If you think it might be in the area of Artificial Intelligence, big data, or the Internet of Things you just might be wrong…
How do I know this?
Because right now in some garage, basement, or super cool co-working space there’s at least one person with the idea, the team, and the energy to build the next billion dollar company.
And when that happens, we will all be surprised because it won’t be what is expected. It never is… Did we really expect Uber, AirBnB, or DropBox?
But no matter how great the idea, how experienced the team, or how much money can be raised, it all comes down to how you Start, Run and Exit the company. If you can’t Start, Run and Exit smoothly you will never make it to the Billion dollar mark. If fact, you may not even make it to the one dollar – of profit – mark.
What would you say if I told you it all comes down to one simple concept? One thing you need to know.
This is that concept… Find your fatal flaw and fix it.
Or more accurately, find your fatal flaws and fix them.
NOTE: Most everything in this article relates to business units in larger companies not just startups.
Back in the late 1970s I started out as a structural engineer. The thing we were always obsessed with was finding and fixing fatal flaws in designs of buildings, bridges, dams or any structure. If we missed potential structural fatal flaws, bad things could happen. People could get hurt.
But what is the definition of a fatal flaw for a startup or a business unit within a larger organization?
Enough said… A fatal flaw can end your business. Missed payroll, angry investors, lights out.
2. Usually something you just don’t want to face right now.
It’s so easy to just go day-to-day without really looking close at what is really keeping your business from being everything you want it to be. Many people think they can wait until tomorrow to deal with real problems then… (See number 1 above)
3. Sometimes everyone else sees it but you don’t.
You are so close to your business and its every-day routine struggles and challenges that you just don’t see the real root of your problems. The one thing that might be keeping you back.
4. Makes your business “uninvestible”. Radioactive to Investors.
Investors are generally smart people. Expect them to look very close at your company. It’s better if you find your Fatal Flaw before they do. If you are having a hard time raising money this may be your real problem.
5. The right questions, thoughtfully answered, can identify a fatal flaw.
You can use the right series of question to help identify your potential fatal flaws. But you need to consider each question carefully and answer them truthfully. The truth can sometimes be an eye opener. And not in a good way. See the list of fatal flaw identifying questions in the next section.
6. And… Once you fix it, another one will emerge.
Just because you found a fatal flaw and fixed it does not mean you are done. Many times another fatal will emerge.
What are the questions that can help identify a fatal flaw in your business? Read on for all the critical questions you need to ask yourself. You can CLICK HERE for a handy cheatsheet with all the questions and a few surprises.
1. Does the team have a clear leader? Without a clear leader the team will tend to drift. Collaboration only works up to a point then someone has to make the hard decisions and lead the team.
2. Does the team work well together? What is the history? Did the team just meet a few weeks ago in some co-working space or have they been friends and teammates for many years. A team full of people who have just met may be headed for trouble at the first sign of disagreement or distress.
3. Is the Mentor matched to the prospective business? The most important person on the startup team will be mentor. This key person will guide the company when setting priorities and making many critical decisions. It is important that the mentor have a skill set and experience related to the needs of the company. It’s no use having an agriculture specialist helping your dating ap startup.
4. Does the pitch excite, interest, and motivate people? You will use your five to fifteen word pitch to quickly tell people what your company does. If you don’t see their eyes widen and hear noticeable excitement in their voices then your pitch is not working. You will use your pitch to attract team members and investors. If you are having a hard time with either or both of these groups then it is probably your pitch.
5. Is the team ready to pivot when needed? Startups seldom end up where they started. Along the way there will be many pivots as the business is fine-tuned to match market requirements. If the team is not ready to pivot they may be creating a business that does not have any potential customers.
6. Does the prospective business have a clear moat? What is your competitive advantage? What will keep others from moving into your market space? If somebody can just hear your excellently crafted pitch, then contract with some technology outsourcing company to create a similar product that goes after the same market, then you have a problem. Moats can be locked in customers, proprietary technology, patents, trademarks, or a unique and large user base.
7. Does the business have a reasonable break-even point? It’s never too early to fire up a spreadsheet and determine if your business can make money. How many customers do you actually need to eliminate your cash burn? How much will they pay for your product/service? What are your expected costs? Get it all into a spreadsheet sooner instead of later.
8. Does the business have a clear distribution strategy? I am defining “distribution” here as (1) the way you attract customers, (2) the way you deliver your product/service to them, then (3) how you extract payment. So many times people create great technology that may fit a market need but there is no way to actually attract enough potential paying customers at a reasonable costs so the company can be profitable. If you are spending ten dollars to attract a customer that is eventually worth two dollars to the company you are not going to make it back on the volume. It is essential that you have a clear distribution plan.
9. Are you really a Wantrepreneur? A Wantreprenuer is someone who wants to be and entrepreneur but is not ready to totally devote their selves to the effort. They are more attracted to the concept of entrepreneurship than the long hours, sacrifices, and huge personal risks involved. A Wantrepreneur is not necessarily a bad thing. Many Wantreprenuers can succeed at some level but they will never run a billion-dollar business. They will be lucky if they can hit cash flow positive and employ five people. Wantreprenuers need to scale back their expectations or they will hit an endless series of curious and painful setbacks. Wantreprenuers should forget about attracting investors, highly qualified team members, or a significant market position. Wantrepreneurs should not be surprised if they discover a new market and a more dedicated Entrepreneur puts in the time, makes the sacrifices, and takes the huge personal risk to truly exploits that market to create the billion dollar business.
