The Titanic sunk in 1912 not only because it hit an iceberg barely noticeable from the surface, but because of a number of flaws in both the design of the ship and safety precautions that weren’t taken before it left the harbor. These problems were hidden until a crisis was encountered — but then made that crisis catastrophic.
If you’re considering starting your own business, you must consider all that is “hidden” if you are to be successful — that is, beware of the icebergs that could sink your startup.
The goal is to navigate around these icebergs, or “hidden debts,” as we like to call them in the startup world. Navigating uncertainty is the primary job of an entrepreneur or founder. It is also the primary challenge that causes most startups to fail.
Each decision you make as you’re starting your own business has the potential to either enable — or hamper — future potential.
Consider the co-founders you bring on board, how you allocate equity, the advisors and investors you engage with, the branding and the logo you use, and the value proposition you propose to customers. Choosing one direction means not choosing another. What if you make a choice that can’t be changed later? You’ve taken on hidden debt that is hard to shed.
And then there’s “technical debt,” or product development shortcuts taken early in the life of the startup to get to MVP (minimally viable product). All of these choices that must be made could have a big effect on how well your startup does as it tries to grow. And all of these decisions have to be made with the relative uncertainty that comes with starting a business from the ground up. It’s uncertain because the right answer is just not knowable at the time.
Take just one example of this — determining if your product fits — or if there’s a need for it in the market (aka product/market fit). It’s one of the biggest reasons startups fail. To have fit, a startup has to work through three big ideas (each of which can create hidden debt): a target market, a product offering and a business model.
Target market: Focus on a specific target market. By focusing on customers with the highest need, promoting will be less expensive and more effective. Many startups just don’t do this — because that means a smaller market to start, and they’ve been told investors want to see big market potential. Problem is — shooting for a bigger market is just less effective. Focus is good!
Product offering: What does this target market really need? Talk to customers, figure out what they are really willing to pay for. This can be intimidating, because you could find out they don’t need your product at all — or at least are not willing to pay for it. But that’s why it’s so important to do. Taking the time to do this, however, costs money. Another debt that may not be hidden.
Business model: Finally — Consider the need for a compelling business model. How are you going to get an ongoing revenue stream to solve this problem? Will it be profitable eventually? There are so many different business models to choose from: franchise, memberships, annual contracts, subscriptions, the list goes on. Taking the time to test out which business model best fits your product is important. Getting the business model wrong can result in a lack of traction because the business is not sustainable.
This is just one example of a laundry list of hidden debts that arise when starting your own business. Taking on debt is inevitable. But, try to be careful about recognizing that debt and taking steps to mitigate its risks. Debt is not necessarily bad as long as you recognize and manage it.
How do we know there’s hidden debt in startups? We’ve learned these lessons the hard way, by working with hundreds of Indiana’s startups. If you are interested in more of these kinds of tips, sign up for our weekly newsletter at TitanicEffect.com (it’s free). Then, look for the book “The Titanic Effect: Successfully Navigating the Uncertainties that Sink Most Startups” coming out in paperback June 2019.
M. Kim Saxton, clinical professor of marketing at the IU Kelley School of Business at IUPUI, and Todd Saxton, associate professor of strategy and entrepreneurship at the IU Kelley School of Business at IUPUI.