By Robert Lee Hamady
To become an entrepreneur, you need to be optimistic. To succeed as an entrepreneur, your optimism better be warranted. To succeed, you want to be realistic.
Right now, thousands of entrepreneurs are filling out online planning models to launch their startups. They will create impressive plans. They will then start up. And they will fail.
Will you be one of them?
Take a wild mushroom hunter’s advice. It’s not enough to know the good mushrooms — or the good planning methods. If you want to survive, you’ve got to know the ways you can be deceived, the ways that can kill you.
That said, here are the most common planning mistakes that can lead you to the startup boneyard.
The Unrealistic Planner
Imagine that you’re sitting with a friend in Washington, DC. You’re both observing a man strolling by. In his fifties with a full head of prematurely white hair, he’s wearing a loose tie and open sport jacket, taking in the scene as he strolls. Your friend says, “If you had to bet, would you say that guy’s a psychiatrist or a lawyer?” What do you answer? More importantly before you read on, what’s your reasoning?
Almost everyone makes their decision based on the man’s appearance and behavior. What they fail to take into account are statistics: lawyers far outnumber psychiatrists. In Washington DC, the ratio is 80 to 1.
So why are statistics so frequently ignored when they are the better predictors? Because the human brain is biased toward empirical evidence and against statistics.
Here are two statistics to test out your bias.
A Dow Jones study found that early-stage entrepreneurs assessed their chance of success at over 80 percent.
The U.S. Census found that the five-year survival rate of startups launched between 1977 and 2000 was less than 50 percent.
Do you, as a would-be entrepreneur, look at those numbers and shrug? Statistics, you say, may be a better predictor, but the experience of others doesn’t pertain to me. And failures are depressing. To be an entrepreneur, you’ve got to be optimistic, right?
Wrong. To become an entrepreneur, you need to be optimistic. To succeed as an entrepreneur, your optimism better be warranted. To succeed, you want to be realistic.
How do you become realistic?
First, fully appreciate the consequences of being unrealistic. Look again at those two percentages. Do you see the causal connection? Entrepreneurs who have a bias towards their own success often overestimate their projected revenue, underestimate their projected expenses, overlook problems, and run out of cash.
Second, become aware of your personal bias toward success. How do you do that? By realizing that not everyone would be as optimistic as you are in assessing the risks and rewards of your startup. Others may be more cautious by nature, more inclined to see obstacles to success and to find reasons not to risk their money. They may be pessimistic where you are optimistic. Who is being realistic? If less than 50% of startups survive 5 years (and statistics are the better predictor), the pessimistic assessment has to be respected.
Third, when you’re planning, take off the entrepreneur’s hat. Give up the wanting to create and the control of the creator. Rather, be the investor, because that’s what you are. Or take on the role of a consultant hired to do a feasibility study for your startup. As such, you are no longer doing step-one-step-two planning for the business you’ve decided to start. Your planning now includes whether to start the business at all. Assume that you have no stake in the outcome, no dog in the fight. You just want to do a clear-eyed assessment of the risks and rewards for the startup. Compile and examine the data with a narrowed eye. Challenge the assumptions underlying the projected revenue numbers and expenses. Find the reasons why a pessimist wouldn’t risk his or her time or money. Then, decide whether to move forward.
The Non-Credible Plan
You’ve selected a strong planning model. You’ve followed the instructions and written your executive summary. You’ve done the research and filled in the sections on size of market, trends and competition. You’ve created an organizational and operations chart. You’ve projected out your quarterly profit-and–loss statements two years with a balance sheet and a cash flow chart. You’ve worked out your marketing plan. Everything important has been addressed. The plan would get an A in a college business course.
You take your plan to two banks. Though your credit rating is 806, the banks aren’t lending to you.
So you find some interested investors and translate your plan into a presentation for them. Though they say they’re impressed, they don’t invest.
What’s wrong? Something is missing from the plan.
That something is believability.
And the usual suspects are your revenue projections. Let's take a look. Your general market research is thorough, your marketing plan makes sense, and you've projected revenue numbers that should make your startup profitable. Now, what assumption are you making? Are you saying that your excellent general research and marketing plan lead to those revenue numbers? I wouldn't bet money on it. And neither should you. The divide leading to your revenue is too wide to believe any numbers. If you bet on it, you're betting on a big leap of faith.
The gap between your planning and your projected revenue can be greatly narrowed by specific research into your audience. Such primary market research includes surveys, focus groups, field tests, observations and interviews. Pausing now to do primary market research probably has the same appeal as pausing for major surgery. But if you want to know how much you’ll be selling, go to your audience and find out how much they’ll be buying.
You don’t know how to conduct good research? Hire a market researcher. Too expensive? Then learn how to conduct it yourself. Your research should be objective, thorough and goal-oriented. Flawed research may be worse than none. You will probably come back with data such as 4 percent of the 300 people contacted say they would buy your handbags online. You may come back with letters of intent to contract for your cleaning service. If you’re open to what your audience wants and prefers, your research data may point you to a different product name, or different product marketing, or even a different audience or product.
Suppose your research data supports weak revenue projections. You may have saved yourself a losing startup. Or suppose your research supports strong revenue projections, but your actual revenues after startup fall short of your projected numbers. You now have the confidence to make adjustments while you stay the course. That’s what comes from a plan that’s believable.
The No-Commitment Process
You’ve left a high-paying job to start something you’re passionate about: a not-for-profit summer school for disadvantaged children. You hire the best education-planning consultant and, together, you develop a curriculum with physical activities and measurable learning goals. While the plan is being developed you hire staff and enroll students for the coming summer. You now distribute your plan to your teachers, your administrator and some involved parents. After some contentious discussion and considerable disagreement about the curriculum and teacher accountability, the plan is consigned to a file drawer.
You’re frustrated, but you haven’t become successful by dodging responsibility. After reflection and research, you form a planning committee of your teachers, administrator, parents and yourself, and you hire a facilitator to guide your committee to set objectives, strategies, and individual action plans. The goal of everyone now shifts: it is to construct; rather than to judge. Several contentious meetings later, a plan is agreed upon. A comparison of the two plans reveals no real difference in content. The only difference—in this case, the difference between success and failure—is in how the two plans were created.
The participation of your key people in the planning process is not an easy way to plan, but it is the better way—and sometimes the only way—to achieve your mission. Why is this? Some of the reasons—feeling important and included, understanding and working out differences, team-building—are obvious. Less obvious is a feeling beyond acceptance. It is commitment.
To appreciate commitment, imagine that your planning committee is discussing before-and-after reading comprehension goals. The question is whether a 20% improvement on a standardized test can be achieved.
“I’ll aim for 20%,” the teacher says.
“What about 16%,” you ask?
“Yes, if they are motivated.”
“What about 12%?”
“I know I can do that,” she says.
“That’s it, then.”
That’s her number. And that’s commitment.
And what about your own commitment? Are you thinking that because your startup is a one-person operation, your own participation can be taken for granted? Think again. The quality of your participation in your planning can vary from detached to committed. Are you going through the motions of planning as you follow the instructions of your planning model? Or are you injecting yourself into the planning by, say, looking at those revenue projections and telling yourself: Now’s the time. Change them. Or do them. You’ll know that you’re committed if you’re no longer hoping to achieve your objectives: rather, you’re willing them.
Corporate strategist Merritt Kastens once said of planning, “You have to think, you have to be honest with yourself, you have to make up your mind—and then you have to do something.” Planning sounds simple. Like golf sounds simple. But easy? Not if you’re planning to win.