SE EP108 – 4 Reasons Startups Fail to Scale
Welcome to Startup Club. Today we are talking about ways that startups fail to scale. And this is actually something, there are 25 million startups in the United States, and very few actually fail to scale. We’re talking about a few percent that actually gets beyond just a small business, and that’s what we’re gonna talk about today.
Eight reasons why Startups Fail to Scale. Serial Entrepreneur.
And um, Michele, what do you think about this topic? Uh, why do you think startups fail to scale? I love this topic and I know this is all based on your recent article that was just published on forbes.com. [00:01:00] So yeah, I mean, it’s hard enough to get a business started, Colin, let’s just be honest. Like that is a struggle enough.
But having been there before where you’re working so hard, you felt like you had a great idea, you felt like you were doing everything right, and yet it’s not moving the needle and you contin continue to pour yourself into it. Like this is like, these are painful things and it’s even more painful if you raise money from your friends and families.
So I’m really looking forward to a good. Active conversation between all of us, the members of Startup Club, to talk about what are these eight reasons that we fail to scale once our business actually gets started. And, you know, how do we avoid this? How do we avoid this? How do we actually get it off the ground in a very positive, you know, growing way so that we can, you know, hopefully, uh, build the business and perhaps exit if [00:02:00] we want to, or just keep it for, you know, a great revenue flow.
So I’m looking forward to hearing your thoughts and all the members on this topic. Yeah, I think it’s interesting and, uh, I had a lot of fun putting the article together. What’s interesting about, um, you know, you do an article for Forbes, the, uh, the length, it was too long. I tend to be a little too long. I know the book that’s coming out is 458 pages, so I’ve definitely violated some of the rule, the etiquette when it comes to.
Uh, writing, but the article, I was forced this time to really distill it down. And I don’t know if you could pin the article, Michele, that would be great, but, uh, yeah, absolutely. But we really got it down to eight, eight very succinct ways. Now, I’ll let you know that in the book we talk about a lot more ways that startups fail to scale.
And, uh, we’ve had on here was Thomas Iceman. He was the Harvard Economics professor of Entrepreneurship, [00:03:00] economics, and Entrepreneurship. And, uh, he was on three or four weeks ago, you talk about why, um, startups fail. What we’re talking about is why they failed to scale. There are 25 million, 30 million small businesses in the United States.
Why do so few of them actually fail to scale? And there’s a, there are a lot of theories and differences or different reasons why. And the article, I sort of brought down to eight reasons and I’ll, I’ll start, I’m gonna go backwards from the article if you wanna see it. Michele’s pinning it right now at the top of the room if you wanna have a look at the article.
Um, and I’m actually gonna go backwards and then I’m gonna ask those who are on stage to share their reasons why they have failed to scale, or if they’ve scaled their company, what they did to scale their company. Cuz the opposite is true here too, right? So, um, I’d like, if you’re in the audience and you want to come on stage, it’s Friday afternoon.
Please join us on stage as the audience builds here. And we, we talk about an important topic because if we can [00:04:00] actually do this, we can increase our, the valuation of our company, improve our livelihood, et cetera. Scaling your business is not something that is just available to a few startups. This is available to everyone and it’s really about following systems.
And that’s number eight, by the way. And I’m gonna go backwards, okay. When I do this, and we’ll, we’ll bring ’em in, you know, throughout the c throughout the, the session here, but I’m gonna go backwards. They don’t use systems to scale. What do I mean by that? Let me tell you a story. Now I’m gonna go back a little bit here into the 19, no, it’s actually 20, sorry.
20 2006, 2005, publicly traded company that I founded with my brother. And, uh, we were out there and these wheels were beginning to fall off the bus. The revenue flatlined, the, um, fights, the battles within the organization [00:05:00] was tough. We had a lot of issues within this company, and the board began to turn on me and began to suggest that I might be over my head.
I was 34 years old, and so they began to turn on me and say, well, maybe we should be looking at bringing somebody else in to run this company. And I said, well, hold on a second. Just hold on a second. Let me come to, to the board with a plan. So I flew out to Vegas to meet a gentleman named Patrick Theen.
Patrick Theen runs a company called Rhythm Systems, which is a goal setting company. And I flew out to, to Vegas and I met with him and I said, Patrick, I I need you to just get the board off my back. Just show them I’ve got professional management skills here that I can run this. And he’s like, no, I’m not gonna take you as a client.
And I said, what were you talking about? He says, no, I’m not gonna take you as a client, but what I, but, but, and I then I said, okay, what do I have to do to get to, to pay you money to take as a client and bring you into my company? And we’re, we’re about 600 employees. To give you a perspective here, the [00:06:00] idea of the size of a company.
And he says, well, you have to follow the following systems. We gotta do it right or we ain’t gonna do it at all. So he was talking about goal setting. He was talking, implementing goal setting. He was talking about hiring correctly, getting the right people on the right seats on the bus. We’ve heard that one before, right?
From Jim Colins. He talked about, um, a lot putting a lot of systems in place so that we could scale the company. So we hired him. We brought him in in the first meeting. Oh my gosh, Michele, there was screaming, yelling, fighting. I drive the coach, my coach, back to the airport and I said, I’m so embarrassed.
I apologize for the team and all that stuff. He says, no, you guys are dealing with it. You’re getting the elephants in the room. You’re putting them out there, and you’re starting to address the real issues that exist within your organization. And you haven’t done that in the first six years of your organization since you went public.
It took us about six years to go public [00:07:00] and, um, he was right. Something magical happened after that date. And we were able to implement goal setting, implement two day strategic planning, 90 days of execution, and we were able to grow that company to a, uh, uh, to sell it to a Fortune 500 company at a significant multiple of earnings, about 17 times ebitda.
It was incredible. If you don’t have the right systems in place, and let’s be honest, let’s be quick. If you’re, if you’re honest with yourselves, you’re an entrepreneur out there, you’re a startup. We all have our, our, our personalities. We all do what we do. We’re a little bit kooky, little bit off the charts, and we sort of think we can got everything under control.
We’re all control freaks. But guess what? You bring in a a few systems, you put them in place, and they don’t have to cost you anything. Zero we’re talking about here. They don’t have to cost you anything. But if you put those systems in place, that’s probably the number one thing that can help [00:08:00] an entrepreneur, entrepreneur scale.
