On the strength of your natural charm and business plan, an angel investor just handed you a fat check. Now what? Slam on the gas to scale up?
Actually, no. Slow your roll.
According to the Startup Genome Report, 74 percent of high-growth internet startups fail due to premature scaling. Entrepreneur Jim Pitkow, quoted in the report, defines this as growth “in anticipation of demand instead of demand driven growth.”
Consider the startup that pays high salaries without the cash flow to support them, builds out a platform before its first users arrive or hires executives when doers would better serve its purposes.
At the McCombs School of Business at the University of Texas at Austin, the M.S. in Technology Commercialization program (MSTC) includes a class to help students transition from a business plan to a viable, revenue-generating company with product on the market.
“That’s where most companies die — during that transition,” said Ed Anderson, professor, McCombs Business School. He co-teaches the class with Mary Ann Anderson, director of McCombs’ Supply Chain Management Center, who informally calls this “the ‘now what?’ class.”
The Andersons walked us through the process:
Do a Risk Register
Whereas you’ll tend to make rosy projections in your business plan, helping you capture investors, this is the point at which you identify all that could go wrong, then create contingency plans.
“It’s easy to devise a plan to put out a fire when the house is fine,” says Mary Ann Anderson. “If you wait for the house to catch fire, you’re in trouble.”
Estimate Time and Cost
It’s likely going to cost more, and take longer, to launch a product than you anticipate. Ed Anderson finds that students’ time estimates are typically shorter than necessary by a factor of about 4.
MSTC students run a Critical Path Analysis, a project management process that determines what it will take to get things done. From that exercise, you’ll understand how much money you’ll need from investors, and when.
You hired good people. That doesn’t mean they’re the right people. Startups need talent with specific skills to deliver against a revenue model. Don’t build an executive team when you need junior talent, for instance. Do hire to compensate for your own deficiencies, engaging a great salesperson or marketer if you don’t excel there.
Consider Supply Chain
You might associate “supply chain” with widgets and warehouses. In fact, supply chain in a digital tech context pertains to delivery, quality and customer service, said Mary Ann Anderson. Examine the ways customers will interact with the product. Understand how they’ll access it, what customer service will do in the event of a bug and the partners you need to maintain the product.
Capacity is also a factor. Consider an effective promotional effort. When your inbox blows up with email queries, make sure you have the resources to act.
“I’d argue that this is more important in digital tech because demand can increase rapidly,” said Ed Anderson. “If you’re manufacturing a product, there are limitations to what you can make. What happens when you don’t have those limitations? Will you be ready for the demand?”
Determine Your Metrics
Be judicious about metrics, focusing on those that will drive management decisions. Specifically, understand that lagging indicators — easy-to-measure outputs like cash flow — show you what went on in the past.
Leading indicators signal what’s to come. Having highly effective processes, for instance, is a leading indicator of cost efficiency. These future-focused indicators change rapidly and are harder to track, but they’re more relevant to scaling.
“Your business plan might say you want to get to Chicago, but if you don’t have a map, you’ll be lost,” said Mary Ann Anderson. “This work gets you to your destination.”
See the professors speak: On September 27, at Capital Factory, you'll have the chance to hear from the Andersons first-hand. Register today.
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The M.S. in Technology Commercialization (MSTC) is a one-year master's degree program focused on technology, business and innovation at the University of Texas at Austin’s McCombs School of Business. Learn more about MSTC.