Stale-dated startups & misestimation of effort

Startups seem to go stale in less than five years. By then the best and brightest have departed for better opportunities. The underlying reason for going stale is misestimating the effort required to succeed. This is the same reason that most projects go stale after 18 months.

There is a interesting relationship between success and the correct estimation of the effort required. I think that’s because success has more to do with morale than money. Money is a fundamental requirement, but employee morale is the driving force that achieves success in spite of all obstacles. Update: Employee morale can stay high for many years if the risks and effort have been correctly estimated.

I have been involved in more than a dozen startups and the ones that made it big had correctly assessed the effort and time required. Using Sensormatic Electronics as an example, Ron Assaf and the other founders were prepared for the long years of work required to bring about a paradigm shift in the retail sales environment.

Recently, a friend told me about a new startup with great new technology that appears to be falling apart, even as success seems to be within sight. This company is five years old and management doesn’t seem to have been prepared for the effort needed to cause a paradigm shift in the infrastructure that their new technology affects. On the verge of success, they have fallen into the usual mode of assigning blame to those working hardest and promoting incompetents in hopes of effecting a change.

How can there be such an egregious oversight? A business plan should cover the business opportunity, initial and long-term markets, a five-year plan for company growth, financing, and the products and technology necessary for success. Even with a detailed plan, assumptions are made as to the time it will take to establish a market base and become profitable. When the area being estimated is not well understood, huge errors can occur.

Five years is a long time for a company to operate without sales. It can be a long time even when sales are satisfactory.

The longer a company is in startup mode, the more opportunities for failure can appear. I was in one startup that achieved every target for five years and with yearly sales of 40 million, fell prey to executive insanity. The company shed 18 founding members in about a year and ground to a halt.

If the success of a new company depends on achieving a paradigm shift in some external network, the Technology Adoption Life Cycle applies. I would estimate that changing a commercial or government infrastructure requires from ten to a hundred times more effort than creating a company and products. It is very easy to underestimate the difficulty of accomplishing a paradigm shift unless you have participated in one.

Thus one can have a splendid new product with no place to deploy it and a company and stockholders that have run out of patience and money. This is a tragic moment, because the technical people who designed the product will leave with all of their hard-earned experience and find an opportunity to create anew. Outside of selling the technology and patents to a larger company, there is no way for the investors to recoup their investments.

I’m afraid that is the best that my friend and the other investors in the previously mentioned startup can hope for. I have been in faltering startups where that wasn’t an option. You take what you can salvage and move on.

I am sure some of you have been there and will have additional comments to add. If you haven’t, maybe this post will help you avoid such in the future.

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