As we discussed in a previous post, the startup landscape has changed in recent years and more businesses can be bootstrapped than in the past. As a result, there has emerged greater differentiation between businesses that need large upfront capital infusions and those that can be bootstrapped. This essentially has created two types of entrepreneurs, each with different reasoning styles driven by the type and maturity of their business.
Manufacturing and innovation companies dominate the mindset of most authors of business books as well as government sponsored small business offices such as those sponsored by the Small Business Administration (SBA). It’s no surprise that the focus is on manufacturing and innovation companies because if they are successful, they can become very large very quickly, which makes for great success stories for authors and government officials to draw on.
However, by their nature, innovation and manufacturing sector companies have very high startup costs because it may take months (or even years!) and considerable expense to develop a viable product. Moreover, these companies have a higher likelihood of failure and losing all their invested capital. Therefore, they are quite risky to start. In fact, according to the Cincinnati research agency AcuPoll, 95% of all new products will fail.
Because of the risk and high pre-start costs, there is so much at stake in getting it right the first time. Innovation startups need startup capital to fund intangible expenses, such as the research and development (R&D). For example, a software development company needs capital to fund the R&D required to write a new application or program. Manufacturing startups, on the other hand, need startup capital to fund tangible assets, such as specialized production equipment needed to produce a new product. Since startups in both of these industries need copious amounts of startup capital, they also require significant upfront planning to minimize the risks necessary to secure large equity investments or obtain debt financing from banks or other lending institutions. While startups in these industries make headlines when they are successful, they represent only a small fraction of all new businesses in a given local ecosystem.
Unfortunately, the startup advice recommended for these promising innovation and manufacturing businesses (with their inherent business risks and large upfront capital requirements) is the basis of most business advice from business book authors as well as government sponsored business offices. The recommendations, while appropriate for a manufacturing or innovations type startups, can be inappropriate for infrastructure (e.g., transportation, communication, and construction) and local service (e.g., barber, retail, and restaurant) type businesses that can be bootstrapped much more easily and started with far less risk.
The heavily postulated advice of writing the classic business plan is most appropriate for risky businesses that are developing a product or service for the mass market and require large upfront investments. However, the vast majority of new businesses these days operate in the long-tail market place. These businesses focus on a narrow product niche, provide infrastructure and local services to businesses or local consumers, and are for the most part not very scalable. Therefore, a case can be made that a “one size fits all” educational, counseling, and mentoring model that recommends writing the classic business plan for ALL businesses is stale given the changes to the business landscape.
Most new businesses, therefore, need a completely different type of advice than provided to the more capital intensive businesses. Furthermore, these long-tail product, infrastructure, and local service businesses are better able to evolve their business and economic models as they continue to grow and mature over time. Eric Ries of the Lean Startup Movement calls this validated learning.
Does your business model require large upfront investment and target a large mass market, therefore requiring significant upfront planning prior to your launch?
Can your business be bootstrapped and target either a small niche market or a local market, therefore being best served by a more validated learning approach?
In the next post, we will explore how the experience of most business book authors, professors, and business consultants is different from yours and why their advice may not be appropriate for you and your new business.
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