We (as everybody else) were well aware of the dreadful start-up failure statistics. It goes like this: 9 out of 10 start-ups fail. Moreover, we were going to enter a highly competitive market. Therefore, we decided that we had to be a smart-up, not a start-up, if we wanted to succeed.
As already discussed in my article Start-up VS Smart-up: Is there a magic formula for startup success, according to CB Insights the top three reasons for startup failures are lack of market, cash problems and inappropriate team. They are followed by strong competition, price or cost issues, poor product or business model, and inadequate marketing. Our intention was to eliminate any possible failure scenario beforehand and invest as little as possible.
It took us €200 and 168 hours of work for 3 months before we made our first sale. But let me start from the beginning.
Product and competition
We manufacture handmade carpets and rugs. We noticed that most of our potential customers had three problems when they were looking for a carpet: size, design and material. When they find good design, the size does not fit the particular space. Or when they find the right size, they either do not like the design or the material. Hence we decided to offer unique design, high-quality natural materials and a choice of size.
Our intention was to build a magnetic product. You can find our concept of magnetic products in Smart Lean Ideas for the New Business Model. In short, this is a product that customers find appealing and seek it out, and you don’t need to make too much effort to sell it. The magnet in our case is the design. Most of our items are pieces of art and grab customers’ attention at first sight. If you don’t believe me, you can see for yourself on our website. In addition, each of our items can be ordered in any size. Furthermore, we can implement our clients’ designs and ideas.
Tip #1: To avoid failure due to a poor or useless product, make sure you have a quality magnetic product.
Since we don’t offer mass production, we do not have to compete with 90% of the carpet manufacturers. Our designs also greatly differ from those of the other 10% of our competitors. We manufacture really unique items and we practically have no competition with respect to our designs. In addition, some of our models are an ultra limited edition. It means that we manufacture only a small quantity of them, thus offering our customers the experience of possessing a rare boutique item.
Tip #2: To avoid failure as a result of getting outcompeted, research your competitors and find out why your product is different or unique.
Assembling the right team was crucial to our plan to keep expenses extremely low as well as to our future development and growth. Our team consists of four people – two designers, one of whom is a photographer, a business development and sales expert, and a marketing expert who is also a copyrighter. Everybody is acquainted with the manufacturing process and can make the product. Having people with diverse skills helped us not to incur any expenses for marketing and copywriting as well as for photography and design.
Each team member had known at least one of the other members for several years before we started working together. This means that we have a clear idea who is capable of what. We also know what we can expect from one another, even what our character or personal idiosyncrasies are.
Tip #3: Gather with your friends, find out what you like to do and create a startup. That is, to avoid failure because of not assembling the right team, know your team and what they are capable of.
To avoid any future conflicts and pressure, we outlined everyone’s area of expertise and agreed on several rules when it came to decision making. The expert in the respective area has the final word whenever disagreement arises in his field. It means that the designers have the final say with respect to new designs, but when it comes to prices and customer relationships, our business development and sales specialist steps in. All decisions concerning our future development, however, should be voted and the majority wins.
Furthermore, we started our business as a side project, and nobody left their day job. For three months each team member has spent approximately 2 to 4 hours per week working on our smart-up. Since we are not pressed by time and overworked, we have the freedom to create and set our own pace of growth and development.
In the beginning, we made a mistake, of course. In our attempts to have as much freedom as possible, we did not explicitly state who was in charge of what activities. We missed just a small detail, but it almost cost us our first customer. We did not decide in advance who would be the first point of contact with customers. A week after receiving our first customer inquiry, we found out that nobody had answered it because each team member thought somebody else did it.
Tip #4: To avoid future disagreements or failure due to lack of structure, develop a decision making model and precisely define each member’s responsibilities.
Eric Ries’ book The Lean Startup was of great help in our startup journey. We adopted his lean ideas and adapted them to our product. Based on the lean principles, our strategy was to spend as little money and time on the venture as possible and try to achieve maximum results. We kept our investments extremely low. You can see in the table below how we allocated our time and resources:
If you ask me how we managed to spend so little on materials, I will refer to Eric Ries’ concept of a minimal viable product (MVP). We did not build our products fully. Most of our products were mock-ups (see the example below). That is, we made one model but photographed it at its different stages of development in order to offer it as three or more different items. Sometimes we assembled a model just to photograph it and after that we reused the materials.
Mock-up 1 Mock-up 2 Fully developed product
Tip #5: To avoid cash problems and keep investments low, make a mock-up of your product to show it to prospective customers.
By the MVP we intended to receive customers’ feedback and validate our assumption that potential customers will not only like our products but will also buy them. Of course, our business model allowed this since we decided not to keep large stocks but manufacture an item when it was ordered. First, we sent photos to people we knew and asked for their opinion. We told them to be totally honest because it was important to us and our future success.