Their company will provide the energy. But we don’t have the systems to do that. Michele, what do you think about that? Yeah, I think, you know, for me, like I think no matter how small or large you are, it’s so incredibly important to have your systems. And you know, this doesn’t need to be overly complex.
In fact, this is a mistake that I’m gonna add on to what you said, Colin, that a lot of companies make, is they think O Systems, I have to buy Oracle. You know, E you know, a whole system and spend a million dollars. We’re not talking about that. Of course, there is a very appropriate place to have that type of a system, but it could be as simple as writing out your standard operating procedures, making sure that the staff knows, like people write these things up quite oftentimes and then nobody knows.
You know, and nobody wants as, [00:09:00] as far as I’ve ever seen at any workplace, no one wants like confusion. No one wants to like run, be running around and guessing what they need to do. So I think it is as small as it needs to be or as large as it needs to be. But you gotta get in there, you gotta do it. And I would always say experiencing it yourself and doing it yourself, um, you know, that’s what helps you design these good, efficient systems and processes.
You have to get your, you have to get your, you have to get a little bit dirty there. You have to roll up your sleeves. Colin, back to you. Well, yeah. I think you’re better at it than I am. I’ll be quite frank. Uh, I try and, uh, but without a coach and without, by the way, when I say coach, I’m not talking, they’re just coaching me.
They came in and coached the entire executive team. We implemented a, a goal setting software platform by rhythm systems. Uh, it was, it was very effective. And, and then we had weekly meetings, daily huddles, like [00:10:00] even your meetings were, we, we, we, we re-engineered the whole way. The company interacted with each other doing a daily sales huddle because we were a technology company that had huge sales contracts, million to 10 million contracts.
And the fact of the matter is we needed to perform, but it took us two to three years to get a contract to sign Verizon, uh, at and t, uh, Vodafone Bell, Canada, all those companies, each of them took years sometimes to implement and sign up. So we had to run, we actually emulated our investment bankers at R bbc, who took us public, who actually had meetings twice a day.
So we implemented this daily sales huddle, and we asked three things, three things only. And the three things we asked were what was your number one focus today? What was your victory yesterday and how are you stuck? And I would invite the executive team into the executives, the cto, the coo, [00:11:00] myself, into these eight minute meetings early morning, and we would be, I would require them to say nothing.
And only the top salespeople would deliver those three things. Guess what was the most powerful thing, Mimi? The most powerful thing of those three questions. And you can, by the way, you can do this in sales, you can do this in operations, you can do this in manufacturing. The most powerful thing was what was my victory yesterday?
Because nobody wants to come to the table without a victory. And I know that. How do I know that? Cuz I had to come to the table with a victory and I had to say, okay, this is what I did yesterday. And I knew if I didn’t call the president of this telecom and have a conversation with that person, I showed up in my front of my team.
I would be embarrassed. So I know it motivated me and I know it motivated others as well, but we wanna keep it rolling here. Michele, if you want to, um, because I’m gonna focus on, on the article and the seven, if you wanna moderate today. Could I ask, that would be great. Could I ask a question? How much did this Knight Enshrining Armor cost you?[00:12:00]
Uh, you talking about the coach? Absolutely. Okay. So the coach cost me about 60,000 a year initially. All right. Now that was two days of strategic planning. That was, uh, a software platform that he had in place. I’m certain it would be more expensive today. I understand that that’s an expense. Now, I, I’m, I don’t want to make it sound like that.
If you don’t have that kind of budget that you shouldn’t think of along these lines, because the fact of the matter is we were Republican traded company, made millions of dollars in profit. Okay. So I totally understand. So you weren’t on the brink, you weren’t on the brink of death. You had 5,000 cash to Yeah, but I was on the brink.
My board was turning on me. Right. Oh, I was, I was, you know, in a situation where, um, and there was more to his story. I mean, there was a fight with a shareholder, like with a part business partner, and I had to fire the business partner and, you know, integrity over money, whatever it is. The stock dropped from $6 a share at the IPO to 4 55.
[00:13:00] And, uh, and, and, and, and I, you know, I, I had, I had issues trying to keep control of the board. That being said, once we brought those systems in, we were able to turn the board around. And, uh, eventually was able to get my own board members in there and eventually fired the venture capital board, the board members from our venture capitalists.
Alright? Um, and turn the company around, take it, take total control, drive the company up and sell it for 17 times. EBITDA 10 55 a share to a Fortune 500 company. It was a fricking, um, awesome success story that couldn’t have happened without implementing these systems. I’m telling you now with 60,000, a hundred thousand dollars for a company like that.
Expensive. Yes. Now here’s the lessons you can learn if you’ve got a $60,000 company or a hundred thousand dollar company. We do it with our, um, we have an incubator here of 10 companies. So Michele and I run the incubator. We actually have a day job other than running startup club. So I just, you know, Jillian, uh, and so we actually run a number of companies.
We’re based outta Fort Lauderdale and we [00:14:00] run an, uh, one of the companies is called Escape Club is 20 vacation Rentals in South Florida, uh, on the, on, uh, west Florida, in east South Florida. And, uh, we actually implemented a system for, from using this goal setting, using the same software, but a small business version.
And we only pay a thousand dollars a year. And we do the coaching ourselves. We do it all. I’m just saying there are solutions out there. You don’t even have to pay a cent. All you have to do is, I mean, if there’s a couple books if you wanted to read, like Scaling Up from Verne Harnish, uh, rhythm Systems from Patrick Theon, uh, and you that that rhythm systems de details the story of of, of Hostopia and the public company that we ran and everything.
But the fact of the matter is you could just read a book, have a spreadsheet, and implement it, implement some of these systems. It does not cost a lot of money. You can do it for free, literally for free. Um, but anyway, I’ll ask you, Michele, if you could, if you could actually Yeah, yeah. I’m share the meeting today.
Yeah. And Julian, stick around. We’re gonna get to ya. [00:15:00] Exactly. You know, I’m thinking today because this is, you know, we’re, we’re gonna go through a list of things and I don’t wanna wait till the end call for people to be able to chime in or ask questions. So let’s go through each of the eight items that you have outlined.
