The Path To Disaster: A Startup Is Not A Small Version of A Big Company[i]^,[ii]

In my previous article I promised that we would spend the balance of 2012, and probably a substantial portion of 2013, going through The Startup Owner’s Manual – a recently published book by Steve Blank and Bob Dorf[iii].

Chapter 1 begins with a brief recap of Webvan’s history[iv] – Webvan was a darling of the dotcom era. It promised to revolutionize the $450 billion U.S. retail grocery business. To do this it planned to build and execute a “killer app” that entailed online ordering and same-day delivery from its warehouses direct to its customers homes. Forget driving to the grocery store. Forget waiting in long lines at checkout. Forget arriving at the grocery store only to realize they have run out of an item on your shopping list.

Sounds good, right?

Webvan was founded in 1996. It went through an initial public offering on 5 November 1999 and started trading on the NASDAQ under the ticker WBVN. The company went bankrupt in 2001. In the process it “raised an astonishing $1.2 billion in start-up capital from the offering and other sources such as venture capitalists, putting it in a league with Amazon.com.”[v]

So where do startups like Webvan go wrong?

There is an important difference between a startup and a big company. Presumably, in a big company customers are already known, the product features that matter to these customers is already known, how much they will pay for the new product or service has already been established, and the market opportunity has already been sized and is well understood. In a big company the business model is already known, and most activities are designed to execute adetailed business plan. In contrast, a startup begins with no customers, no real understanding of the features customers need, no idea what customers will be willing to pay for the product, and no knowledge of the business model that will be most suited to creating, delivering and extracting value.

Steve and Bob delve deep into “The 9 Deadly Sins of The New Product Introduction Model.”

1. Assuming “I Know What The Customer Wants” – a startup begins with a set of guesses or hypotheses about what its “customers” want. Such guesses are not facts till they have been proven by speaking with customers willing to pay for the product once it is available.
2. The “I know What Features To Build Flaw” – assuming one knows what one’s customers want leads to the belief that one knows that features to build into one’s product. Webvan realized too late that the product it created did not entice grocery shoppers to abandon their already established grocery shopping habits in large enough numbers to keep it in business. The few that did gave it highly positive reviews, but there were not enough such customers to keep it from failing.
3. Focus on Launch Date–an immovable product launch date can lead to a situation in which the startup becomes focused on the wrong things. The startup hurtles towards the launch date even if it does not yet know its customers, or how to educate them about its product. Also, this becomes a milestone by which the startup’s investors will judge the performance of their investment.
4. Emphasis on Execution Instead of Hypotheses, Testing, Learning and Iteration –the emphasis on getting things done at a startup can lead employees to focus on execution rather than searching for answers to the guesses that the startup is operating under. Hypotheses have to be tested, and tested again. Executing on untested hypothesis is a “going-out-of-business strategy.”
5. Traditional Business Plans Presume No Trial and No Errors – A business plan offers the great comfort of presumed certainty. The reality of a startup’s existence is one of acute uncertainty. That can be very unsettling. It is important for a startup’s founders, investors, employees, and board of directors to avoid the seduction that accompanies reliance on business plans, and the management tools that characterize the experience of large companies with known customers and well-established business models. Results of experimentation and validation tests should matter more than milestones.
6. Confusing Traditional Job Titles with What A Startup Needs To Accomplish – the traits that an individual needs in order to succeed in the environment of a startup differ significantly from those that lead to success in a large company with a known business model, a fixed business plan, known customers, and a known market. In contrast, to succeed in the startup environment an individual needs to be comfortable with chaos, flux, and “operating without a map”. The worst thing that could happen for a startup is for employees to default to behaving as they would if they were working in a large company.
7. Sales and Marketing Execute to a Plan – sales and marketing can become too focused on executing to a plan rather than learning the identity of a startup’s customers and gaining knowledge about what will spur those customers to engage in revenue generating activities. Consider a scenario in which a startup has gained “hundreds of thousands of customers” but only a tiny fraction of those customers actually make a purchase, and to make things worse a vast majority of completed purchases are made by a really really small number of repeat buyers. A focus on the “hundreds of thousands of customers” might camouflage the startup’s dire need to determine what steps it needs to take in order to dramatically increase the number of customers that actually make a purchase. This is what happened in Webvan’s case.
8. Presumption of Success Leads to Premature Scaling – executing to a business plan often leads to premature scaling, even when the reality might call for the startup to hit the brakes. Expanding overhead costs before the revenue to support such costs materializes is the shortest path to disaster for a startup. Hiring, and infrastructure expansion should only happen after sales and marketing have become predictable, repeatable, and scalable processes.
9. Management by Crisis Leads to a Death Spiral – the accumulation of all these mistakes leads to the inevitable demise of the startup that makes the mistake of operating as if it is merely a small version of a big company. Peapod and Tesco started pursuing the same opportunity as Webvan at about the same time as Webvan. They are successful, growing and profitable today.

Avoid these 9 mistakes and you’ll improve your startup’s odds of success.

Let’s talk again in two weeks. On deck? Contemplations about The Path to the Epiphany: The Customer Development Model – chapter 2 in The Startup Owner’s Manual.