Oct 272014

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Dr. Earl R. Smith II

Barely one out of ten start-ups survives the first five years. Of the remaining less than twenty percent make it to the tenth year. Understanding the process of starting a business is best something other than a purely intellectual exercise. In an important sense it is one of the biggest challenges facing any entrepreneur. I limit my work with new companies precisely because such fundamental understandings are often lacking. The process of gaining the required insight can often take years – and may, in some cases, never be gained.

After years of working with dozens of entrepreneurs – and starting half a dozen of my own companies – I have developed a screening process which has proven very helpful in identifying those entrepreneurs and start-ups which are most likely to succeed. This has allowed me to concentrate my efforts on the relatively few which have very good chances of succeeding. Here is a quick review of some of the items on my list:

Focus: This is always my first screen when getting to know a start-up team. I look for an imbalance in their understandings of the challenges which they face and pay particular attention to the prioritization of goals and metrics which they have decided on. My attention focuses on the presence or lack of the tendency to develop and implement plans to accomplish the single most important goal during the start-up phase – turning potential clients into paying accounts.

Within the military there is a useful saying – ‘In war, amateurs talk strategy while professionals talk logistics.’ I often encounter CEO-wannabees whose vision of the world and their business seems to be based on a radical overestimation of the importance of their business and a radical underestimation of the indifference of the world towards that business. They spend all their time talking about the strategic importance of what they are doing and almost no time focused on tactical implementation. The logistics of turning potential clients into actual ones is what they should be focusing on. Success in this area demonstrates both the ability of the team to develop and keep clients and the inherent benefits of the company’s value proposition.

Customers and markets: This leads me to my second screen. Here my rule is ‘amateurs have markets and professionals have customers’. I have lost count of the number of times that someone has made a presentation which included a statement like – ‘it’s a twenty bullion dollar business and if we get only 1% of it … ’. My response is always, ‘well come back when you have .000001% of it and we’ll talk.’

The primary objective in any start-up is to get clients from among the population of potential clients and have them pay for whatever the company is offering. If they can’t do that, then the CEO is not running a company – it’s a senior-class project. The fact that they did a Google search and uncovered some estimate of their market is irrelevant. The fact that they have companies – clients – who are running business better established and more successful than theirs and are willing to actually pay for their product or service – is an affirmation of the attractiveness of the company’s value proposition and the strength of the management team. In fact, it is the only measure that really matters.

Anti-humanism: I am always on the lookout for refugees from life who are parading as entrepreneurs. Most often these people have not been able to make it in larger organizations – mostly because they don’t deal with other people very well – and have a strongly anti-social tendency.

There are several characteristics of these people that are worth mentioning. The first is that their commitments are generally worthless. They tend find the fact that there are other people on the planet an irritation and inconvenience. They consider commitments to them are disposable. Second they don’t tend to build real teams. I might find a loosely organized gaggle around a CEO but nothing even approaching an effectively operating team. I have encountered ‘entrepreneurs’ who have assembled very impressive teams and advisory boards which are completely non-functional. When you boil it all down you find a single individual bearing most – if not all – of the burden of getting the company off the ground.

The trick to understanding this phenomenon is that, within the ‘entrepreneur’s’ mind, the company is an intellectual exercise which is inconvenienced by the fact that other humans actually exist – inconvenienced by the fact they might actually have to rely on them to solve the complex challenges that every start-up faces.

Finally, start-ups run by these people tend to be free standing – meaning that they do not seek out and build stable working relationships with better established and more successful companies. If partnerships are established at all they tend to be informal arrangements which are mostly unproductive.

Communication patterns: I pay attention to the patterns of communication which an entrepreneur uses – particularly during my initial interviews with them. Most of the problem types aren’t able to recognize the depth or complexity of issues which their company is facing – or they want to avoid those depths and complexities altogether. If I find myself constantly saying – ‘well, before we move onto that issue, let’s finish our discussion on the last one’ – it is a pretty good indication that this person is approaching our conversation as an intellectual exercise.

Also, I have found over years of working with and studying entrepreneurs – successful ones, that is – that the really good ones are compulsively extensive communicators. They discuss important issues and opportunities with everybody they trust and see as potentially contributing to the possibility of success. The important goal is focusing all available resources on meeting the fundamental challenges that a new company faces – the foremost of which is the establishment of a growing customer base.

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