No, but what my suggestion was, let’s go around the audience first. And then I’ll come back to the number seven. Okay, go ahead. Sorry. Yeah, let’s after each one, let’s, let’s give, let’s open it up for questions and then we’ll go to the next one. So we are on the last one, which is number eight, which talked about implementing processes and systems.
So if you have any questions or you wanna weigh in with your experience, cuz I know we have a lot of very experienced members here in the room, you know, just, um, go off your mic and, and let’s go for it. And if you’re not on stage, please just raise your hand. So is there anybody on the stage, um, Julian, Kira, or dot Clifton that has anything to add to this one point before we move on to the [00:16:00] number seven one?
Kiara, I’m putting you on the spot here. Anything? Hey, I had to run back to my phone to get it real quick, so, um, but no, I was just really listening in and, um, thinking about the question. As far as startups failing to scale and kind of back to what the last, uh, individual was saying, I think it has a lot to do with not having that coaching perspective.
Um, and I’m one who thoroughly believes in investing in my business, investing in myself and my dreams. And I’ve had coaching, um, and it was good coaching, but I think it also matters as far as the learning style. So I had one coach that was like, we touched base a couple times a week and it was great. Um, but then she kind of just disappeared off the scene.
Um, and then I had another [00:17:00] coaching program that I went through, or shall I say, I’m going through right now. And it’s, it’s wonderful coaching. Like as far as the instruction I get. Um, because it’s all video based, like, it’s basically a coaching class, shall I say. Um, and it walks you through step by step.
But I’m the type of person I really need accountability. So, um, walking through, uh, video course that teaches you how to do certain things and implementing different systems in the business, um, even though that’s great, it’s like I feel like my time is so limited. This course is so extensive and I just feel like I don’t have time to sit and watch these whole, all these videos on how to implement certain systems, um, and still run the business because it’s just, I feel like it’s affecting my time.
And so, um, I think a lot of what has to, or what happens is when it comes to running [00:18:00] businesses, it is really de dependent upon the individual. Like as far as coaching styles and learning styles, um, it just really depends on the individual. Yeah, and I would say also to your point, Kira, where you are and where the business is because we’re, you know, Colins’s example is about a specific dedicated coach, but there are a lot of, you know, variations to that.
It could be, it could be a group of entrepreneurs or a group of CEOs that you’re a part of and you’re all helping each other. That is coaching. Or it could be, as you said, you know, kind of some kind of online, um, system. I think another one could be too, Colin, I’m gonna say just like what we do here at our office is it could be that you’re in an incubator or a co-working system, a co you know, co um, yeah, co-working space or an incubator, like all of [00:19:00] those, you know, sometimes it’s formal, sometimes it’s informal, but you’re right, you, you have to strike that balance.
In these days, it’s really easy to be inundated and overwhelmed with, uh, you know, lots of content. And, and yeah, you have to figure out a way to prioritize that so that you can actually act upon, you know, what is the right course, Colin? I said Yeah, no, something. It’s, it’s great. I love this, um, question because, uh, I work with a cohort at the Allen Lavan Center, nsu, and, uh, I do it about every two months, and we meet with, uh, companies at different, different programs, different co different, uh, companies.
You have ideation, you have incubation, you have acceleration, you have post acceleration. But, uh, I meet, I primarily love the incubations stage. That’s the, that’s the fun one where companies are starting out and they don’t have a lot of money for coaching and whatnot. The very first session’s a 10, it’s 10 sessions and it’s 10 different [00:20:00] speakers, and I, I kick it off with the four sticky note business plan.
And we literally write a business plan in 30 minutes and everyone presents it. And we have the four sticky note business plan, uh, in the book start scale, exit, repeat. But I do believe we did a, we put it on Startup Club somewhere. You could probably just search for it on Google. But the fact of the matter is you could literally spend 30 minutes and come up with strategies for your business and it costs you absolutely nothing.
This incubator costs you absolutely nothing. It’s a free incubator and there are incubators and government backed program, uh, incubators, accelerators, or innovation centers all around the United States and Canada and the world for that matter that you can join and they’re free. Uh, if you wanna look up at the one in Alan Levan Center, just cert Alan Levan, Senator Incubator.
I’m certain it’ll, it’ll pop up. I know on their LinkedIn they talk a lot about that. Are we good with the, the internet, Michele? Cause I know, yeah, I think we’re good. I’m getting a couple notices. Okay. I’m getting a couple notices. I think it’s, [00:21:00] uh, clubhouse, but we’re doing fine. And we hear you. All right.
All right. Um, you’re, you’re pulling a hook. Okay. I’ll shut up. Yeah, that, that was great. Yeah. I mean, Kira, I, I, I get what you’re saying too. I’m just gonna comment here and then give Renee a chance to comment. Is I am one of those people, like my instinct or my default, let’s just say when I’m feeling uncomfortable, it’s just like, oh my gosh, I have to read a bunch.
I have to take classes, I have to do this. But you really have to be careful and you really have to, you know, suss out what is, what is useful and what is not. And, um, you know, there’s a lot of work that needs to be done. So I would suggest that you, you know, that we all, not just you, we all have a group of peers that we respect.
Okay. Respect is an important term here. That we can, you know, bump ideas off of and get suggestions on how to move those kind of things forward. For me personally, I’ve found that the most valuable thing for me, cuz I tend to be very [00:22:00] analytical and if I could just talk to somebody that I really respected helps me to, to get some, you know, kind of prioritization and focus.
All right. Yeah, I think Julian was next. I had popped Renee in as a moderator cuz he’s been here many times. We know him, we love him. Uh, but I think Julian was next. Julian is there, is there a question or something? No, we’re just chatting about that last one. You, you did ask a question about coaches. We’re just making sure and seeing if you had anything else before we move on to the next person or the next item on Colins Forbes article list.
It’s okay if you don’t. All right, so let’s pop over to Renee and then Mark, we just marked, has been here many times as well. Then we can hit over you, mark, cuz I wanna make sure that we have time during this hour to hit all the eight reasons. So Renee, was there anything that you wanted to add on? I know you’re a seasoned, um, investor, vc, [00:23:00] and, um, business operator.
