The 8 mistakes a start-up makes…

Among the many urban legends about how to start a business is the one about the business plan written on a napkin. It has achieved a level of success rivalled only by that of launching a business from the family garage.

However, things don’t work like that. No one can guarantee that a business plan will definitely work – knowing that would be the equivalent of knowing the winning lottery numbers in advance – but it is possible to identify a number of recurring pitfalls that guarantee it WON’T work.

The help of a mentor when setting up a business, therefore, will not guarantee success, but it will ensure that you do not fall into well-known pitfalls – sometimes due to sheer ignorance and at other times because you have been blinded by enthusiasm for the project.

Having helped draw up many business plans and analysed many others – sometimes retrospectively – I have compiled a list of common mistakes that are entirely avoidable, which I set out here:

1. Failing to estimate turnover:

Anyone might say that until we get started, there’s no way of knowing; however, we’re going to put all the resources needed to launch the project into action so that we’re able to handle a certain volume of business. If we don’t have that estimate, where do we even begin? Reassuring note: A well-planned project must be able to withstand a 100 per cent upward deviation or a 50 per cent downward deviation without collapsing. The point at which break-even is reached may change, but provided basic precautions have been taken in the investment policy, the project should hold up.

2. Not knowing why a business fails:

A company, particularly an SME, is not going to go under simply because its ROI, NPV or IRR figures are lower than expected, nor because, having analysed Porter’s five forces model, we find an unfavourable configuration: It will go under because one fine day they’ll open the cash drawer and there won’t be enough to pay the electricity bill or the wages.

3. Failing to factor in the ‘desert crossing’ period:

When a business is launched, there is a period – until it becomes fully operational – during which money is spent but none comes in. When calculating funding requirements, you must include the amount needed to keep the business afloat until it is able to sustain itself through its own profits.

4. Relying on start-up grants:

In many cases, grants have a discretionary element, but even when they do not, the entrepreneur may face liquidity crises and delays in payments from the public sector. It is best not to set up a business if the grant is needed to pay that month’s wages.

5. Do not separate the role of Partner from that of employee within the company:

It is very common for two partners starting a business to split it 50–50, for three partners to each hold a third, and so on. Up to this point, the problem is not serious; the problem arises when all partners allocate themselves the same salary and insist on being ‘equal’ in every respect. Inevitably, there will be a partner who feels they are contributing more and wants this to be recognised financially by the others. Solution: As partners, according to their shareholding; as employees, according to their work. Mixing the two is a sure-fire recipe for conflict.

6. Unrealistic deadlines:

When setting up the business requires preliminary work such as construction, installations, software development or other tasks, it is very common for deadlines to be significantly longer than estimated, with the consequent impact on cash flow. Solution: Realistic deadlines and penalties for non-compliance.

7. Failure to properly assess the necessary technical skills:

Sometimes a highly qualified specialist may be needed, but there may not be enough money to pay them, leading to settling for someone who does not meet the required profile. Solution: Seek out the right person and, where payment in cash is not possible, offer a stake in the company instead.

8. Failing to properly assess management capabilities:

The ‘management’ aspect is far less transparent than that relating to technical skills and involves a range of interpersonal elements, such as the ability to assess the situation as a whole and to coordinate a variety of different resources. It is precisely this vague nature that often means this aspect is not assessed by the entrepreneur, particularly when they are required to carry out a self-assessment. Solution: Ask yourself whether your past experience qualifies you in any way for this new venture, why, and even what aspects of that experience you need to unlearn as soon as possible.

One was missing at the time, but perhaps, as time has gone by, it has gained greater prominence: the ‘Internet as King Midas’ syndrome. It particularly affects young tech enthusiasts and involves the belief that a mobile or tablet app, or the provision of services via a website, will open the doors to fame and fortune. In most cases, that boundless enthusiasm is deflated by a single question: ‘What do you have that cannot be easily copied at no cost?’

Neither enthusiasm nor desperation are good guides when starting a new business. Mentoring in the creation of new businesses provides precisely what may be lacking: common sense and experience. Mistakes teach very valuable but excessively costly lessons. If we can at least avoid the ones we’re most likely to make, it will have been worth having dispassionate, expert support.

EPUNTO has designed a specific product – start-up mentoring – which, combined with extremely flexible contracting arrangements, allows it to adapt to the needs of any start-up, regardless of its investment capacity.