Why should an aspiring entrepreneur be concerned about passion?What kind of startup problems are caused by misdirected enthusi-asm? Among a range of impacts, the most common negative conse-quences fall into six major categories.
New entrepreneurs often struggle to find the best fit between whatthey personally bring to the table (strengths, weaknesses, needs, andhopes) and what the new business requires. The more passionate thefounder, the more likely he or she will drift toward one of two ex-tremes. At one end are founders who focus only on what they love todo, thereby neglecting other important areas of the business. In thisscenario, the entrepreneur’s passion becomes an end in itself, ratherthan something that fuels a higher business purpose.
He or she con-fuses positive emotion with progress, and “feeling good” becomes themoment-by-moment measure of success. At the other extreme arefounders who try to do it all, taking on roles that don’t play to theirstrengths, spreading themselves too thin and refusing to let otherstake up the slack. In this case, new business owners become overex-tended and overwhelmed while the startup challenge grows in com-plexity, urgency, and scope.
I remember a conversation with Mark Williams in early 2006, notlong after he raised his initial funding for his idea to create learningproducts for the Apple iPod. “I’m going way too fast,” he told me, “andI’m going nowhere at all.” Mark was working at breakneck speed witha couple of software developers to design and build Modality’s firstproduct prototypes.
The work was obsessive but clunky—one stepforward, two steps back. He was frequently traveling to New York andPhiladelphia to wrestle with publishers over licensing deals and toCalifornia to meet with key Apple representatives. His remaining time, like scarce butter on toast, was spread thinly across everythingelse in the business—forecasting a budget, planning an office move, designing a brand, and assembling the pieces of an e-commerce por-tal—all of this while being continually jerked around by the unex-pected daily crises that define startup life. “At that time, you’re doingeverything,” he remembers. “You’re not sleeping, of course. You’reworking around the clock. You’re incredibly intense about meetingdeadlines that are externally imposed. You’re running this race againstall kinds of unknowns.”
Mark had reached a breakpoint that required him to expand histeam and let go of key task areas. We talked about the importance ofthe founder’s role in building longer-term capacity and discussed howhe could position himself over time to exploit his strengths and coverfor his weaknesses. Looking back, he remembers how challenging itwas to “make a pit stop,” as he called it, to bring on additional talentand offload some of the work. “There was such a great dialogue be-tween the two or three people I was working with at the time,” he re-calls. “It was very natural and nonverbal—unconscious in many ways.We had been together from day one, so bringing additional peopleinto the fold was a struggle for many, many reasons.” But by doing thisdifficult work, Mark and his team began to generate much more MGP(his acronym for “making good progress”) on all essential fronts.
A related problem with founder alignment is seen in freedom-crazed entrepreneurs, who dive headlong into startup adventures withlittle awareness of how their founding role in the new venture will ad-versely impact their loved ones and their well-grooved lifestyle. Atthe startup’s inception, they envision a thriving venture and happyfamilies all around. Then the realities of getting a business off theground begin to sink in—the never completed to-do list, the mindconstantly riveted to work-related challenges, and the fact that fami-lies and friends usually sacrifice more than expected. If expectationsand reality are not aligned, new founders can be overwhelmed withunnecessary stress, fatigue, and guilt.
MISSING THE MARKET
Most startups suffer from anemic early sales, far below projections.In too many cases, the uncomfortable truth is that expected market demand for a new product or service, demand that is critical to thestartup’s viability, simply doesn’t exist. A classic misjudgment on thepart of the founding team is usually to blame: We believe passionatelyin this product, so everyone else will, too. It’s a build-it-and-they-will-comementality, where the entrepreneur knows better than the customer swhat will make them happy.
Too often, this attitude gives rise to in-spired products that never find more than a few customers, or bril-liantly conceived solutions in search of problems to solve. Even whena robust market opportunity does exist, over-confident founding teamsrarely invest enough time, energy, and resources into marketing andselling their offering. They assume that the world will beat a path totheir doorway. And they routinely underestimate, or dismiss alto-gether, the strength of competitive forces that will impact success.