Is there anything you wanna add to that specific point about processes? Yeah, totally. Um, so my perspective is I was never personally a good administrator or operator. That wasn’t my strength. Mine was innovation and marketing and product development, research development. But what I discovered, and it took me 15 years to discover it from 1975 to 89 when I watched an outstanding company, which column mayor member called c w that went to 300 million in sales in a few years, taking on the I B M PC.
They had processes in place whereby each person would be dependent on the previous one performing and delivering what they needed to do their job. And so the, the fellow, the CEO, organized all the processes just that it be, it was almost a pressure cooker environment where, where 10, 20, 30 people had to get certain [00:24:00] processes done, where also next people in line couldn’t get their job done.
And so to put pressure on everyone to perform on time so that everybody else could perform. And that was a concept I’d never seen before. Another concept which we did implement cuz I had, um, 150 service people and modular compare modular component, um, centers and the service organization. Wow. Like the service tech would go out.
It said that it came back and said, sorry. So, so the, Michele, you’re off, you’re on mute. You’re not on mute, Michele. Sorry, Renee. We, we love your ideas. Just keep going. I know. So, so the service people would go out and do the service call. They get back to the office by 5, 5 30. They provide the parts that they needed, which went to Montreal electronically, and they were shipped overnight and arrived the next morning.
The service tech could go the next morning back to the clients and fix a machine. And so the interesting concept there, [00:25:00] which wasn’t mine, it was the service manager’s concept, was the service tech goes the diagnosis and, and the next day comes back with a part and fixes. And so the whole concept of processes, which personally I was never good at, um, is fascinating as far as being able to scale.
The other concept for scaling is managing the resources. So I can’t tell you how many times my VP of r and d used to walk in my office, smash his hand on the desk and say, we can’t do it all. Stop pushing us. Choose A, B, or C, choose cheap quality or speed, pick two of them. And so one has to balance the resources.
One has to be able to make sure that there’s a smooth, scalable growth. And so whenever the r and d people are too busy, I’ll just focus on marketing or focus on some other thing which would not interfere with them. So it’s always a balance of what resources you have, which ones you want to add to, and keeping [00:26:00] the goal in mind.
And that combined with intelligent processes, operational processes, I think is really critical in scaling on, on a proper scale. But probably you’re better at this than I am, so you probably have much better insights. No, I I, this is great, Renee. Because you made me think of several things, and Colin, I think we might have to have two sessions for this to get through all of your eight reasons in your article.
But, uh, Renee, you, you, you know, we’re not talking right about being bureaucratic or trying to cover every situation. Like that’s not fun for anybody. And I would dare to say it’s stifles innovation and it’s not effective. We’re talking about giving people, you know, the guidelines, right? The standard operating kind of procedures.
If so, if you wanna call it that, so that they can get what they need to get done. And as to resources, I have never worked for a company where people weren’t screaming that they needed more resources. But you’re right, [00:27:00] this is a large part about keeping people focused. On the right goals for the company and being accountable.
I, what I find is not having processes. People get sucked into everybody’s favorite project or everybody’s favorite emergency or drama. So, um, you, you’re right, it all has to be done with a focus. And I would say to those that haven’t really started this kind of discipline, start off small and grow it and force yourself, force yourself over and over again to be strategic about what those goals are.
And be honest, do not acc create is one of the things I like to say. Don’t create false emergencies that, that’s, you know, this, that’s not fun for anybody and it hurts the company. But Colin, this is your article. We have amazing members. I’ve, I feel like let’s get onto your next item and then Mark, I wanna hit you next on the first, on the next one.[00:28:00]
Yeah. So, uh, like I know we really touched the tip for the iceberg when it comes to systems. Uh, and there’s seven other we want to tackle here. This next one, uh, is something that we’ve experienced over the last few years. Uh, we, I mentioned earlier, we run an incubator. We have a company called pot.com.
It’s in the incubator. I’m the chairman and largest shareholder of the company and we launch about 10 new products, maybe 20 new products, 10 to 20 new products per year. And we have struggled in the last couple of years because we really didn’t have a strategy for launching. Now, don’t get me wrong, here’s a company that hit 39 million in sales and was Ink Magazines, uh, three years in a row.
Fastest one of the fastest growing companies in America. Okay. This is pretty cool. Pretty fast thing. It’s a, we love it. It’s all great. So, company’s doing great. But just cause I, but I will talk about some things that we didn’t do well and how we’ve [00:29:00] changed that. And the fact of the matter is we would launch products based on, you know what some people in the company thought were great products, great ideas.
We’d launched them and they turned out to be duds. And literally it cost us millions of dollars because we made this one mistake. We, we failed to kill our failures fast enough. Now let me, now let me be clear. And this was interesting writing the article cuz I had actually had not written this in the book.
This is post, um, writing the book, which is, it’s still coming out. October 3rd, start, scale, exit, repeat. But it all comes down to this test and fail more. Cut losers quickly and scale winners big. Now it’s that simple. Okay, now let me explain this a little bit here. It’s okay. To have eight outta 10 product launches fail.
It may be even eight. [00:30:00] Okay? To have eight outta 10 companies fail, which we have multiple fail failures. If we want to talk about that, we can spend a lot of time on that. The fact of the matter is you got to cut them off quickly. You spend $50,000, it’s not working. Cut it off. The product doesn’t sell, cut it off.
It can’t be sold on Facebook marketing. Cut it off. Whatever it is, the R O R O A S, the roaz is too high. Whatever it is, return on ad spend, we’re gonna cut it off. Okay? Now we’re gonna get a couple products. Now, if you go to pot.com right now, you’ll look at right at the front page. Right now, you’ll see one of the top selling products in the world right now.
Dog products, which is a memory foam dog bed for the car, which keeps selling out constantly. And here’s a product we didn’t scale over the last three years. Michele and I, almost four years ago to this date actually, Michele and I were in a factory in China and discovered a product, reinvented it, redesigned it, and brought it to the, to the United States, and we launched it slowly.[00:31:00]
The fact is we were not launching our, our winners quickly. So it’s call comes down to this test and fail more. Cut losers quickly. Scale, scale winners big. It’s that simple.
All right. I really love that one. And, and I, I would just add on too, it’s like, yeah, it didn’t work, but you know, there’s learnings, right? There’s learnings that people take away from these things, and that’s absolutely critical to have that constant, you know, feedback cycle. And how else are you gonna learn it, then putting it out there and, you know, your best effort, obviously in learning.
