Last month, to illustrate the importance of “staying power” in getting a new venture off the ground, I wrote a post about the patience displayed by President Obama’s national security team in tracking Osama Bin Laden. After years of painstaking intelligence activity and a long trail of near misses, they steadily persevered over time, finally seizing the right moment to strike. The history-changing event was the result of a decade-long process — many swings at the plate that yielded the ultimate home run.
This week and next I want to go further and outline a set of principles for lengthening and strengthening your startup runway. Early startup ideas are typically off the mark, which is why great businesses iterate and experiment their way to success. But doing so takes time. Too often, enthusiastic founding teams severely underestimate how much time and treasure they will burn before they finally strike gold. Therefore, entrepreneurs who can give themselves and their ventures more time — treating time as a competitive advantage rather than as a dwindling resource — will enjoy a much higher likelihood of success.
In Chapter 8 of my book, 6 Secrets to Startup Success, I outline strategies for improving your entrepreneurial staying power at two levels: The first is at the level of your venture, where factors external to the you will either lengthen your startup runway or cut it dangerously short. The second set of strategies can be applied at the founder level, where your personal ability to persevere over time will ultimately determine whether your venture is viable and healthy over the long haul.
Today I’ll outline four venture-level strategies. Next week, I’ll follow up with four founder-level strategies for increasing personal stamina and long-term effectiveness.
Venture Level Strategies
- Launch Close to the Customer – Even after burning significant time and cash, some founding teams haven’t really started. They have yet to interact with paying customers. They understand very little about market demand for their product. They may not have a ready-to-sell product or a workable channel for sales and distribution. Instead, they are engaged in pre-launch activities that are not directly aimed at acquiring clients and are several steps removed from the marketplace. One of the keys to strengthening your runway is to move your effective starting point, the point at which you plunge in full-time and begin to burn significant resources, as close as possible to your point of revenue creation. This usually means gestating and incubating your idea as inexpensively as you can, while making a living through other means. How much can you develop and test your idea without a huge expenditure of capital? How fully can you develop a working product before you make the full-time plunge? How well can you research and understand the market for your idea, even pre-selling customers, before you cross the point of no return?
- Address Your Biggest Risks Early – Venture capitalists call it the Valley of Death, the period after a founder has begun to spend capital but has yet to find a steady revenue stream. A large percentage of new businesses never make it through this first phase, which is why startups are known to be hazardous and the word “entrepreneur” conjures an image of a daring, swashbuckling gambler. But, as Matthew J. Eyring and Clark G. Gilbert write in the May 2010 issue of Harvard Business Review, the stereotype of the risk-loving entrepreneur is a myth, at least among those that are highly successful. The best entrepreneurs are not the bold risk-takers that they are made out to be. They are, in the authors’ words, “relentless managers of risk.” They understand that not all risks are created equal, so they identify and prioritize threats that pose the greatest danger to their venture—Gilbert and Eyring call these “deal-killer risks”—and find ways to creatively address these early in the startup process.
- Raise More Money than You Think You Will Need – Startup founders typically view their ventures through rose-colored glasses, overestimating early revenues and underestimating early costs. A general rule of thumb: Determine what you will need for a successful launch, in realistic terms, and then double it. Everything will take longer, and cost more, than you expect. Consider a wide a spectrum of potential sources — personal savings, financing from banks, equity investments or personal loans from friends/family, angel or venture capital investors, etc. I should mention here that there is a school of thought in the startup world that argues against over-funding your startup, on the assumption that too much capital can cause founders to lose touch with the marketplace, or to lack focus, discipline and urgency. But I see these concerns to be independent of how much funding is available. A strong founding team, one worth investing in, will not be distracted or derailed by too much money. And the cost of additional capital, whether in interest payments or ownership shares, pales in comparison to the price of a dream doomed from the beginning because of underfunding. Finally, having access to resources doesn’t mean you must tap into them, with a commercial line of credit being the classic example.
- Commit Resources Wisely – Raising ample funds is one side of the financial equation that will determine the length of your startup runway. The other is your burn rate, the negative cash flow likely to be created during your launch. As you build your venture with an eye toward managing risk, preserving flexibility, and staying in the game, your rate of spending will be a critical lever for extending and stretching your time and cash. Don’t confuse raising money with the need to spend it. Instill a disciplined process of managing your commitment of funds and projected cash levels. The more judiciously you manage expenses, the more you multiply the power and impact of whatever capital is available.
I provide more details and examples for each of these strategies in my book. While these principles might sound obvious, entrepreneurs whose ventures perform well in the above areas enjoy much greater odds than the passionate startup team that wings it.
I’d love to hear from other founders and investors with startup experience: What do you think are the most powerful strategies for giving a great startup idea ample time to succeed?