Posted on March 18, 2014 @ 05:56:00 AM by Paul Meagher
In yesterday's blog I discussed the idea of "hardiness zones" for plants and suggested that startups might be more or less hardy which would determine what types of economic zones they might be able to survive and thrive in. I didn't offer up any account of what startup hardiness might consist of because I frankly didn't know how to tackle defining it in a plausible way. I now think I have a method that might be used; namely, to examine failed startups or businesses, figure out what factors caused them to fail, and thereby identify the factors that contribute to startup hardiness. The companies that fail lack these factors and are less hardy; the companies that succeed have the factors and are more hardy. The assignment of a startup hardiness score is not the result of measuring some single underlying factor but the outcome of multiple underlying factors that determine the hardiness of a business relative to an economically defined "hardiness zone". Just as plants have many adaptations that allow them to survive and thrive in tough climate conditions, business have adaptations that allow them to survive and thrive in economic zones that are more or less difficult to survive and thrive in.
In my daily newspaper, they reported on the closure of a bakery & cafe business that was well known in my home town and very popular. They were in business for 7 years all told, but had to recently declare bankruptcy and close their two locations. The cause of the failure was well documented. They did very well at their first location, decided to expand into another location at the prompting of a local successful businessman, but the startup costs ($265,000 loan for renovations), loan financing costs (%18.5), monthly utilities ($2000 per month) and monthly rent (undisclosed except to say it was "high") put an untenable financial burden on their complete enterprise. The businessman was lured into the second location because he thought it would be a better economic zone to do business in because it was growing again and had a larger potential customer base than his first location; however, he arguably got into bed with the wrong businessman whose success may have blinded him to the poor financial deal he was getting into. The businessman owned the building so stood to make large profits off the startup if he could make it work, but the startup couldn't and it sunk his whole enterprise.
So what can we learn about business hardiness from this case? We should keep in mind that the business did well for 6 years prior to their failure in a very tough economic zone that required considerable hardiness to survive. They had overflowing parking lots and had to expand their first building to handle the volume of customers. This in an area with a sparse local population base and below-average to average incomes. The quality and uniqueness of the product they were offering drew people in from far outside of their local population base and it became a destination point in a popular tourism route. So having a quality product delivered in a quality manner is a factor that made them a hardy business. The business may have done very well in an economic zone that required less hardiness, but they wanted to live where they were and try to make a go of it there. The owner was a nice guy and got along with many people in the community including local farmers and fisherman who he sourced product from. They returned the favor and frequented his business and promoted it. Goodwill and reciprocity are important hardiness factors in small rural communities because local negative gossip can easily kill a business. This is a factor that is important to some degree in more urbanized businesses with a larger population base, but it is arguably critical to survival in depressed rural zone where only the hardiest of businesses can survive.
The downfall of the business could be summed up as poor financial acumen. So a hardy business needs to be good with finances not just in the initial stages of opening and operating a business, but also when you decide to grow your business. Once you achieve initial success operating on a shoe string, it might be easy to overestimate your growth potential and make unwise financial commitments when entering into a second phase of growth. So another factor that is important in determining the hardiness of a business is the ability of the business to manage their finances during the startup phase and during growth phases.
The concept of startup hardiness can be fleshed out via a comparative examination of businesses that have failed and succeeded in your economic zone and in other economic zones. Through this process you can come up with a list of factors that it takes to survive and thrive in your economic zone as a startup or as an expanding business that may be entering a similar or different economic zone. My analysis suggested that there are at least three factors involved in determining startup hardiness - the level of good will and reciprocity towards the startup, the quality of the product and/or service being offered, and the ability to manage finances during startup and growth. The hardiness of the startup might be evaluated according to how many factors are present, to what degree, and according to a factor weighting that is determined by the type of economic zone the startup is operating in.
The concept of startup hardiness may offer a framework you can use to organize and understand why some startups fail or succeed. The metaphor of plant hardiness and hardiness zones can stimulate productive thinking about what startup hardiness consists of.