Based on votes of confidence from her many friends and col-leagues, as well as encouraging market data and her own deep senseof personal mission, Lynn Ivey planned to start signing up futureclients in May 2007, four months before The Ivey’s scheduled grandopening. She decided to target wealthy families, who would pay out-of-pocket for an exclusive, club-like atmosphere, positioning The Iveyas an exception to other drab and depressing senior facilities. Herclients would be known as “members” and would pay an upfrontmembership fee of $3,000, as well as a weekly fee for attendance.
The Ivey’s business plan forecast sixty pre-registrations from Mayto September, which would generate $180,000 in registration fees. Ac-cording to plan, one hundred members would sign up by the end of2007, resulting in over $1 million in client revenues for the year (a fig-ure thought conservative by Lynn and her team, as it didn’t includerevenue from planned ancillary services, such as transportation, spaservices, gourmet meals-to-go for caregivers, etc.).
To accomplish the sales task, Lynn hired a full-time marketingprofessional in January 2007 and engaged the services of a local mar-keting firm. She presented the sales plan to her experienced, well-connected board, and the group generated additional marketing ideas.Everyone seemed to know families who would be perfect prospectsfor The Ivey’s services, and board members were eager to help opendoors with prospective corporate and institutional partners.
By the end of June, after two months of active sales efforts, Lynnand her staff were confused as to why no members had enrolled butremained confident that there was still plenty of time to generate salesmomentum before the fall. Throughout the summer, Lynn receivedregular inquiries from curious families, but she saw few prospects thatwere both qualified and willing to move forward. After a barren sum-mer led to still no sales through September, her puzzlement turnedto concern.
Ever the optimist, Lynn had a two-pronged explanation. First, dis-cussions with prospective client families were proving to be morecomplex and lengthy than originally thought. Spouses and childrenof declining seniors were grappling with emotional family issues ofdenial and guilt, and major care decisions often involved multiple chil-dren living in different parts of the country.
Second, even though TheIvey had invested in colorful wall-sized renderings of the facility andworld-class marketing materials, Lynn became convinced that havinga finished building to show prospective customers would be the keyto generating expected sales. A series of delays had pushed the center’sgrand opening out until November, and she eagerly anticipated thisevent as the magical point when prospective members and their fam-ilies could see the grandeur and comfort of the facility for themselves.No more abstract descriptions of the service—just oohs and ahs fromtouring families hungry to sign up.
But the lack of sales, combined with facility delays, were strainingThe Ivey’s financial picture. During the third week in October 2007,Lynn communicated to her board the need for approval to raise moreinvestor capital. “The Ivey has a need for additional funding,” shewrote.
The primary reason is that I missed the boat completely whenprojecting that we would have sold many memberships from a virtualsales office prior to construction completion.” In closing, she wrote“I’m really sorry that I’m having to request this at this time. However,I am confident that we will fill up as soon as prospective membersbegin to see the facility.”
Not long afterward, Lynn and her staff moved into the new build-ing, a dazzling 11,000-square-foot-resort-style lodge. The cedar shakeand stone facility features a huge great room with wide windows, a massive stone fireplace, and vaulted ceilings, along with many otherspecialized rooms for activities and programming, a “tranquilityroom,” a physical fitness room, a craft and movie room, a full-servicekitchen, and a library.
Although families began signing up for on-site tours, sales re-mained alarmingly low. By the end of 2007, only a few members wereon board, generating revenues of less than $10,000 for the year, ap-proximately 1 percent of projected sales. Head scratching and sleep-less nights continued. Worse yet, at a time when her every minuteshould have been focused on solving the mystery of The Ivey’s missingmarket, Lynn was faced with the gargantuan task of coming up withanother $1.5 million.
ROSE-COLORED PLANNING (OR NONE AT ALL)
Passion-trapped entrepreneurs are unrealistically optimistic. Securein their belief that they’ve discovered a can’t-miss idea, they view thestartup journey through rose-colored glasses. Best-case assumptionsdrive plans and projections. Projected revenues and expenses arebased on what’s possible, rather than on what is practical or likely. Asa result, founders caught in the passion trap are blissfully unaware ofhow long it will take, in realistic terms, to reach their financialbreakeven point and what it will cost to get there.