After that we wrote a short questionnaire for people we did not know. At the end of this questionnaire we announced a presale at 10% off. We asked the respondents if they would buy the product at this price and if not, why. We had two purposes: to find out if customers would buy our products and to avoid future price issues. Our survey yielded the following results: 10% of the participants in our survey ordered our product, 80% said that they did not need a carpet right now but they would have our product in mind in future, 10% thought our price was high. We did not expect that everybody would need our product at that moment. We were prepared to make changes to our products and price policy, should any issues arise. Therefore, we were quite satisfied by the results. At that stage, we did not pivot. The pivots we actually made were in customer segmentation, sales channels and our marketing strategy.
Tip #6: To avoid price issues, research your customers’ readiness to pay you the price you ask for.
As mentioned above, the number one reason for startup failure is the lack of market. Initially our marketing efforts were neither concentrated nor intensive. We were not sure who our potential customers were and did not use Buyer Personas, i.e. customer profiles, to target them more precisely. We were cautious about our speed of growth as well. We were not ready for rapid growth and did not want to fail because we could not deliver the ordered goods.
We used our MVP to research our potential market. We made a website and social media profiles as well as an Etsy shop. After that we measured our marketing results. We completely disregarded the likes and shares we received. They fall in the category of vain metrics since they show if your product or design is appealing to prospective customers, but they do not indicate if they will buy it. We counted the number of inquiries we received from customers and the number of closed sales.
While researching our market, we made a second mistake. We focused only on individual customers and excluded other market segments as well as several European countries. We though that our model of manufacturing only items that were ordered would not allow us to handle B2B sales. Therefore, we focused only on B2C sales and used Etsy as the only sales channel. We initially assumed that our first customers will find us through our Etsy shop.
However, the reality proved us completely wrong. Our first customers found us through our website. Keep in mind that we have neither a fancy site nor a lot of traffic. Besides, it turned out that our prospects were not individuals but boutique furniture shops and interior designers, and one of the shops even being located in an excluded country. We expected to build a retail business, but there were a plenty of wholesale opportunities as well.
Then we made our first pivot. We reviewed our sales and marketing strategies and revised them accordingly. Now we are planning to use other sales channels like online and brick-and-mortar boutique home décor shops and marketplaces for interior designers. Though most people think that crowdfunding is a way to fund a new venture, it can also be used as a sales channel. For example, last year Indiegogo introduced a new service called InDemand. It is available to all participants who have met their funding goal and allows them to take pre-orders for their products after their campaign is over.
Tip #7: To avoid failure due to lack of market and capture all customer segments, thoroughly research your potential market and find your niche even before your product is fully built.
The question everybody asks when launching a startup refers to scaling: Is our business scalable? Our reply is: Yes, it is. I can assure you that we take scaling very seriously. Our goal is not to make profit as quickly as possible, but to build a sustainable business. Besides, there are many instances of startups failing due to premature scaling as well as the opposite case – failure because of late scaling.
Scaling is like fine tuning of machine. Both premature and dysfunctional scaling are equally dangerous and result in failure. A famous example of premature scaling is Webvan. They invested too much in building an infrastructure and rapid expansion and eventually ran out of cash. According to the Startup Genome Project, dysfunctional scaling is rare. Friendster, a social network, is one such example. They did not manage to adapt their website quickly enough to cope with the massive influx of new visitors. As you can see, we took every precaution not to scale prematurely, but we almost fell in the trap of dysfunctional scaling. At some point, we had more orders than we could handle. Our solution was to hire freelancers to manufacture our products.
At present, we have two options ahead of us – to continue building our business at a slow pace or accelerate our growth by looking for investments. Both options have their advantages and disadvantages. In the first case, we can continue to treat our smart-up as a side project and outsource some of our activities. But we will have to reinvest all our profit in further development and innovation and completely dedicate ourselves to the venture only after we accumulate enough capital. Now that we have acquired some customers and know how to attract more, we can look for investments. Then our growth will be rapid. In this case, we should be very careful and look for investors who share our ideas and would like to build a sustainable business.
Our smart-up journey involves one last stage of development. We plan to offer our customers an innovative product and new experience. We also want to further differentiate from our competitors. Imagine that you are the designer of your own high quality, luxury carpet. You can assemble it from premanufactured elements. Or you can change the model whenever you like. I know what your next questions will be and my answer is: No, you don’t have to sew it or make any other efforts. It is as easy as a piece of cake. It will take you a few minutes to make a completely new carpet. You just have to rearrange its elements. Our future plans also include developing a virtual atelier where our customer will be able to create their own designs and see what they will actually look like before they order them or play with different carpet elements before they buy them.
Our future is bright as long as we continue to be careful and make wise decisions. Contrary to popular beliefs, we do not think that you have to be a tech startup to build a scalable business and have an innovative element. We have also proved that you do not have to invest heavily in your new venture in order to be successful. Focus on the product and its value for customers, find the right team of enthusiasts, lean test all your assumptions and your potential market, and think of all sales channels you can utilize.
Therefore, our last tip for you is: Don’t be a start-up, be a smart-up!
You can reach us at firstname.lastname@example.org if you want to praise us, tell us how wrong we are, order a carpet, ask for advice, give us advice or just to say hello.