All right, so I wanna get on to our audience, our members. Um, mark, I promise I’d start with you first since you didn’t get to go last time, and then Renee will come back to you. So Mark, tell us your thoughts on this. I, I know you have experience in this realm in terms of software. Mark the mike shares.
Okay, [00:32:00] wonderful. Thanks for having me. Um, yeah, you know, one of the things I see, especially in the tech, uh, early stage and pre pre-funding stage companies, uh, when it comes to scale is a lot of them, and I’m looking at these points, I think these points are solid and a lot of them don’t address. Um, the biggest risk to the business.
And, you know, they’ll sit with investors and, you know, they’ll talk about the grand vision of where they’re going. And, you know, for a lot of investors in their mind as well, you know, this is a, this is a risk for my investment because of x. And, you know, and many investor, well many startups will ignore that risk and they’ll continue along with the grand vision of what they’re trying to do.
And, uh, I think that goes a lot in line with, you know, point number seven, which is they don’t kill their ferry fast enough. Well, a lot of businesses aren’t addressing the biggest risk of the business fast enough. And, you know, by not addressing the biggest risk, they can’t move as quickly as they could have they addressed it.
Cause then they’ll identify. Oh, maybe my costs are too high. That’s my biggest [00:33:00] risk. Or maybe there’s a learning curve to my customers getting to my product, and that’s my biggest risk. And so by addressing that first and primarily instead of building a bunch of stuff, cause a lot of ’em, they build a bunch of stuff.
If I just address the one thing, um, that is the risk to my business, then I can quickly move through that, uh, pivot if I have to and get along, get going with scaling because I’m addressing the biggest problems that are impacting my business. Yeah. Mark, isn’t it cool though that we could fail on eight products, but succeed on two, but then make millions of dollars on the two that hit?
I think that’s fascinating. Like, you know, this whole concept of failure, we’re taught that it’s such a bad thing and not to, you know, whatever. But I think that’s just fascinating that you can do that. Absolutely. And then you learn so much, you know, through the experience. Uh, and, and I was thinking about that.
I was like, man, if you know, those first three products failed when you get into product, you know, number four, you’re taking [00:34:00] all those learnings and those first three failures into number four, and you get so good at not only de-risking your business, um, but you get good at avoiding those things that, you know, might have been pitfalls in the early one.
You get good at going, all right, well, I can analyze the cost of this before we even get started, or I can analyze, um, the amount of market shared that I can that is available to be captured. You know, these are things you’re learning through the process. And I, I just think by failing on those other companies, I, again, it’s not really failure so much as you learn.
Okay, that didn’t really work. So let me pivot into the next thing. And, uh, I think those, I mean, that’s critical. And even if as an investor, when you’re looking at, you know, founders and you’re looking like, oh, this guy has already run through his fair shade of failures, that’s not, uh, points against him, that’s like, okay, this guy has experience and he’s, he like, understands what the bottom feels like so I can trust him with my money.
Um, so I, I think it works for you, you know.[00:35:00]
Excellent. I, I would totally agree. And you gotta do it fast and you gotta do it with discipline and not ignore it. Right? Don’t just abandon necessarily, but learn and live. All right, so we’re going back to the members. Um, Renee, you’re next. Yeah. This is saying the same thing in different words. Um, it doesn’t matter if you make mistakes, it’s how fast you correct it.
And so it’s critical to really don’t care about mistakes, just fix it fast. Second, when you get rid of the slow moving products and services and you recognize that you should get rid of them, suddenly you’re free with more resources to scale the good ones. So it gives you a new freedom to focus and, and scale on the positive.
So, so there’s multiple benefits to getting rid of something that’s not moving as it should, and to the point of investing in failure. 1989 when actually had a significant [00:36:00] failure, my father’s first words were, I’d rather invest in you now because of what you’ve learned than before. So I was more investible after a failure, then prior to a failure.
Thanks. Yeah. It’s, it’s fu it’s funny you say that because uh, we should have burned our failures. We were selling and we think we might still sub some on the site, but we were selling like tennis ball, basketball. I don’t know, unicorn fricking dog beds for 49 bucks that fill up the space when we could have been selling them $149 bed.
Cause once they filled up the space in their house, you’ve lost them. And, and so much energy was put into so much opportunity, cost lost was put into that, these failures. Um, but I also like your point about failure. I do believe that failures are the scars of our past that guide us through our, our next venture.
Uh, [00:37:00] so it’s, it’s true. Failures are are definitely something we can all learn from. But it’s hard when you got a big ego. You know, these e these entrepreneurs, they all have big egos. So I’m in including me, and I come up with an idea and I pitch it to the team and we’re doing this and we run with it and we fail.
I’m like, no, we could just push it harder. No, we could market it better. No, we could do this, that, and the other. But the fact of the matter is you gotta know when to cut and move on that part. When did you destroy your ego? Have you ab been able to destroy your ego? Destroy my ego? I don’t know. It’s been, are you talking about that?
Was that the question? Yeah. My ego. Yeah. Check your ego at the door. Yeah. Chapter 48 or whatever. I don’t know. I talk a lot about ego in the book and how entrepreneurs, that’s actually the number one reason why startups fail, by the way. And we’ll get to that in a few minutes. Maybe we’ll summarize it today and then come back like you say Michele, and come back to it next week.
I think it would be fun to really deep dig deep into the other, uh, the other ones. [00:38:00] But I don’t think we’re gonna complete that today. But that’s the number one reason why startups fail. It’s cuz they’re ego. It’s cuz the ego of the atra fucking Hi here. Can I give you the biggest example that I’ve ever seen?
- Adam Osborne had gone to a hundred and million in sales in 18 months. Which is huge growth with his Oborne computer in 1995. Us, his ego, he said, there’s so many CPM users that IBM won’t be able to break the marketplace because we got 4,000 CPM users in the market, so we’re gonna win a CPM instead of ibm.
And they went bankrupt within four months. There are countless, countless stories and, and we’re, we’re jumping ahead to number one, but that was Julian. That was great that you brought that up. And, uh, do you wanna try, uh, hitting number six, Michele, we’re going backwards. We did number four. Number eight was they don’t use systems to scale.
