Seven Questions About Startup Success

If there was any doubt that Canada is a nation of entrepreneurs, take a look at these Statistics Canada numbers: last year, small- and medium-sized firms employed 13.7 million people, or almost 85 per cent of the labour force. Add in the fact that between 2011 and 2021 entrepreneurship grew more than 50 per cent in Canada, and you begin to get a sense of just how much Canadians love running their own businesses.

That love doesn’t always work out, though. About 80 per cent of businesses survive their first three years. That number drops to about 70 per cent by year five and slides from there. And then there are the recent rifts of high inflation, high interest rates, and a looming recession that could mean hard times for even more startups in the months ahead. 

So what can entrepreneurs do to minimize the risks and join the ranks of successful Canadian business owners? Smith Business Insight asked four experts to find out: JP Shearer, the associate director of the Centre for Entrepreneurship, Innovation & Social Impact at Smith School of Business; Shayn Diamond, a partner at venture capital firm Whitecap Venture Partners; and entrepreneurs Karn Saroya and Natalie Gray, the founders of Web3 reinsurance platform Re. Here’s what they told us.

What major mistakes do entrepreneurs make when they’re starting out?

Karn Saroya and Natalie Gray: There are really four big errors we see. One, they focus on things that do not grow their business. Conferences are fun but they do nothing for your bottom line. Two, and this is somewhat related, they place too much importance on vanity metrics. The most important metric you should be chasing is revenue. Page views, likes, shares don’t matter unless they lead to revenue. Three, hiring too early. Nothing bleeds cash like headcount. And finally, some entrepreneurs will build too much software before they figure out how the product fits in the market. Software is expensive, and even more expensive to maintain. The best code is no code.   

Conversely, then, what are some regular habits successful entrepreneurs tend to share?

JP Shearer: Some of the most successful entrepreneurs don’t believe they have power over anyone. They focus on the collective power they have with others to get things done and the power within themselves to achieve their goals. Successful entrepreneurs also tend to surround themselves with people who can mentor, advise and challenge them to be better. And they listen to understand those people rather than listening to respond. They are incredible chess players as well. They think three moves ahead and control the venture game.  

What questions should someone launching a new venture ask themselves over and over again as they start to build their business?

Shayn Diamond: I think the biggest question should be, who am I doing this with? Who’s sitting across the table with me? Because that’s the person who will be in the trenches with me. And that question can be, who’s sitting across the table from me in my personal life, because [starting a business is] a huge investment of time and mindshare and risk. It can be, who’s sitting across the table from me in terms of my partner or co-founders? And then also, if you go down the path of investment, who’s sitting across the table from me from an investment perspective? Misalignment on any one of those three can result in catastrophe.

What are the key elements of scaling a business that entrepreneurs should pay attention to, but don’t?

Shearer: I always try to remind entrepreneurs that the economics of the business are fundamental. Cash is king. Pay attention to the bottom line and all the associated costs, not just the total revenue figure. If that is your only focus, it can quickly give you a false sense of security. You also need to avoid the urgency or tendency to scale fast. As ventures grow, the company has to evolve with it, and that comes with complexities. This means putting functional teams in place, scaling your infrastructure, training or hiring leaders and implementing systems and processes. Slow down and think through these steps. Entrepreneurial ventures live or die on their decisions between growth and scale.  

What’s your best advice for pitching a business to investors?

Diamond: Honestly, I can’t stand it when somebody comes in and tries to sell me the phone book. They have the best thing since sliced bread and they have a 10-page slide that sounds like they’re at a TED conference. It’s table stakes that you believe that what you’re offering is going to change the world. More importantly to us—and related to the earlier question about surrounding yourself with the right people—we [as investors] equally have to surround ourselves with the right people. So I would much rather have an honest, down-to-earth conversation that’s not premeditated, that’s off the cuff. Free-flowing conversations are the ones that result in investments a lot more frequently than one-hour monologues, because for us we really stress the interpersonal relationships and connection. At the early stage, knowing who we’re going to be working with is usually more paramount than what they’re doing. 

What are signs that a business idea may not be working, and it’s time to abandon it or change strategy?

Shearer: An entrepreneur’s biggest challenge is knowing when to let go of the original idea. They label themselves a failure if it doesn’t work out, so they keep trying to force it to work. Any entrepreneur who goes to market with a product-centric mindset—that is, they haven’t considered the customer in any way—will likely crash-land pretty hard. Some of the signs it’s not working: You’re burning through cash faster than you’re generating it, leading to a radically reduced runway; the market is not buying your product, and you fail to ask yourself why; and you fail to recognize [the business] has been going nowhere for a lengthy period of time and you lose sight of why you started this in the first place.

Can failure make you a better entrepreneur?

Saroya and Gray: One hundred per cent it can. Knowing what doesn’t work can be just as important as knowing what does work. The key is to embrace failure by testing in small iterations. If something isn’t working out, stop doing that. If something is working out, double down on it. You also have to remember that it doesn’t have to be a complete failure to offer a lesson or be done better the next time. From a sales call, to a pitch, to a product launch—there is no limit to doing better than the last time. Ask yourself what went well, and keep doing that. What didn’t go so well? Why and how would you do better next time?