Startups are used to uncertainty, says Sreekumar Bhaskaran. The only real certainty is that most of them will fail.
Successful startups are the ones that learn to adapt to constantly changing circumstances. This is true when the economy is booming, and it’s true at a time of unprecedented disruption.
“The COVID-19 pandemic has completely thrown a wrench into it,” says Bhaskaran, an associate professor of information technology and operations management at the SMU Cox School of Business. “But, in general, this is not unlike what startups face on a regular basis.”
Bhaskaran has studied what makes startups successful, with an emphasis on how entrepreneurs find a balance between their businesses’ short-term survival and their long-term profitability. It’s a trade-off at the heart of a research paper he co-authored (along with Georgia Tech professor Karthik Ramachandran and Babson College professor Sinan Erzurumlu) in 2019 entitled, “Sequential Product Development and Introduction by Cash-Constrained Start-Ups.” We spoke with him about why most startups fail and the skills needed to facilitate their success.
Why Startups Fail
Most startups have different approaches to deal with uncertainty, dictated by their needs as much as their constraints. Bhaskaran credits startups for their innovation and for the share of new products and technologies they have introduced in recent years. “If they’re thinking about entering the market, they need to have something differentiating themselves,” he says. It’s one of the few things that startups do have in common.
“All startups have great ideas,” Bhaskaran says. “That’s the baseline. If you don’t have a good idea, you’re not even going to be able to get off the block or raise funds. What distinguishes successful startups is their ability to manage the execution of taking the idea and delivering it to the market.”
Even a great idea developed by a talented team will nevertheless fail if the startup runs out of money before a finished product is successfully commercialized. This is what dooms most startups. It’s why almost every cash-strapped startup is confronted with some variation of the same dilemma: Introduce an on-hand version of its product to generate immediate revenue … or wait until the more advanced version is ready for the market?
In other words, release the product you have right now, and you may bring in enough money to continue development, refining the advanced version — but you then run the risk of cannibalizing the potential payoff of the later, better-quality advanced version of the product, damaging your profits in the long run.
Perhaps worse, if the earlier version of the product isn’t quite ready for prime time, you’re sacrificing your reputation. Bhaskaran’s paper gives the example of a medical-equipment startup working on a product that would help patients recovering from orthopedic-implant surgery. To fund further research and development into a more advanced version of the product, the startup launched an early, FDA-approved iteration of it, only to find that patients treated with the early version experienced postsurgical complications. When the advanced product was finally complete, it took considerable additional effort and pain to generate adoption.
Better products will generate more revenue, Bhaskaran says. For more established companies, it’s almost always better to wait. The problem then is that many startups simply can’t afford to be patient.
Why Startups Succeed
There are, however, ways that even a cash-constrained startup can leverage its operations to maximize both profitability and short-term survival, Bhaskaran says. He and his colleagues used their research to develop a managerial framework that takes into account all the factors a startup must consider in deciding when to launch a product, including financial constraints, the cost of continued development and the risks of sequential product launches.
That framework should prove especially relevant as startups navigate an economy rocked by COVID-19.
“Given the uncertain environment in which most of these startups operate in, it’s important for them to be able to find the right kind of pivot,” Bhaskaran says. A product that might have been developed for one purpose can be retooled to better meet the needs of new circumstances. “Know your technology, know what your idea is and what your product is, and most importantly, understand the needs of the market.”
Startups developing 3D-printing technology, for instance, can pivot to produce masks, PPEs or even toilet paper, a product that has seen recent high demand. An app designed to manage the waiting list at a restaurant might offer features that help restaurant staff comply with regulations and ensure social distancing among seated guests.
That flexibility will also be important as startups look to raise funds from venture capitalists who are spooked by an unpredictable market and reluctant to invest. But everybody’s going to struggle in difficult times.
“There are going to be some very hard conversations,” Bhaskaran says. Startups may consider scaling down, and they can’t control how much money they have. “But how you spend the money, that’s in your control. Be creative about controlling the cash-burn rate. Be lean.”
And be creative about working in a world of social distancing. Technology has made long-distance collaboration easier, despite the difficulty of coming together in the same room with colleagues. But being able to work with, or even interact with, customers is a different story.
“You might not be able to understand what customers’ needs and requirements are now when you can’t interact with them on a day-to-day basis,” Bhaskaran says. All the more reason to pay attention to the process of customer discovery and to innovate to meet their customers’ needs.
But his best advice for a startup weathering the current economic crisis is simple.
“Hang in there,” Bhaskaran says. “If you can survive here, you can survive when things get back. You might not change the world today, but once you come out at the end of this, you’re going to be in a much stronger position. The needs that consumers have — the market opportunities — they’re not just going to evaporate.”
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