How to Avoid Killing Your Startup
Whether the widely reported statistic that eight out of ten businesses fail in the first 18 months is accurate or not, few will disagree with the fact that most startups fail.
However, it’s rarely from a lack of owner passion, interest, hard work, or desire for success. In many cases, businesses are started by people with years of corporate experience. They understand how to read a profit and loss (P&L) statement, how to budget, hire employees, launch products, and manage cash flow.
Despite this, when the landscape shifts and they are running a business built entirely around their own dream with their own money, common sense can go out the window. Their sense of purpose seems to overshadow their understanding of good business and the need to generate profit.
I learned this painful reality firsthand in one of my early businesses producing New York City theater. I was so focused on creating great art, I barely gave thought to a business plan. A critically acclaimed play I produced closed due to a poor decision to invest in additional production details over multiple ticket sales channels. My product was good, but customers struggled to buy it. Balancing purpose and business execution from the start can make the difference between growing or going out of business.
Why purpose matters
Most people don’t get out of bed one morning and say, “I need to make money, so I am going to start a business.”
If you own or run a business, you know that making money in a business is difficult at best, especially at the beginning. Few businesses are overnight sensations. In fact, most take several years to become profitable. So, if someone needs to make money, getting a job is the path of least resistance.
People start businesses for reasons above and beyond making money, even though money is an essential part of the equation. They want to help customers and their community with something they are passionate about. They want to make a difference in the world. This difference is the purpose of their company and the reason they work long hours, take massive risks, and even mortgage their homes to pursue their dream. Some succeed, but sadly, many more go broke in the process. While purpose is the backbone of any good business, without money, purpose dies.
The challenge for businesses that prioritize P&L statements over organizational purpose is that most employees don’t really care about profits or even understand how a P&L works. Like the owner or founder of a business, highly engaged people go to work each day for the difference they are hoping to make. Trying to get employees to jump out of bed each morning to add $500,000 to the company’s top line sales simply doesn’t work. But ask employees to come to work each day to improve someone’s life, bring families together, or help a business owner run a better business, and you will most certainly create a more meaningful connection for them.
Ultimately, fulfilling an organizational purpose is the path to profits. But at the same time, profits fuel an organization’s ability to fulfill its purpose. The two elements go hand in hand for the good of the business and those it serves.
Understanding your business’s “why” (or its purpose) starts with a simple question: “What void would be left for my customers, my community, and the world if my business disappeared today?”
Your culture and all recruitment activities should support and attract people who deeply care about filling this void. Your business model must clearly align to how you make money fulfilling this purpose.
Why profits matter just as much as purpose
Making money is not an ugly thing for a purpose-driven organization to do. It is an essential thing.
A focus on profitability may seem obvious. Commercial entities are there to make money, right? However, you may be surprised to know that many new entrepreneurs are so focused on their passion for what they do that they forget they need to make money to keep doing it. While it is essential that an organization be driven by a strong purpose if it is to achieve exceptional results, the company will surely fail if purpose takes precedence over the business realities of making money. A company can only make a real difference to its customers, its community, and the world if it remains profitable.
A profitable business can pay its bills, develop new products, compete with other profitable businesses, and hire more like-minded people to perpetuate and fulfill its purpose. Without profits, people lose their jobs, customers suffer, and the business is forced to close its doors. While most people who start a business can figure out what they want to spend their day doing, many fail to determine how they will make money doing it.
Many entrepreneurs put tasks like creating a website, business cards, and eye-catching slogans before those like asking and answering hard questions such as, “How am I going to make money?”
What not to do
An ironic illustration of the failure to balance good business with organizational purpose comes from the charity world. Most people believe the not-for-profit space plays by different rules and that, in charitable organizations, purpose is more important than money.
The reality is, it is not. In both not-for-profit and for-profit entities, purpose and money need to be given equal weight. Despite this fact, owners of startups often think with an old-school mentality traditionally reserved for charities: purpose rises above money/profit. This mindset is responsible for the failure of thousands of businesses of all kinds.
For example, in early 2016, Goodwill Industries International, an 80-year-old charity, suddenly closed 16 Toronto-area stores and ten donation centers. The move rocked the community, and the CEO of Goodwill Industries of Toronto, Eastern, Central, and Northern Ontario (TECNO) resigned shortly after.
Though Goodwill TECNO was striving to do good in the community, they eventually went bankrupt. Goodwill’s purpose is not only to provide clothing and household goods for needy families, but also to help provide jobs for the community. Its focus includes employing people who have physical and mental disabilities. Because the CEO put purpose over good business, the organization was not only unable to help more people find jobs, it ultimately had to let hundreds of workers in its centers go. A meaningful purpose isn’t enough to ensure survival for any organization.
Manage your finances and fuel your purpose
As Goodwill illustrated, the only way to make a real difference to those you serve is to ensure that you balance your purpose and passion with a strong business model and execution. If you have to shut down because you have been unable to keep the lights on, you fail across the board.
At the end of the day, the more money you make and the better you manage it, the more of a difference your business will be able to deliver. Making money is not a “nice to have” for startups that want to make a difference in the world; it is mandatory if the business is to continue.
Ultimately, your daily operations depends on cash flow. It keeps your business going. It is important to use a good accounting software that features an easy-to-read financial dashboard to track critical business metrics like accounts payable and receivable. Keeping your numbers in front of you helps keep a tight watch on important financial measures and the health and sustainability of your business. Like driving a sports car, your dashboard will tell you when adjustments are needed to optimize performance.
The fact that many startups don’t make money for the first few years does not mean you shouldn’t do everything possible to beat the odds. Generating profit should always remain a short- and long-term goal. If complacency sets in because of perceived limitations, you will produce nothing more than you expect.
Always make the objective of profits an immediate need, equal to your desire to do good for others. Using statistics as a scapegoat for a lack of financial results is a startup killer.
Questions to ask yourself for clarity on your purpose
To ensure your startup is positioned for success, ask and answer the following questions:
- What is my business’s purpose, above and beyond making money?
- How does fulfilling my business’s purpose generate sales and profits?
- Is my business currently making money, or on track to, in the short-term? Why or why not?
- If it is not, what do I need to do differently to ensure short- and long-term profitability?
Published on Bplans, 22 November 2017
For additional startup assistance, check out my new book “Purpose Meets Execution: How Winning Organizations Accelerate Engagement and Drive Profits“ and Purpose Meets Execution.
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