Business growing difficulties of a start-up entrepreneurial venture
Q: We’re a start-up entrepreneurial venture company in our first three years. We have no problem with what one of your previous columns called continuous innovating. That’s because the four founders of our company are all food scientists and former professors from UP Los Baños. But none of us had any business or management experience.
Over those first four years, we already had two fairly successful food product innovations. Sales of both products have grown even beyond our initial expectations. We’ve read that in their first three to four years, we should be prepared for an unprofitable performance. But at the end of our first year, we were already profitable.
However, we also read that over the first five to 10 years, we should prepare for difficult years ahead. As scientists, we want to do that. The books we’ve read on managing innovations and entrepreneurship all talked about the life cycle stages of an entrepreneurial venture company. Of course, they also cover problems and difficulties in growing a start-up business. But which problem and difficulty are the hardest during these first 5-10 years?
A: You have to think in terms of stages of growth of your start-up venture. Over these first three years, you should be no stranger anymore to business growing problems and difficulties. We’re certain that you’ve encountered all or almost all of those problems and difficulties.
When we say “think in terms of stages,” that’s how we want you to think of the answer to your correct and important question. What we’ve learned from our own experience in helping start-up innovative companies is that their hardest and most difficult problem to solve varies by stages. In their “early childhood” stage of the first 5-6 years, the most serious problem is the targeting of the right market segment. The typical start-up entrepreneurial venture wants to reach as many of the entire market in these early years. That’s what the company founders believe is the surest way to grow the new business.
What the founders do not realize is that this strategy of gaining a market focus is the worst way to grow and to sustain growth. First, going after the entire market wastes scarce resources and time. Not everyone in the market is equally predisposed to the start-up’s product innovation. So you’re spending money to reach even those who don’t like you at all.
The largest market segment may also be already happy with your leading competitor. The venture company who did this market segment focusing correctly is Puregold. When it started, it knew that the large suppliers and buyers, for example, were the likes of Unilever, P&G, Nestle and their kind were already with SM. Puregold knew that SM in fact “owns” many of these client suppliers. So Puregold decided to avoid confronting and challenging SM in this market segment. Instead, it defined its customer segment focus as small retailers like sari-sari stores, market stalls and the like, especially those who experienced at one time or another an SM “rejection.”
This customer segment targeting immediately paid off. Today, most retail marketers consider Puregold as “the SM challenger that’s here to stay.” The implication for you at this early childhood stage is crucial. Not having the right market segment focus can invariably and then inevitably hinder your early childhood growth.
How are you to know if your choice of your target customer segment is correct or not? Profile your customer buyers. It’s rare that your target customers are also your actual customers. When the larger population of your actual customers is not your target customers, then you can be almost sure your target customer segment should have been that larger population of actual customers.
Now, let’s proceed to the next stage of “late childhood” when your start-up venture becomes 6 to 10 or 11 years old. During these years, your most threatening difficulty shifts from market segment focus to money. The reason is that you will be experiencing accelerating growth. And business growth is hungry for cash. So it’s your cash flow and your cash management and control that you then must focus on. But the trouble is that if you’re profitable as you said you already are, you may get diverted to focus instead on profit. That’s because profit inspires and makes you greedy for more. Resist the temptation. Profit is the wrong focus at this stage. Attend to your cash flow because your accelerating growth needs cash and more cash. If you don’t, you run the risk of decelerating or even stopping your business growth. It can be that bad.
In eight to nine out of 10 cases, the preceding sequence of most serious problem from the early to the late childhood stages will be true and will apply to your case. What may differ is the number of years or time duration of each of the two stages we talked about. We would be interested in your feedback later on regarding your actually experiencing of our two-stage predictions.
The third stage of adolescence is even riskier because it has a different and harder to handle most serious problem. But our space does not allow us to tackle how you should manage business growing at this stage. We will do that in next Friday’s column.
Keep your questions coming. Send them to us at [email protected] or [email protected]. God bless!
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