Number seven was they don’t kill failures fast enough [00:39:00] because they’re ego or whatever it is. Number six, failure. Failure to expand the story. Okay, that’s an interesting one. That was a little more ethereal when I thought about this particular one. I think the best example of success. Was Amazon. Uh, Amazon was a book retailer.
A lot in the audience. Probably don’t know that, but that’s what they did. All they did was sell books online, physical books. And if they had stuck with that, they’d have a pretty good business today. You know, they might be worth a few hundred million dollars, maybe even a billion. But instead they expanded their story.
They went way beyond what they currently were doing. And you see that in countless number of companies, uh, that do that. And, uh, sometimes we get stuck in this idea that we are a video rental, a uh, company called Blockbuster. And that is our story. That we’re video [00:40:00] rental. No, we’re not video rental, are we?
Netflix? We’re in the business of delivering content. And whether that’s through videos, through the mail. Or whether that’s through the internet, it’s the same thing. All we’re, what we’re trying to do is deliver the actual product to you like, or the service, and don’t get caught up in the form of delivery or whatever it is.
So you can see how Reid read Hastings from Netflix. He transformed his company. He never got stuck in that mold. Uh, you know, it’s, it’s, I use the example ex expanding your stories. Like adding toppings to a pizza can make it delicious and exciting. Or you can turn it into something that’s totally a mess too.
So we gotta be careful when we expand that we know, oh, and lemme talk about this. Yeah. That we know we can expand and it needs to be a logical upgrade or something connected to our current business model. At [00:41:00] pot.com, we launched something called Marley Scent. So we sell these dog bed rugs best in the world.
Uh, we pioneered the space, invented the space, invented the products, patented a lot of the products, patented designs, everything. And we decided to sell a spray that you could use for the dog bed. So you’d buy the bed, you’d put the spray on a logical upgrade. Perfect. Then we decided to sell C B D and vitamins.
That wasn’t quite a logical upgrade, even though it’s in the pet space and we have a million customers and we can just get 1% of the customers. We got 10,000 people signing up to our vitamin subscription. Guess what? We got 37 people after two months of marketing that. And the fact is, we’re known to be design and comfort for your dog.
And we had a logical upgrade, was the spray. And sometimes when you go too far out from your current model too fast, that can break down as well. And so that’s, [00:42:00] that’s number six. Fail to expand the story. All right, we’ve got about 17 minutes here before the end. I, I think yeah, we, we’ll definitely come back for part two, but I, I wanna open it up to the members.
Let’s have, um, who wants to contact, um, comment on that or add to it on stage here. Mark, I think you are raising your hand. Go for it. Um, you know, to that point, another story that I thought was really good, it’s one of my favorites. Uh, and that’s the Groupon story. Um, you know, these guys started on one end, they were making this fundraising application and then one of the features, uh, of the fundraising application, uh, because it was failing and it wasn’t really, uh, living up to what the investors were expecting.
And one of the features was, you know what? Groupon as we know it today, and they started out at the very beginning, was a two for one deal for a pizza shop, [00:43:00] right. And they did so well with this two for one deal at the pizza shop. They expanded on the story to what we know as Groupon today, but it was very simple in the beginning.
And as they were able to create this simple story and they saw how the reaction was to the story, um, they then began to expand on this story. And, you know, now we have one of the fastest billion dollar companies in history, uh, just because they continued to expand on this story that they identified that worked.
Uh, and that’s one of my favorite examples. Yeah, we have to get those, uh, dog beds that we, that the, the, the unicorn dog beds. We have like thousand of them or something. We have to get them over to Groupon. Thanks for reminding me. But you’re right, they do have a good, good system. It was a good story. All right.
Anyone else before we move on to the next. [00:44:00] Failed to scale item. All right, so this one’s all about vision. Okay. Fail to get everybody on the same page. And it’s actually pretty similar to systems cuz systems can sometimes resolve this issue. But what I talked about earlier about our, our company, our, in 2006, uh, we had huge fights in the first, that first strategic planning session.
And, and my brother and I, we fought a lot and he had his division and or half the company, I had my half the company and he literally locked out the other half of the company. We literally created a wall between the two companies. And so we, we, he was going in one direction, I’m going in another direction.
So you’re not yet partner misalignments. And then you also have staff misalignment. They don’t sometimes know which way you want to go. Do you want to grow? Do you want profitability? Do we want this? So absolutely getting a very clear story. But also, again, having those, I think what helped us a lot was the goal setting [00:45:00] from Rhythm Systems by Patrick Theon where we were able to put in place the 90 day, we do a two day strategic planning, we do 90 days of execution.
We set three to five priorities for the company, and then we set three to five priorities for every individual for that quarter. And they would set them themselves in the strap planning session, but they would align with the vision or the priorities of the company. Okay. So this quarter, and we had, um, done a lot of migrations for websites and email for telecoms.
So we would literally say, okay, this quarter we wanna migrate a hundred thousand websites or a hundred or a million emails or whatever it is. And the next quarter we’d try to stretch it even further. And now everybody would now know, okay, if we’re gonna do that, Well, guess what? We’re gonna have to hire 20 more people in Ukraine or whatever it was.
We had a lot of Ukraine staff, but, uh, uh, 20 more people in Ukraine to help with the migrations. We’re gonna have to do this, and everybody was in alignment prior to bringing in goal setting. We were not in alignment. [00:46:00] And you need to be in alignment with your business partner, with your investors, and with your team.
And again, putting in systems and goal setting helped us keep that alignment. All right. Some great points there. So, um, Reginald, obviously you’re here on the stage. I wanna make sure you have an opportunity to add in. Is there anything you wanna add in or anyone else on any of the other members?
Okay. All right. Wanna talk? Do we wanna talk about money next? Yeah, I, I think, okay, here’s a funny one. Number four, I put too much funding. The fact of the matter is the number one reason why startups fail is that they don’t have enough funding. Okay, so this is actually a little bit of a fun play in the article.
Number four, too much funding. Um, I’m actually involved in a company right now. I’m on the board. They called me in, wish they called me in earlier, whatever. Um, I’m, I’m on the board and they raised [00:47:00] 60 million of venture capital funding and the original founder, uh, has about, had about 40% of the company.