Once your company is up and running for a few months it’s time to consider the…
RUN Phase FATAL FLAW Identification Question:
1. Has the team listened to customers and created a needed product? Meeting customer needs is what your business should be all about. If you aren’t meeting and exceeding your customer’s requirements your days are numbered.
2. Do you have five (or less) measurable goals guiding everyone in the company? By this point your team has probably grown a bit. It’s very important that everyone is working toward the same goals. And it’s your fault if those goals are not clear to every single person on your team. Why take any chances? Write them down on a large sheet of paper and post them where everyone can see them. One of the first questions I ask company team members is, “what are your goals and priorities?” If everyone has a different answer then I know trouble is brewing. If they have no answer then it’s even a bigger problem. If the CEO doesn’t have an answer then it is time for a new CEO.
3. Is the team matched to your goals? There is a definite skill set require to reach each of your goals. Sometimes that skill set requirement can change as a company grows. You need to constantly use training, education, and potentially team member turnover to be sure you have the right team to achieve the company’s stated goals.
4. Is the team working well together? Is the company a place of harmony most of the time or are team members always arguing? I heard about a company that brought in a marriage counselor to help get harmony back in the office.
5. Are critical deadlines being met? Is there real progress? Running a business is all about deadlines. You are either meeting the deadlines or not. I will frequently check in with startups a few months after I initially talk to them just to see if anything has been accomplished since we last spoke. Nothing (or very little) accomplished points to a fatal flaw that needs to be fixed.
6. Have your business assumptions been accurate? When you started the company you built your concept around a set of business assumption about the market, potential customers, etc… If those assumptions were wrong and the business has not changed course, that’s a fatal flaw warning sign!
7. Are revenue and expense estimates accurate? Those revenue and expense budgets you started with are important tools. How do your actual numbers compare with what you expected? If they are far off, especially in the revenue side, then you need to get to work on this fatal flaw.
8. Have critical team positions been filled? Without the right people your company can’t get anywhere. In your startup phase you identified some critical hires. Were you able to find, recruit and hire those people? If not, how will you ever reach your company’s goals? Why were these key team positions not filled? Is there another way to get the critical tasks done?
You have been running your company for a while. Maybe years. Things seem to be going well since you have identified and fixed your fatal flaws along the way. Then, your phone rings and it’s BigCo on the line and they want to buy your company. Is that good or bad? Here are the…
EXIT Phase FATAL FLAW Identification Questions:
1. Has the business been set up for a clean, simple, smooth exit from day one? When you are close to an exit deal for your company the buyer will usually send a SWAT team of accountants and lawyers to your office to look over your numbers and contracts. Don’t even think about pulling an all-nighter to get this material cleaned up and ready. It won’t work. From day one you need to keep all your agreements (including employee agreement), contracts, and accounting records in an organized way. This may seem like a distraction early on when you are trying to run your business but when the SWAT team shows up and everything is neat and organized they will be very pleased. Your exit will be smooth and easy.
2. Are you negotiating from a position of weakness? The wrong time to exit is when your company is weeks (or even months) away from running out of working capital. When a buyers sees you dire position, your purchase price will collapse. Better to start when you are a year or more from running out of capital. When the story is brighter. Or even better, raise some temporary funds so things don’t look so desperate. Other areas of potential weakness could be unresolved employee contract issues, persistent budgeted expense (cash burn) problems, intellectual property loose ends, or a strong competitor coming into your market space.
3. Have you maximized your value yet? Will locking in a dozen more clients or a few thousand more end users raise your valuation? Many times, I have seen companies going through the selling process too early. In six more months, they could more than double their selling price.
4. Does the buyer see your true value? Try to find out why the buyer really wants to buy your company. It may not be what you think. When you find out exactly why they want your company then you can negotiate from a better position.
5. Are you ready to “walk away” if the deal is not right? The first phase of most company purchase experiences is when the buyer romances you. Generally they will tell you anything to get you to the bargaining table. They will “in principal” agree to everything you ask for. Then when you look at the actual agreement a few things may have changed and they will be full of explanations. If you are not ready to walk away from the deal you may get sucked into a bad deal.
6. Are you really ready to exit the business? This may sound like an odd question but think about it. You just spend the last few years building the business, what are you going to do the day after you sell the business? The answer to this one is important. Even if you will be on some kind of contract after the deal is done you will no longer be calling the shots. The buyer will really be in charge now, no matter what they tell you. If you aren’t ready to call it quits don’t do the deal.
If you think about your company as a bridge, it’s up to you to be sure that bridge is as strong as possible. One fatal flaw can cause your bridge to collapse. Engineers use design tools, techniques, and procedures to identify dangerous structural fatal flaw before they become a problem and fix them.
You can use these questions to tease out and identify your company’s fatal flaws at every stage. In all probability, you may find several fatal flaws. It’s up to you to priorities the ones that could do the most damage to your potential startup, operating business, or division in a larger company… Then fix them.