As entrepreneur/investor Guy Kawasaki notes in his book The Artof the Start, aspiring entrepreneurs often fall into the trap of “top down”forecasting when sizing up a business idea.1The founder starts with alarge number, representing a population or a market to be targeted,then works downward from that number to generate expected revenuesfor a new product.
As an example, let’s say you’ve developed a newtechnology for restaurant owners, priced at $10,000 per unit. Thereare about 215,000 full-service restaurants in the United States, and youbelieve that you will be able to capture 1 percent of this market overthree years. This would result in 2,150 product sales or $21.5 millionin top-line revenue over a three-year period. Sounds good. And evenif you forecast only one-fifth of that number for year one, 430 units,you’re on track for more than $4 million in sales in your first year.
But startup plans must be executed from the bottom up, wherethe math works differently. Suppose you can afford to begin with ateam of three sales professionals, working full time, who can each siftthrough two hundred leads a month to generate twenty onsite demon-strations.
Let’s assume these twenty demonstrations will land eachsalesperson an average of two sales per month, equaling 1 percent ofmonthly leads (if you think that’s a pessimistic number, you’ve nevertried to get a restaurant owner to part with $10,000). This sales ratewould generate twenty-four sales for the year for each salesperson, orseventy-two sales for the team as a whole. That’s $720,000 in first-year revenue, with a lot of assumptions baked in about having skilled,active salespeople on board, supported by marketing, technology, andinfrastructure, all of which will require significant upfront costs andongoing management and servicing expenses.
Based on these bottom-up assumptions, you would need a team of thirty salespeople workingover three years to achieve your goal of capturing a 1 percent marketshare. This is not outside of the realm of possibility, with the rightproduct, the right plan, the right funding, the right talent, and the rightbreaks, but cracking one percent of any market generally requires aherculean effort. Simply forecasting downward from a large availablemarket won’t make it so.
Although passion can lead to over-optimistic planning, a surpris-ing number of fast-moving founders avoid planning altogether. Theyplunge forward and manage by feel, without an accurate read onwhere the business stands. They tend to operate in a financial fog, and,lacking the focus of a clear game plan, they can be pulled and dis-tracted by an endless stream of new money-making ideas.
As someonewho hears a lot of new business pitches, I’m struck by how often am-bitious entrepreneurs visualize global expansion or exotic product ex-tensions long before they have won their first paying customer. Asmanagement researchers Keith Hmieleski and Robert Baron noted inthe June 2009 Academy of Management Journal, highly optimistic entre-preneurs often see opportunities everywhere they look, a distractingtendency that can interfere with their ability to effectively grow theirnew ventures.
This challenge applies to seasoned businesspeople as well as first-timers. In fact, Hmieleski and Baron have shown that experienced en-trepreneurs are actually more likely to suffer from overconfidence and“opportunity overload” than those with no startup experience.3En-trepreneur Jay Goltz may be a case in point. He writes a highly in-sightful column for The New York Times’s Small Business Blog, haslaunched many ventures over the past two decades, and employs morethan one hundred people in five successful businesses. “Did I mentionthat four of my businesses failed?” he writes. “In my case, it wasn’tmarket conditions or competition or lack of capital . . . It was my pen-chant for jumping into things with blind optimism and not enoughthought. I’m a recovering entrepreneuraholic. I’m trying to stop.
AN UNFORGIVING STRATEGY
There has never been, nor will there ever be, a shortage of new busi-ness ideas or aspiring founders willing to commit time, sweat, andtears to bring them to life. Unfortunately, many of these ideas, per-haps the vast majority, don’t represent achievable business opportu-nities. Jeff Cornwall, director of the Center for Entrepreneurship atBelmont University, estimates that 40 percent of startup failures aresimply due to businesses that should never have been launched inthe first place.
John Osher, successful, serial entrepreneur and creatorof hundreds of consumer products, goes even further. He has devel-oped a well-circulated list of classic mistakes that he and other en-trepreneurs have made, and first on his list is what he considers themost important mistake of all. “Nine of ten people fail because theiroriginal concept is not viable,” he says. “They want to be in businessso much that they often don’t do the work they need to do ahead oftime, so everything they do (going forward) is doomed.
