Four mistakes that could kill your start-up

23:30, Dec 02 2012

Launching your own small business can be littered with traps that trip up a new enterprise before it has a chance to establish a solid footing. Here's four tips from expert start-up advisors to how to avoid them.

1. Research your market

Validate your market and understand who your consumer will be, says Andy Hamilton, CEO of the Icehouse business incubator.

''You need to undertake up to 100 interviews with market participants to explore the real pain point that exists with customers.

''Nearly all start-up entrepreneurs jump into starting, before ensuring it is worth the hard work, because it just might be that it is a great idea with bad timing or bad economics or is just not valued by customers.''

Failure to do that homework leads to chasing your tail, he says.

''It costs time, money and ultimately your business while you search for the market you can build a business around.''

2. Don't build first and sell second

While it's natural to want to build and perfect your product before you sell it, Hamilton says, it's better if you can share it before you build. ''What you learn from legends like [Navman founder] Peter Maire is they'll conceptualise and get a customer commitment that gives them confidence the market wants it. Even better if you can get cash up front.''

By building first you waste time on the product instead of the market - and you may be building something that is not valued, Hamilton says.

Nick Churchouse, venture manager of Wellington-based incubator, Creative HQ, agrees.

''Business starts and finishes with customers. Knowing who that customer is and what matters to them is critical. The product should be defined by the market and not the other way around.''

3. Build a killer team

Kiwis have an independent streak that pushes them to do everything themselves, says Hamilton. "If there are other people around who have been there and done it, entrepreneurs should grab that experience.

''One person can't have all the skills required in market validation, product development, sales, marketing, finance, administration ... the list goes on. Build a killer team and you have a chance."

Churchouse says along with resolve and courage start-up founders need to be self-aware and know their limits. ''Every startup success should see a business growing faster than the person who runs it. Too many founders hang on to their business and curtail its growth in the process.''

That doesn't necessarily mean starting a business with the intention of selling, but can mean knowing when to take on a CEO or key team members who can take you to the next level.

''A start-up founding team does everything, fighting lean to earn some early wins, build the right sales channels and partnerships, develop the product and deliver it into the market. That takes a certain set of skills," Chruchouse says. ''As the momentum builds, the right person to take the company onward is not the founder. Some manage the step up, but many founders find themselves embroiled in doing stuff they never wanted to do.''

4. Running out of cash

It might seem obvious but running out of cash is a big problem for start-ups.

Cash comes from customers paying you money to deliver value; that is the lifeblood of business, Hamilton says. Without that cash start-ups must rely on funds from friends, family, co-founders and investors. If you can't get customer money, you then need to get it from other sources like friends and family, co-founders and investors.

''Investors will always want to know how much money the start-up needs to do what it is promising. If an entrepreneur says they need $300,000 to do three things, and they run out of

money and only do two things, what comes next generally isn't good," Hamilton says.

''They will either refuse to invest more money or they will invest again but at a lower valuation and will take more of your business. That is pretty fair if you don't do what you said you were going to do with their money.''

Churchouse says too many start-ups underestimate how long it takes for money to flow back to them.

''Deals can take forever to come off, and then the cash takes months to arrive. Investment is always a long play, and too many startups wait till they are out of cash before looking for more.

''The best start-up teams know where the cash is coming from before they need it.''