And he finally left the company three, four years ago, two years ago. Uh, and that was the one who actually replaced him on the board in a friendly way. I was trying to help him out cuz he owns a lot of shares here. But the fact of the matter is, if you, I’m getting a lot of texts right now. Sorry if it comes in and out a bit, but, uh, the fact of the matter is they raised a lot.
They had got, they caught something called Silicon Valley disease. I know it’s a unique term. No one’s ever said that before, but it’s in the, it’s in the book that I, I’m coming out with. But the fact is they have Silicon Valley disease and they are carnage on the Silicon Valley Highway. And when you take venture capital funding, they have liquidation preference, which means the venture capital gets paid first no matter what.
Now, just for a second here, let’s have some fun. The company today is probably worth about 20 million. Okay. 60 million of venture capital. [00:48:00] Will they be able to get over that 60 million hurdle with their interest, uh, rates or their return on investment requirements over the next five to 10 years? To be quite frank, we’re trying, we’re trying to reinvent the company with ai, all this other stuff, but it’s gonna be very, very challenging.
Just for this example, let’s assume they can’t, cuz it’s unlikely at this point. It’s pretty unlikely, uh, that entrepreneur is gonna walk away with zero after 15 years. Okay? The VCs will walk away with their 20 million or whatever they get when they exit the company. The fact is, VCs often encourage companies to spend more, do it quickly, make it happen.
Cuz they know they’re generally gonna walk away with their initial investment, but they want a 10 x. So they’re gonna push that entrepreneur to do things that might be a little risky, a little reckless, because they want them to deliver on the other side. The system right now is not structured, in my opinion.
Well, Desi, it’s not designed for the entrepreneur with this [00:49:00] concept of liquidation preference. Now we’re in a whole different environment today than we were a year ago where we’re not even talking about liquidation preference anymore. We’re talking liquidation, preference plus whatever, guaranteed return on investments and whatnot.
But what happens when you win this lottery called venture capital, which is absolutely not obviously a lottery. I’m being sarcastic when you win it. A lot of companies spend a lot of money and they no longer have that startup mentality. They get the big offices. I remember the company, uh, one of my companies that I was involved with years ago, I had sold it.
The first thing they did was, was invest 7 million in an office building they didn’t even own. I mean, these, these guys, they’re just, they, they got all this money. Gotta run it like a billion dollar company. We’re gonna be a unicorn. So let’s spend the money like a unicorn. But ya ain’t there yet. And so, ra raising too much money can be very dangerous for your health as a startup.
I’m not gonna diminish the fact that the number one reason, [00:50:00] um, that startups do fail statistically is that they don’t raise enough funding. But I wanted to take a bit of a different twist with the article.
All right. So any input from the members here on stage? Um, I’ll, I’ll add first. Um, yeah, I mean it also means, I, I know you said this, but it’s that your valuation could be too high. Like there’s a lot of, uh, Bad things there if you can’t like come to the table with that valuation and Oh gosh. A lawful lot of stress.
All right. So anything from Renee or Mark, Julian, Reginald, any comments? Yeah, and too little or too much if you’ve seen that happen before, right? Because you have the brilliant concept, brilliant operator, and they just don’t have the funding. And that’s an environment we’re in today. This is a very difficult environment for startups to raise money.
Plus your AI maybe, [00:51:00] but yeah, that’s for sure. Yeah, I mean, I guess my question would be how, what, how do you know what is too much money and what is fair and you know,
how do I say this? Um, what are these companies really evaluated on besides the previous investor or how much cash they have? Yeah. And I’m more interested in what can happen, like what you were talking about, losing control of the board. I have, I don’t know what that means. Okay. Well let me start with your first question.
Um, and there’s a chapter in the, I dedicate in this book. It’s actually, um, we interviewed Jenny Casson. She’s a regular on startup club and it’s raising the right money for the right situation. So we were, we met a startup two days ago, Michele and I, and we talked to him and he’s got a device, and I’ll be very careful how I [00:52:00] speak here, but he’s got a device that is a medical device that could have game-changing effects on, on, on people’s lives and has a, a, a broad, uh, a broad application.
And he’s early, he’s fairly, he’s been working there for six years, but he’s still relatively early, has not gone to market yet. And the first thing I said to him was, you need venture capital. Okay, so I’m gonna be the first to say I don’t like venture capital. I’ve used venture capital, but there are certain scenarios when you have to use venture capital.
And those scenarios are the ones where you’re in a very fast moving technology environment and you need to dominate market quickly. You cannot do it faster than through venture capital. That’s the way to do it. Clubhouse is a perfect example. They’re up against, you saw that Twitter spaces, they’re up against, uh, I think Spotify shut theirs down, but the fact of the matter is social audio chat.
As soon as they launched, they had Mark Zuckerberg, they had everybody looking at them and saying, okay, we’re going after this [00:53:00] space. And if they don’t go fast, they’re gonna get smoked. So they needed to raise venture capital. So I’m all for venture capital for the right funding for the right situation.
But the vast majority of companies, something like 93% of companies on the Inc. 5,000, do not have venture capital. And venture capital is not a panacea, it is not a lottery. And too many of our, too many of the companies I have and in my incubator and, and and too many of the people I’ve worked with have always thought venture capital’s the solution.
It’s, it’s the victory. It’s, no, it’s not. Even the IPO’s not a victory. But the fact of the matter is, I mean, that’s pretty cool cuz you’re getting into liquidity pretty soon as an entrepreneur. But the fact of the matter is venture capital is not a victory. And so you’re gonna wanna really look at your company where you’re at, raise the money for the right situation, and it starts everything from government funded money, getting funding from your customers.
There are some, so many different ways to get funding as with respect to control with the board generally. Um, I have a, a theory liquidity or [00:54:00] control. I’m not gonna go into that story. Uh, we’re we’re involved with the company. It went from a billion to zero. Um, so I’m not gonna go in that story cause that’ll be, we’ll be here for another two hours and I’ll be crying.
But the fact of the matter is, but the fact of the matter is, uh, and it’s in the book by the way too, but the fact of the matter is, I believe firmly that we have to believe more in ourselves. And that’s a mistake that I’ve made in the past by believing too much in others. I believe in partnerships. I partner very well with my brother.
