In addressing the fatal flaws that undermine early-stage companies, Diana Kander dismisses one idea right away.
“They don’t fail because they don’t work hard enough,” she said.
Rather than a lack of effort, Kander said, it’s usually other issues that cause entrepreneurs to fail.
Kander, who is the author of the New York Times bestseller “All In Startup,” a senior fellow at the Kansas City-based Ewing Marion Kauffman Foundation and an assistant professor at the University of Missouri, has seen her share of successes and failures as part of the equity team of nine different businesses.
As Kander explained during a talk last month at MU’s Trulaske College of Business, “wanna-preneurs” don’t take the right approach to business. Wanna-preneurs are innovators who bounce between ideas without generating profits. They often fail, Kander said, for one of few common reasons:
1. They build products rather than find customers.
Kander said some entrepreneurs neglect to truly test whether people will buy their products. She used an example from a “Shark Tank” episode, a product called Elephant Chat. When couples want to address a serious subject, or the “elephant in the room,” they can signal their intentions using Elephant Chat, a sleekly designed box containing a plush purple elephant.
Though Elephant Chat’s creators built a nice-looking product and got good feedback, they failed to consider whether people would buy that product at the desired price point. The inability to find customers after spending considerable time and resources on a product is a problem that plagues many entrepreneurs, Kander said.
2. They don’t solve a real problem.
To illustrate the importance of companies and products that solve problems, Kander used the example of a trip to the hardware store. “I go into Home Depot,” she said, “and I have a leaky sink.”
A crescent wrench might be just the tool to fix that sink, she said. But if the wrench is marketed merely as cheap or durable, and not as the solution to the problem of a leaky sink, customers may not purchase it.
If a product solves a major “migraine” problem rather than a minor “headache” problem, its price becomes elastic, Kander said. In other words, customers are willing to pay a premium for certain products because those products solve their most troublesome problems.
“If somebody created a solution to your migraines,” she said, “you’re much more likely to share that experience than something that doesn’t really solve a problem.”
3. They act as fortune-tellers rather than as detectives.
Wanna-preneurs try to guess what’s going to happen rather than using clues and signals to make informed decisions, Kander said.
“Starting a company should not be a creative writing exercise where you put your best guesses down on paper and hope that they come true,” she said. “Starting a company should be a diligent effort, as if you’re a detective trying to solve a mystery.”
Kander used the case study of Steve Jobs. He tweaked his original idea, a computer that customers could put together, to better respond to what people really wanted, which was an all-in-one computer. “He was the consummate detective,” she said, “always listening and always looking for what people were interested in.”
4. They gamble everything when they should instead make strategic bets.
A successful entrepreneur is not all in until he or she is confident of victory, Kander said. “If you know any professional poker players or actually very successful entrepreneurs, they would tell you that they’re not actually gambling at all but they make really strategic, calculated bets,” she said.
She pointed out that Facebook has generated revenue from ad space since its inception. “Until they could sell the ad space to pay for additional servers, they didn’t expand schools. They allowed sales to dictate how quickly they would expand,” Kander said. “They didn’t just expand wherever they could. They expanded very strategically.”
The company’s series of savvy, small bets didn’t stop there. When Facebook expanded from Harvard, it first went to schools with similar products, like MIT and Stanford. If Facebook could beat competitors in sophisticated environments, Kander said, then the startup figured it was likely to excel in places where it didn’t have any clear competition.
Kander concluded her presentation with an admission: She spoke with such authority on these startup pitfalls because she had encountered all of them in her own entrepreneurial ventures. But, over time, she has learned the importance of interacting with customers early and often.
“Failure hurts so bad, but it doesn’t hurt as bad as regret,” she said. “What I find a lot of entrepreneurs have is a regret that they had’t more opportunity to try this or try that.
“If you start out and commit yourself to a plan where you don’t interact with a customer till six months or a year down the road, or till you’ve spent $100,000, you’re going to find regret. If you instead take the path of the detective and treat each opportunity as a mystery, then you might find a lot of interesting and lucky surprises along the way.”