The Risks and Opportunities in a Startup: Age 2-5 Years
In my previous article, I discussed the key risks and opportunities that startups face when they’re just starting out. This time, I’d like to go one step further to the second phase of a startup’s growth: age 2-5 years.
This is a critical period. The initial excitement of starting a business is over, and now it’s time to scale up. What you do in this phase will make a big difference to how you are perceived by investors and customers. It’s an opportunity to either take off and soar, or fizzle out. Which camp you fall into will depend to a large extent on how you address the following risks and opportunities:
Talent Risk: Can You Attract the Right People?
Hiring is one of the most important and challenging decisions you’ll make as a startup. So, before you get started, here are a few questions: Have you estimated how many people you’ll need? You don’t want to end up with too many employees to pay, or too few to keep your business up and running.
What are the precise skills that you’re looking for, and where are you going to find them? Universities are a great place to locate fresh talent, especially interns. If it’s experience you need, leverage your board members and advisors to tap their networks. Spread the word on social media networks. Consider freelancers for short-term defined work through sites like Elance.com. Make your presence felt at startup events—there are always potential hires there. And if you already have a few employees, get them involved because they can be your biggest advocates for new talent.
Here’s the difficult one—how do you make people want to work for you? I believe it starts with having a compelling vision, and conveying it as convincingly as possible. At this stage, you need people who will share your passion for the business, and will go all out with you to make it work. The good news is that most people want to work on something extraordinary and exciting where they can make a personal impact on the success. Can you give them that opportunity?
Also, can you create a work culture that they’ll want to be part of? Culture is much more than the perks (free food, free car washes, or haircuts). Culture is about the values of an organization and how people interact with one another and their customers. Define your culture up front and hire people that embody and reinforce that culture.
Sales and Marketing Risk: Can You Find Buyers?
Way before Mint.com launched its personal financial management tool, it hit upon the idea of starting a finance blog that chronicled everything from people’s worst financial mistakes, to the stuff tech celebrities carried in their wallets. By the time Mint’s product was ready for launch, it already had more traffic than its competitors. The company also offered people special beta access in return for putting up a badge on their individual blog or Facebook page saying, “I want Mint.” This got Mint free advertising on 600 different blogs, and boosted its search engine rankings.
In other words, you don’t need a lot of money to effectively market your product. A little bit of ingenuity can take you far. But first, understand your target customer. Align your marketing strategy accordingly. And when it comes to choosing a marketing channel, don’t put all your eggs in one basket. Leverage diverse options like blogging, social media marketing, and referral programs. The idea is to get maximum visibility, so that people start identifying your brand. You might even want to speak at a webinar, or give away your product as a prize during a conference, in return for publicity. But always keep your marketing budget in mind. And have good analytics to measure what’s working and what’s not.
Your end goal should be to build and cultivate a community and pipeline of prospective customers—this will allow you to build sales traction more quickly.
Cash Risk: Can You Generate a Steady Cash Flow?
Raising initial funds for your startup is one thing. But sustaining cash flow is a whole other ball game. Recently, top investors raised concerns that Silicon Valley startups may be burning through cash at an alarmingly rapid rate, which could set them up for failure when the market shifts.
CB Insights, in its analysis of 101+ startup failure postmortems, found that almost a third of startups failed because they ran out of money. For instance, Flud, the mobile-social news reader that raised $2.1 million in seed financing, was downloaded by millions of people and received praise from various quarters; but three years later, it was unable to raise additional funding and had to shut down.
As a startup, you need a steady flow of money to not just build your product, but also hire and pay your employees, and fund your sales and marketing. Where is that money going to come from? How steady are your sources of income? Do you have a strong financial process in place? Is there a team who can manage your cash flow, and make sound financial decisions on your behalf?
Minimize costs wherever possible. You don’t need that swanky office space. Go small. Browse deals sites for office equipment, or rent them. Use the cloud to manage data. Choose Skype and Viber for conference calls.
If your business plan calls for more cash investment before you will be profitable, line up investor relationships. Have you been networking with them? Have you developed and demonstrated your growth plans? How are investors viewing your business? Understand from them what business milestones will be needed to raise more capital. These are important questions to ask as you look to scale up and generate a sustainable cash flow.
That said, the best plan is to create customer traction and revenue as soon as possible—right from the beta stage. Chart out a plan with realistic milestones of how you can achieve this.
The Big Picture
Building a business is never easy. But if you’ve made it beyond year 1, it’s a testament not only to your entrepreneurial spirit, but also to your ability to effectively manage and mitigate critical risks. In years 2-5, the stakes may be higher, but so are the opportunities. Take the time to understand and mitigate the risks, and the rewards will follow.
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