Why launching new businesses slowly is actually riskier and more expensive
James Shomar, Chief Leadership Officer
I’ve noticed a pattern recently. Many CEOs tend to launch new businesses much slower than they should. Whether they’re entering a new market, launching a new product, or following a new business model, they tend to execute a very well thought out but relatively slow go-to-market plan. There are a lot of reasons for this, and many sound quite logical upon first glance:
- We want to make sure we get all the bugs out of a new product before sales ramp up.
- We know how important it is to build a strong reputation with our first customers.
- We need to make sure we have all of our marketing figured out first.
- We want to leverage government grants (if possible) to fund product development.
- When my friend launched something new this is the way they did it.
- Launching something new is a big investment for us and we want to do it right the first time.
Counterintuitively, launching a new business slowly and conservatively is actually one of the riskiest things you can do; far riskier than being fast and experimental. Going slow can masquerade as being very judicious and efficient with your resources: man hours, money, time, etc. It would seem logical that if you’re taking the time to make decisions that are well thought out and deliberated that you would therefore be using your resources more efficiently. In reality, what usually happens is the financial startup costs (which were high to begin with) usually go over budget, the opportunity cost is very high because of all of the time that could have been spent elsewhere, and the ROI is low because it takes so long for sales to ramp up and deliver the cashflows necessary to break even.
Moving fast is just the opposite. I’ll caution by saying that moving fast does not mean being rash and haphazard. Moving fast actually requires a CEO to be very self-aware and accept the fact that only market data can point you in the right direction. It’s about being very intentional with how you spend your time and resources to run focused micro-experiments. Those experiments are designed to give you feedback from the market very quickly so you can iterate without huge upfront investments. When you move fast you are looking to make data driven decisions so when you do iterate, you’re hedging your bets. Moving fast allows you to find product market fit before making large investments to ramp up sales. Moving fast can even be a competitive advantage because you learn these things before your competition does. Moving fast allows you to minimize your time to break even because your investment was reduced and you generate sales early. Moving fast also delivers a higher ROI because you can use market data to develop a predictable and scalable sales model. I told you it was counterintuitive, but I’ve launched and invested in dozens of new businesses and coached hundreds of CEOs and I’m yet to come across an instance where they were better off with a slow, conservative go-to-market strategy.
There is a reason the “lean start-up” model exists and in large part remains best practice. No amount of business experience, brand recognition, or market positioning can fully make up for what lean start-up has to offer. Even entrepreneurs who started their company by practicing lean start-up, will still sometimes fail to leverage it as they mature and launch new growth initiatives.
Someone asked me recently how I look at “risk” in the context of a new business. It’s a reasonable question as modern culture often frames entrepreneurs as “people who take risks to try something new.” Underlying that assumption is that launching a new business is like playing craps and betting everything on black 22. Smart entrepreneurs, however, prefer to look at new venture risk as a game of Moneyball; a go-to-market strategy in which we can overcome the odds, hedge our bets, get better leverage from our resources, accelerate our time to market, and often create a competitive advantage in the process.
It’s not too good to be true. It’s thinking like a start-up even when you aren’t one anymore.
James is excited to get to know MACNY’s members and to help them grow their businesses. If you would like to connect with James, please email him directly at [email protected]. James will also be leading a monthly Growth Forum. Click here to register for the session on January 26.