This is a guest post by Wilton Risenhoover, an active member of the UCLA VC Fund who sits on the investment committee. Mr. Risenhoover is an entrepreneur himself and teaches at UCLA. His current project is Fintel.io.
It is said that over 70% of new businesses fail. The primary reason for most business failures is that they run out of cash. The primary reason they run out of cash is because they do not have enough sales. And the primary reason they don't have enough sales is because they don't have product-market fit.
Product-market fit is a relatively new concept in the business world, but it is probably the most important -- and most overlooked -- topic for the first-time entrepreneurs I work with.
The idea behind product-market fit is simply this: your product must solve a critical problem for a specific audience, a problem so important that your audience must be willing to spend currency (money or otherwise) to solve it, and the audience must be reachable in an economical way. Looking at this through traditional marketing metrics, we would say that the customer lifetime value must be greater than the customer acquisition cost.
This seems obvious on paper but in reality it is very hard for many entrepreneurs to achieve, especially first-time entrepreneurs. The problem doesn't seem to stem from an unwillingness to try, but rather inexperience or intellectual dishonesty. In the first case, it is the simple issue of not knowing how to get somewhere if you've never been there . Maps simply show how others got to their destinations. Truly innovative products tread into uncharted territory, so stories of others' success only serve as loose guides, rather than directions. It is only after a long process of testing, evaluating, and repeating that entrepreneurs can see progress towards product-market fit, and it's the inexperience with this process where I see entrepreneurs fail.
The other issue - that of intellectual dishonesty - is a problem that all entrepreneurs face at some time or another. We are all faced with making the best decisions we can based on incomplete information. However, there is a fundamental lie that we tell ourselves every day - that this time, we will be successful. Think about it - 70% of all new businesses fail, yet we wake up every day telling ourselves that this one will work. We are optimists and overlook the stark realities of failure in order to do what we love. This is entrepreneurship.
The problem is when this fundamental lie - this basic optimism that keeps us going every day - seeps into our daily decision making and impacts our judgment. Entrepreneurs can go interview dozens of potential customers and then blindly focus on a positive response that support their theory, even though the majority of the responses clearly show a negative reaction. We conflate our need to believe in success with the viability of our current business idea. When you say to yourself that you are going to "trust my gut," this is usually what is happening.
There is a very simple way to combat this, and that is to reframe success. Instead of the standard old lie - "this time, I will be successful," say "I will achieve success eventually." A lot of entrepreneurs become entrepreneurs because they wake up one day with a problem and suddenly realize that it's a potential business idea. Because it's their only idea, they hang onto it because it is what defines them as an entrepreneur. They think that in order to become a successful entrepreneur, they must make a success of the idea they have (since it's their only one). In reality, it's rarely the first idea that is the successful one.
Venture capitalists take a portfolio approach to investing, and entrepreneurs should too. I always have five or six opportunities mulling around in my head. I create an investment deck for each of them and regularly evaluate their viability. I send them to colleagues to get their opinions. By definition, they are all partially-baked. I've shelved many of them, but some are still promising.
This problem of intellectual dishonesty is pervasive amongst first-time entrepreneurs, and I believe it is one of the leading root causes of business failures. However, it doesn't have to be that way. We need to take a portfolio approach to our careers, and recognize that our personal success is not dependent on the current business we are focused on, but rather recognize that success will come to us if we are persistent in finding the most viable opportunity and maintain good judgment. If we entrepreneurs can stop conflating our personal needs to be successful with the viability of our current business opportunities, we will more quickly find the product-market fit that is required for success.
We just sent you an email. Please click the link in the email to confirm your subscription!
OKSubscriptions powered by Strikingly