By Craig Everett
Every few months like clockwork, the media reports how the Silicon Valley tech boom is slowing (or growing, or stable). It’s possible that the preoccupation with the state of Silicon Valley is because the region serves as a barometer of the nation’s “tech health.” But more likely, it reflects our general fascination with the creative, entrepreneurial, fast-growing dynamic of the local tech startup community.
While much has been written about the VC and funding of these local businesses, there is scant attention paid to the unique challenges faced by tech startups – not from a market standpoint, but from that of a small business owner. Like other small businesses, tech startups must address the usual barriers to success – over-taxation, regulatory hurdles, even state-mandated wage increases. But for startups, there are certain problems that may spell the difference between success and closing the doors.
May is the month in which our federal and state governments recognize small businesses. In the spirit of championing their successes, here are five small business pitfalls that tech startups should heed:
1. Failing to validate market demand to maintain investor interest. As entrepreneurs bring their vision and business plan to fruition, there is often a flurry of interest by potential investors in the “big idea.” This is always an exciting time for a business owner, who feels this interest represents validation. But it also may simply represent an investor’s desire to invest early in hopes of achieving big yields, or an investor’s desire to diversify his/her portfolio. The business owner who neglects to keep investors focused on and hungry for the growing market demand for the product or service is operating at great risk of having future funding dry up.
2. Commitment to culture while neglecting execution. A recent Wall Street Journal story questioned whether the decreased local demand for pool tables reflected a slowing of the tech segment. Tongue-in-check, yes…but there are elements of truth to the old adage that tech culture trumps business operation. By all means, stay committed to your unique culture, whether that be via pool tables, Red Bull, group karaoke or a supportive work environment. But ignore execution at your own risk. Culture may endear you to employees, but precise execution on a business plan is critical to short- and long-term success.
3. Falling in love with business model and not being nimble to market factors. Every small business owner loves his product or service, and with good reason. Starting a business is a lot like falling in love. But it also carries the same risk: a myopic view that doesn’t fully contemplate flaws, risks and the need for contingency plans. Evolution is linked to success. Netflix is perhaps the best known example of a company embracing change. Launched in 1997 as a mail DVD service, Netflix recognized that it had to disrupt its own model to survive. After transitioning to an online distribution model, the company boasts 75 million subscribers, which speaks to the success of this strategy.
4. “We’re growing!” or ramping up too fast. One of the most thrilling realizations by a business owner is that business pressures are exceeding available resources. That equals success, right? Well, maybe – or maybe not. Tech companies are uniquely vulnerable in believing that early demand, often driven by novelty, equals long-term demand — and hiring too quickly. For every early leader in the tech field, there are numerous hungry followers nipping at your heels, often with a product, built on your hard-earned groundwork, offered for less. Rather than hire employees, are there other options that you can consider that will allow you to concentrate your core resources on your mission? Can you use contractors for a short time instead, until you reach a time of critical mass when revenues are stable?
5. Quitting too early, or conversely, quitting too late. There comes a time when each business owner questions whether they should continue. Being an entrepreneur in the tech field is not for the timid. Stay the course, dig in, and work to succeed! Maybe your business plan needs adapting, or maybe you can consider alternatives like selling or partnering with an established company. But keep in your hip pocket the Silicon Valley mantra of, “Fail Fast, Fail Cheap.” When it’s crystal clear your plan won’t work – say, you’ve heard it from numerous external stakeholders, including your investors – and you don’t care anymore, do everyone a favor and stop. Lots of companies don’t quit as soon as they should, and the result can be a long trail of lost resources, unhappy employees, and desperation.
Being aware of these unique considerations will help level the entrepreneurial playing field and increase the odds of success for Silicon Valley tech small businesses.
Craig R. Everett, PhD, is an assistant professor of finance at Pepperdine University Graziadio School of Business and Management and director of the Pepperdine Private Capital Markets Project.