commonly referred to as a business plan is often no more than a set of aspirational financial projections. “In this setting all too often potential customers’ needs operational requirements and marketing discipline get to play only a cameo role against the imperative of gaining funding to get the show on the road,” Devlin notes.
Part of the motivation for developing the BMAP methodology and book, Devlin maintains, is a desire to reduce the business failure rate – a level of attrition that is accepted as a norm across most economies.
“A high failure rate is assumed as a given yet there is common evidence of damaging social stigma attached to failures that is not attached to other endeavours. Social stigma has a very significant psychological impact for founders as well as the wider social impact for all involved in a business. People who might otherwise go on to create very successful second or third attempt businesses that could provide employment for many others, become discouraged and give up,” he says.
Attention to detail is important including gaining a thorough understanding of how specific markets and industry sectors work. Among the more specific pieces of advice Devlin and Fennelly have is to be aware of the type of supply chain management systems used in particular industries. In construction, the Achilles system is often used, for example. In industrial applications, you should also expect to interview the engineer/technician who would be using your product or service as they would most likely be the ones to sign off on you getting approved vendor status.
Fennelly and Devlin also strongly advise prospective entrepreneurs to find a mentor. Fennelly acknowledges that it is often difficult to source one but suggest it is much more likely to happen if promoters are more specific in their request.
“It can be viewed as an open-ended request in terms of time and context and few will commit to this. The methodology in our book allows you to approach a potential mentor and ask if they can mentor you through this process and it requires just three meetings over six weeks. After that you can go two ways – either a clean break or you can develop a future relationship,” he says.
The BMAP Value Proposition
• What is our proposed offering?
• What problems is it solving?
• Are we competitive on costs or features?
• How would we be perceived by customers?
• Do we bring increased customer satisfaction?
• Do we reduce stress levels?
• Are we bundling products or services?
• Would we be perceived as a risky purchase?
• Are there new or substitute products on the market?
• Countdown to Launch by Greg Devlin and Liam Fennelly is published tomorrow (May 10) by Oak Tree Press (€29.95 paperback / €15.45 eBook) and is available from SuccessStore.comand selected bookshops.