While working with early stage startups, more often than not the founders explain how their venture has some special characteristic. This typically suggests that they do not have to worry about basic constraints that every other start-up has to overcome.
Ultimately, however, after a year or two, the company has either flopped belly-up, or the founders have learned the harsh knowledge that the basic rules of business also apply to them.
Basic Rules of Gravity
It is actually quite simple for a company to succeed. The business needs to have something to sell; it needs to have customers to buy what it sells; and in the long run, the company has to be able to generate more money from sales than it took to produce what the company currently offers.
I call these three conditions presented here: the gravity rules of business—they apply to every company.
Almost all of us agree on the validity of the rules, if they are presented on a general and abstract level. But we — myself included — can sometimes get lost when it comes time to apply these rules in a practical business situation.
There are some very common misconceptions in understanding the rules.
The classical one is the belief that the technology of the company is so great that there is no need to find customers or develop a profitable earning logic.
The reliance on the technology alone has been presented for so long as the main problem of Finnish start-ups that one would expect it not to be a problem anymore. But I am still often facing variations of the symptom. For instance, many gaming companies think that their game concept will be so great that nothing else than completing it is needed for a success story.
Another classical misconception is that the offering concept is so unique that company does not have competition. But, if there is no competition, there are no customers either.
As the importance of customers and sales has become evident for an increasing number of founders, a new misconception field has emerged.
There are nowadays start-ups that think that they can pass the pains of early-stage business easily, because they have secured their first customer or their first big deal. For those companies, it is important to remember: “It is the first million that is the hardest, not the first hundred thousand.”
One or two big customers are seldom sufficient to provide a foundation for a profitable business. And when they are, the customer related risks are usually very high. Often also, the first piloting customer of a start-up does not continue buying from the company after the initial project. It goes to its traditional mainstream supplier to buy the production class version of the thing delivered.
As the importance of financing has gained increasing attention, there are also a group of start-ups believing that securing a quarter of a million or sometimes even a million of external financing secures their success. But money that doesn’t come from buying customers can only keep a business afloat for a little more than a very limited period.
No Secret Formula
There is also a smaller group of companies believing that they can circumvent the basic rules of business by just patenting their invention. However, business models based on licensing patents are very demanding. In practice, license fees are very low, if the licensor does not have significant revenues evidencing the value of the patents.
All in all, in starting up businesses, there is no secret formula to success. You cannot circumvent the rules of gravity. You have to sell, you have to have competitive offering, and you cannot buy your way to the final destination.