Because early ideas are so frequently off the mark, surviving andthriving as an entrepreneur means treating the startup journey as anexercise in uncertainty. The future is unknowable. No matter howthoroughly you research your target market, or how rigorously youplan your startup launch, your first strategy will most likely be wrong.So, too, will your second.
In the few weeks, months, or years it takes to launch your product or service, the world will change. New obsta-cles and opportunities will appear as you accelerate along your learn-ing curve. Unpredictable events will occur, some good, some bad, andhighly anticipated outcomes may never materialize. For this reason,startup success requires that you allow for quick, early failures as youput your ideas into action. This means building plenty of flexibilityinto your business model so that you can integrate relevant lessonsand adapt to new conditions.
Unfortunately, passionate and overconfident founders sometimesput the lion’s share of their available resources into a singular, high-cost strategy, leaving no cushion or wiggle room for things to gowrong, or to go differently, as they inevitably will. This bet-the-farmapproach can require major outlays of capital before key assumptionscan be tested in the real world. All the eggs are in a single basket, andfew good options remain when the basket hits the ground.
When bulldozers first began clearing and grading The Ivey’s fu-ture site, Lynn Ivey believed that her prime location and the highquality of her planned facility, surrounded by thousands of wealthy,aging households, would prove to be the cornerstone of her dream.The building was carefully designed and custom built from the groundup.
Every brick, curtain, color, and piece of furniture conformed tothe greater ideal. But constructing the facility and getting a full staffin place required a $4.5 million capital commitment that would, overtime, weigh Lynn down like an anchor around her neck. In additionto building and maintenance costs, zoning and regulatory factors con-strained her ability to use the building for other commercial purposes,with the notable exception of hosting weekend events like weddingreceptions and retreats.
It seems Lynn was caught in a classic unforgiving strategy: Largeupfront capital requirements had used up most of her “dry powder”and incurred a heavy debt burden, all before her basic concept couldbe tested. She lacked a viable contingency plan for revenue shortfalls,which proved to be severe, and, other than approaching friends andfamily for private loans, she found few options when her money beganto run out.
She considered opening The Ivey to all older adults, cre-ating a kind of “well seniors club,” but worried that the concept wouldn’t mix well with her mission of serving cognitively challengedolder adults. The lack of members eventually forced her to bring her prices down by nearly 70 percent, to a level equal to other adultdaycare centers (many of them nonprofits with dramatically less over-head). This increased the number of members slightly, but put TheIvey further into a financial hole. She would need to find a consistent,high-level revenue stream if The Ivey was to survive.
New businesses that call for heavy investment in facilities or in-frastructure before the first offering of a product or service incurmuch greater risk than most other startups. Lynn Ivey did consider,very early in her planning process, the idea of leasing temporary spacein order to test her concept with a lower expense base, but she deter-mined that available spaces wouldn’t allow for her envisioned atmos-phere of luxury and comfort.
THE REALITY DISTORTION FIELD
Andy Hertzfeld, a member of the first Macintosh computer softwaredevelopment team in the early 1980s, credits fellow team memberBud Tribble with coining the phrase “reality distortion field” to de-scribe the driving, charismatic influence that Apple co-founder SteveJobs, carried over the team. “The reality distortion field was a con-founding mélange of (Jobs’s) charismatic rhetorical style, an in-domitable will, and an eagerness to bend any fact to fit the purposeat hand,” he writes. Once they understood Jobs’s ability to bend re-ality, team members puzzled over how to respond to it. “We wouldoften discuss potential techniques for grounding it,” Hertzfeld writes,“but after a while, most of us gave up, accepting it as a force of na-ture.
Steve Jobs is certainly a force of nature, and his confident, forcefulstyle has driven Apple Computer to great heights over the years. Thesame quality drove him to leave Apple in order to launch NeXTComputer in 1985. Jobs believed that his NeXT cube system, aimedmostly at high-end academics, would change the world of computing.Jobs secured a high-profile investment partner in Texas billionaire Ross Perot, who later called the investment “one of the worst mistakesI ever made,” then sprinted forward in pursuit of his big idea. Afterbuilding a state-of-the-art manufacturing facility ready to crank out150,000 units a year, NeXT sold only 50,000 computers over the lifeof the company.
