Share

Sound start-up advice

The Founder’s Dilemmas: Anticipating and avoiding the Pitfalls that can sink a Startup, by Noam Wasserman

EVERY economy needs a steady flow of start-ups to grow and create jobs. Estimates vary on the value to the country of small business, but there is strong support for the idea that small businesses create more jobs than larger companies. And behemoths such as Microsoft, Facebook and Google were once start-ups.

The problem is that out of seven start-ups, only two will be operating a year later. That is a 71% failure rate. Imagine if close to all businesses that started, succeeded and went on to employ only five people. In a short time our “national scar,” unemployment, would be on the way down and prosperity on the way up.

Naom Wasserman has assembled superb data from his research on over 10 000 new businesses that were set to grow large. His research focused exclusively on businesses that were intended to grow large, not on lifestyle businesses intended only to keep the founder comfortable. He also accessed a wide range of reliable data from other sources to formulate this book.

Epic fail because of poor judgement

What makes Wasserman’s book so unusual is his focus on a fact other research overlooks. More business start-ups fail because of internal problems caused by the founders’ errors of judgement rather than by external causes. If founders in the initial stages could make better decisions, many more businesses would be saved, and more would thrive.

Wasserman has identified a clear a set of dilemmas facing founders. Choices have to be made between alternatives, with one choice obviously better than another. All come with significant upsides and downsides. Solved appropriately, the founders will survive to face the next dilemma. Fail, and there could be no next dilemma.

“This book’s central message is that these founding decisions need to be made by design, not by default,” says Wasserman.

There are four primary founding decisions that make up the content of the book. Each dilemma is analysed, and its implications made clear. This clarity will help you and those you care about make better, safer decisions.

At the “Pre-founding” stage, there is a set of dilemmas regarding when to launch the start-up. There are at least three major areas of considerations. If you do not have enough money, it may be wise to work for someone else until you do. Perhaps you should borrow money and start right now? If you delay the start of the business, will you have missed the wave?

There is no one right answer to this question, and it requires the consideration of a number of factors. Are you able to ensure the security of your family (if you are responsible for one)?

If you have savings or a retrenchment package, will that suffice? Does your life partner earn sufficient to support the family? If he or she does, are they completely committed to your success to pay their part while you play yours? If not, the strain of founding the business may exhaust your strength and shatter your relationship. Are you locked in the golden handcuffs of a secure job?

These and many more profound and difficult questions need probing and honest answers.     

Once you have made the decision to start a business, you face the “Founding Team Dilemmas” . Are you able to start a business alone or should you have others doing this with you? There are always skills that are required, but cannot reside in one person. Then there may be a need to work with another person who shares your commitment to the success of the venture.

The need to work with others raises the “Relationship Dilemma". Will the business work best if you team up with friends, family, acquaintances or strangers? Should you seek someone you have actually worked with before?

The “Role Dilemma” follows from this. What are the positions each one of you should assume in the new business? How should each person be rewarded for their contribution to the venture?

Don't give away half of nothing

If you reward with more equity than is deserved, you cannot take it back when this becomes apparent. “Reward Dilemmas” are especially dangerous at the beginning of a business when there is nothing tangible. Giving away half of nothing but a promise is easy. However, when the business makes money, paying dividends to someone who never deserved it takes on a different hue. Few mistakes sour relationships more profoundly.

Beyond the dilemmas of the founding team are the “Investor Dilemmas”. Most businesses require funding to take off in a meaningful way.

You can turn to family and friends, “angel” investors, or venture capitalists. Accessing each of these sources becomes progressively harder, and each poses its dilemmas.

For example, when taking money from your pensioned parents, you do this believing you will succeed. Five out of of seven businesses never do, causing great harm to people close to you. Borrowing from family and friends is best when it is a gift that comes with love, not an investment.

Angel investors tend not to be professional investors. They are often people who have money and are prepared to “take a punt” on what looks like a “good idea” in exchange for equity and a high return. As with all investors, you will be required give up a portion of your business to the investor in exchange for the support.

At every stage there are dilemmas that if not confronted and addressed thoughtfully, will do more damage to the fledgling business than ones that come from external forces.

Self-inflicted wounds can be avoided. Forewarned is forearmed. Read Wasserman’s profound book.
 
Readability:       Light ---+- Serious
Insights:           High +---- Low
Practical:           High -+--- Low

*Ian Mann of Gateways consults internationally on leadership and strategy and is the author of Strategy that Works. Views expressed are his own.

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.94
-0.9%
Rand - Pound
24.10
-0.9%
Rand - Euro
20.59
-0.7%
Rand - Aus dollar
12.42
-0.9%
Rand - Yen
0.13
-0.8%
Platinum
915.75
-0.8%
Palladium
1,028.36
-3.5%
Gold
2,159.96
+0.2%
Silver
25.03
-0.6%
Brent Crude
85.34
-0.1%
Top 40
66,252
0.0%
All Share
72,431
0.0%
Resource 10
53,317
0.0%
Industrial 25
100,473
0.0%
Financial 15
16,622
0.0%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders