Startup: Top 7 Red Flags In Your Conversations

Running a startup is challenging. Over 90% of startups fail. However, some failures can be mitigated if the owners don’t delude themselves for too long.

It was 10 PM. The office was illuminated only by the dim light of an open laptop. Anna once again looked at the message from a key customer — after many months of negotiations, he announced that the purchase of the product would be postponed for another year.

It was the most important deal that had been negotiated! They were to receive the money for the license in advance. She hid her face in her hands.

The company’s account was practically empty. The startup had a working capital loan of $400,000, and in a week’s time, it would be necessary to pay the employees’ salaries and another installment of the bank loan. She did not have any savings herself; they had not received any remuneration for 5 months.

She couldn’t think. She felt fear and shame. She was completely lost. How could she have let this happen?

Running a startup is challenging. Over 90% of startups fail. However, some failures can be mitigated if the owners don’t delude themselves for too long. Here are the top 7 statements that you may notice in your internal conversations that should be a warning sign for you.

#7 “Lots of people want to talk to us.”

I am still surprised at how many startups confuse these three questions:

• Are customers interested in your product?
• Do customers want to pay for it now?
• Are the customers using it happy?

I have experienced two times when a product that seemed to open every door and generate a huge number of sales opportunities failed. In the first case, customers were interested in a product connected with new GDPR regulations, but it was not enough to purchase it right now. In the second, the buyers and IT departments did not agree to implement the solution that the end-users cared about.

Be careful. Pleasant meetings with “important people,” long conversations, and words of support mean nothing. Growing sales, even small (not a “prospect of sales”) together with growing customer happiness are the ultimate, bias-free indicators of the progress you are making.

#6 “We have almost no costs, just our time.”

As a person involved in a startup, learn to value your time. After all, the same hours could be invested by working full-time, working on another initiative, pursuing your passions, or spending time with your family.

I recommend that you treat each hour spent on your own business as an investment and save it on the cost side. For example, if your hourly wage is $100, 180 hours is $ 18,000, which you invest in your business each month.

Many startups don’t fail just because owners work below the rates they could get in the market. Don’t be one of them. Do you have evidence that the situation will change? If not, is your ego worth it?

#5 “In theory, we’ve earned a lot.”

If there is no investor with a huge bag of money behind your back, from the very beginning, you must realize that some customers may have a standard payment period of 90 days. Others will far exceed agreed deadlines or not pay at all. It’s common and expected.

When this happens, how are you going to pay your bills? Can you mitigate these risks by, for example, using a subscription model, asking for advance payments, or diversifying your sources of income?

Take care of your cash flow from the very beginning. Otherwise, you can have the best product on the market and still go bankrupt. You need cash to survive, not its promise.

#4 “We have no competition in the market.”

If you think you have a brilliant product and you have no competition, you are 99% wrong. There are three possible explanations:

• It’s not important. At the heart of any successful product that has remained in the market is solving an urgent, pressing problem. Are you sure your solution isn’t just “nice to have”? Will the customer be ready to pay for it? What’s the easiest way to confirm this? Do you really need to build a solution first?
• Technology will not work as expected. Has anyone tried to solve the same problem in the past? Why did they fail? Are you confident that you will be able to build a solution using the selected technology?
• You haven’t done your homework. Competition already exists; maybe it offers a completely different product, solving the same problem? For example, if you created a brilliant data analysis tool, maybe Microsoft Excel is “good enough”?

To survive in the marketplace, you need to stand out from the crowd. Competing with price should be treated as a last resort. My favorite approach is to make the competition irrelevant.

You can learn more about the business models here.

#3 “We need one more feature.”

Many startups cut themselves off from the world and spend months refining the product without showing it to customers. Meanwhile, customer feedback is gold. Find the courage to reach out to customers as soon as possible and get their opinion.

Use MVPs to quickly test your essential assumption and get maximum validated learning with minimal effort.

Stop Wasting Money. MVP Is Just an Experiment.

Consider:

1. Concierge MVP — Help users accomplish their goals as a means of validating whether or not they have a need for what you’re offering. In software, product drawings or wireframe mockups are all you need. This is fully transparent to the customer.
2. Wizard of Oz MVP — Create the illusion of a working product, for example, by performing certain actions manually, behind the scenes. This is one of the fastest and most effective ways to test hypotheses as to whether the proposed features (e.g., generating a PDF document) will create value for customers.
3. Landing page MVP — Create a web page describing the product and encourage visitors to take action, for example, download a demo or contact. After taking action, thank them and let them know you’re working on a solution, and let them know when it’s available. A landing page MVP can help you determine if you’ll be able to get what you need to achieve product-market fit.

#2 “We need more money to increase sales.”

It may seem hard to get steady growth in business. However, according to the book Lean Startup by Eric Ries, there are four primary ways past customers drive sustainable growth:

• Word of mouth — Existing customers recommend your product to others. The holy grail of sales, yet the most difficult to apply. A common solution is to reward the recommending and/or recommended person. For example, Revault, Uber, and Dropbox.
• A side effect of using the product — Customers advertise your product simply by using it, e.g., Nike logo on a T-shirt, Gmail, Outlook for Mobile, Trello, Miro.
• Paid ads — Advertisements in the search network (e.g. Google Ads) and on portals such as LinkedIn or Facebook. It is necessary to track the effectiveness of such ads.
• Repeat Use — Many products require recurring payments. Great examples are Spotify, Netflix, and YouTube Premium subscriptions. It is often a good idea to propose to offer higher packages/versions of the same product (e.g., Microsoft 365 E1 /Microsoft 365 E3, Google Drive additional storage).

In my opinion, startups can use paid advertising to increase sales, but they can’t only rely on it, especially at the beginning. If your customers are satisfied, they will naturally recommend your solution to others. Does the data show this?

You can learn more about the engines of growth here.

#1 “We have invested too much to quit.”

Sunk costs fallacy is the worst trap you can fall into. This is when you have invested so much that despite your losses, you cannot let go.

I was there a few years ago and have one piece of advice. Forget about the past. This money, energy, and time are gone. Use your brain instead of your heart and move on!

Final thoughts

Many failures are not for lack of trying. On the contrary, you can make no mistake. Consider and exhaust every option available to you and fail anyway. It’s part of the business. When you invest your time, energy, and money, you should be ready for it.

It is a good strategy to review your plan periodically and make decisions early enough to limit losses. The independent opinion of people who are not emotionally involved can be helpful.

If you were successful, congratulations. But if it turns out that the idea did not work, what is your Plan B?