The product was critically acclaimed, even coveted,in technology circles, but it was much more expensive than competingsystems and so advanced that the typical user found limited practicalvalue. “He believed that the company couldn’t fail,” wrote technologycolumnist, Colin Barker, in October 2000. “In the end, the story of theNeXT cube became a study in failure. NeXT was a high-profile dis-aster, a computer system that the world admired but wouldn’t buy.
The NeXT example provides a cautionary tale for all entrepre-neurs because every founding team creates its own reality distortionfield somewhere along the startup path. “Drinking the Kool-Aid” is avery common early-phase business activity. After building overly rosyplans, founders are swayed by psychological pressure to seek out datathat validate their vision and to avoid or deny bad news. Unspokengroup norms promote disdain, even hostility, toward people who raiseconcerns or point out contradictory data. These pressures combineto create a kind of psychological cocoon around the startup team andits founding premise. The business is assumed to be on a destiny-driven path.
Steve Jobs is only one of many successful entrepreneurs who havefound that world-class intellect and leadership skills won’t protectthem from the occasional dangers of reality distortion. J.C. Faulkner,the most talented entrepreneur I have ever worked with, temporarilylost touch with his own solid instincts when he attempted, two yearsafter his tremendously successful launch of Decision One Mortgage(D1), to start a new telemarketing subsidiary in April of 1998.
Despite concerns on the part of his original D1 leadership team, J.C. lured anintact management team from another company to set up and run thenew business, to be called Home Free Mortgage, and hired sixty callcenter employees to occupy an entire floor of office space. He decidedto oversee the new initiative himself, thinking that he wanted to keephis D1 leadership fully focused on growing the core business. But members of his D1 team grew increasingly worried about cracks inthe Home Free model and the lack of experience in its managementteam. Uncharacteristically, J.C. brushed off these concerns.
When mortgage markets took a nosedive a few months later, J.C.and his original team spent most of a day debating Home Free’s de-teriorating financial situation. The conversation was skillful and bru-tally honest—so much so that the reality and gravity of the situationbecame abundantly clear. J.C. decided to shut down Home Free thenext morning. It was an excruciating decision; he had worked tirelesslyfor more than six months to recruit the Home Free team and negotiatea deal to extract them from their previous company (a fact thatprompted some dark humor from his banker, who told him that “hedated the company longer than he was married to it”).
Although J.C. had arranged for his original team members to haveownership stakes in Home Free, he decided to absorb the entire losshimself. Looking back, he jokes that he personally earned $8 millionthat year from D1 and lost $8 million on Home Free. But more painfulthan the financial loss was the experience of telling employees that hewas closing the company after only four months, and then shortlythereafter meeting with his local D1 staff to explain his mistake.
The launch and demise of Home Free Mortgage serves as a kindof photographic negative for all that went right about the D1 launch.D1 is the positive case study and Home Free is the anti-case, occurringbecause a talented entrepreneur got swept up in passionate pursuit ofa pet project that never would have withstood his usual level of scrutinyand analysis. “In a sense, I was in a hurry to prove that D1 wasn’t luck,”J.C. now says.
I had some ego confusion, so I was very quick to try toprove that I was smart. What I did—very quickly and very expen-sively—was prove just the opposite.” I once asked him what he wouldhe have done differently, had his judgment not been fogged by over-confidence. “I would have dug into their financials,” he says. “I wouldhave spent more time. I would set up a real clear structure, start outwith a small amount of money, get profitable on a small scale, and thenreplicate it. I would have done the things I did when I started DI.
AN EVAPORATING RUNWAY
Until the new business concept has proven itself and is generating asustainable level of revenue, startup founders must deal with a pileof ever dwindling resources. The first five negative impacts all in-crease the likelihood that a new entrepreneur will run out of cash,time, support, or personal will before he or she can find an adequaterevenue stream. Exerting additional pressure on desperate foundersis a rule I find myself repeating to every aspiring entrepreneur who shares startup plans with me: Everything will take longer and cost moremoney than you think.
This principle underscores the importance ofdeveloping realistic, hype-free estimates regarding your new ven-ture’s pathway to profitability, so that you can set realistic timelines,secure adequate resources, and identify behaviors and practices thatwill maximize your startup’s staying power.