I’ve seen partnerships be successful under the right circumstances and situations. But the fact of the matter is we should not, um, we should be very, very careful of giving up control. And there’s so many shysters out there, there’s so many investors, and I’ve seen so many miserable entrepreneurs because they lose control of their company and get removed from their company in a lot of circumstances.
And it doesn’t need to happen. We need to really do, need to hold on to control of your company and board. Board. In order to control your company, you need to control [00:55:00] 51% of the shares and you need to control your board unless you’ve given up certain rights to venture capitalists, which you often, people often do, um, in order to, uh, to get their funding.
So for example, um, I’m not. Absolutely. Sure. But is people like Bezos and Mark Zuckerberg, do they have 50? I don’t think they have 51%. Yeah. Are they in control of their board? Yeah. So, um, there’s a couple of, uh, things that happen in corporate America. First of all, I think Mark Zuckerberg does have voting control.
He set up special stock, uh, for his company. I don’t, please, I’m not a, I’m, I might be wrong here, but I’m pretty certain, I’m pretty certain I’m right, but I’m not a hundred percent certain. Okay. So be careful with what I’m gonna say. But a lot of entrepreneurs do set up a special voting shares where they have like a 10 to one or certain.
Um, and Im pretty certain Mark Zuckerberg has this, where they’ll have that control. Um, it’s a very, very rare. Um, [00:56:00] uh, stock formation that you’ll see and, and I would often recommend against this most v no, most VCs will never play that game. Look, if you’re Facebook, you’re Google, you can, you can start to write your own ticket.
If you’re chat g p t right now, you think they need, uh, they could go in there and they could do something without, if he wanted to control the shares, although he owns 0% of the company. So I don’t know how that’s gonna work. But the fact of the matter is, um, if you want, uh, a lot of these really big unicorn successes early on, they sometimes set up unique structures.
Beyond that though, when you get into corporate environments, the CEO often can control a board. And, um, and even though we did not have 51% of the company at my prior company, uh, we had about 30%, my brother and I, we were able to control the board once, once we, um, got certain board members nominated who were.
Look, they’re independent board members, but they’re also loyal to us. And, um, you know, this is something that they don’t talk about, whatnot people will [00:57:00] never talk about, but you gotta bring people in around you that you can trust. And when push comes to shove, they’re gonna back you. No, no people, nobody talks like that.
I know, but Bay Facts. Exactly. All right, Michele, we’re on a roll here, aren’t we? All right. I think we’re on number four. Is that right? Um, I lost my screen here that I’m, I’m jumping to it now. I’m jumping to it now. I saw Giuseppe just jump in the room. It’d be great to have him on stage. I know we missed a meeting with him, so, um, but always love to hear from Giuseppe there as well.
Um, all right, so I’m gonna tell you where we are. We, let’s, let’s just review. So we started with number eight. They don’t use systems to scale. Number seven, they don’t kill failures fast enough. Number six, failure to expand the story. Number five, and I think [00:58:00] this is where we are co misalignment around the vision.
No, we covered that. And then we covered too much funding and not enough funding and too much running on enough funding. We’re on. So next week, no, next week we’re gonna cover, they keep their original staff too long. And that happens often in companies. Number two, they fail to find the people to grow. Look team, it’s all about the people.
I know people say that all the time. It’s about the people. People. It’s true. It’s so true. I wanna talk about why I could go on for an hour on that topic. It’s so important. And the number one reason why startups fail to scale is the entrepreneur is in the way. It’s their big ego. It’s three o’clock now. I know we’ve got other meetings here at the, at the club.
It’s at our incubator. Uh, I really enjoyed this topic. We’re gonna tackle the next three next week, unless we have a guest speaker next week. I can’t remember, but we will definitely tackle 2.0 of this topic. I think it was a lot of fun. I liked the way you, you moderated that, Michele, and, uh, [00:59:00] what a real pleasure to talk about it.
And it’s such a key, uh, chapter in my book. And I’m, I’m telling you this book we had, I’ve, I’ve had over 30 years of, of experience running businesses. I spent 10 years writing the book and we interviewed over a hundred people to put this book together. It’s being published by Forbes. It’s coming out on October 3rd.
It’s called Start scale, exit, repeat. Uh, you cannot order it yet through what we’re hoping within a week or two. We’ll be able to get that up. We will have a special firstname.lastname@example.org if you sign up to the email list, and we’ll send that out in the future. So that’s another motivation. To go to startup.club and sign up to that email list.
The more important motivation, though, is we have some phenomenal speakers, some, uh, serial entrepreneurs, unicorn entrepreneurs. We have top, uh, top selling authors coming on this show, which we do every Friday, two o’clock [01:00:00] eastern called the Serial Entrepreneur Secrets Revealed. Mimi OER writes the email@example.com, my co-host Michele Van Tilburg and myself calling c Campbell.
Thank you very much for joining us, Renee. We loved having you on stage. Giuseppe, we didn’t even get to you. I know you came in late, but we, we do miss you Giuseppe. We were just closing down here right now. Any last words from my friend Giuseppe? About what? About about scaling businesses? Cuz you’re, you’re one of the, you, you’re big on real estate.
Yeah. Yeah. So, perfect. So what’s your, what’s your one tip? To help small businesses or startups scale their business. If you want to scale your business, you need to be ready. It means that you need to have the right knowledge and the right experience, Colin, because the difference between social media, real life is only one in the social media.
Everybody talking about knowledge in the real life need, need, absolutely experience. Experience is the result. The [01:01:00] knowledge, action result. If you don’t have achieved the result yet, you want to scale a business possible, you need to be humble with yourself, check around you, check your knowledge, check your results, and uh, you can, uh, hey, something that, uh, can add value for your project.
That is exactly what I did in all my life to zapper back to you. Well, I love the way you closed the show, and thank you. Thank you for coming on. This has been a serial entrepreneur secret revealed. Michele, any last thoughts before we close the room? No. Everybody have, um, a wonderful long weekend if you’re here in the US and we’ll look forward to seeing you.
As we said, you know, go to ww.startup.club. It’s free. We don’t ask for anything in return. We all do this as a labor of love to help other people and join the email list and hopefully you’ll find that you get value out of it. So thank you again. Thank you especially to all the members who attended and [01:02:00] came on stage.
All your questions, all your support, we couldn’t do it without you, and have a wonderful day. Thank you so much, and we’ll see you next week.