By Martyn Dawes, Coffee Nation
When I started Coffee Nation I thought I had found an idea that was good to run with - simple to operate takeaway coffee dispensers installed in newsagents and convenience stores across the UK.
A similar offer already existed in the US and what works there usually comes here. Also, coffee shops were just starting to appear in the UK so I thought the signs were positive.
I was right on all counts but I then made what was to prove an almost fatal mistake. Confident the business was ready to start, I completed my desk research, identified suppliers and set about writing a business plan and then realised I needed to raise funds to grow the business. My business plan told me how much.
Unfortunately, the following 18 months were to prove a rude awakening. Not one of my coffee machines hit the forecast sales numbers. This meant retailers began to lose interest. Worse still I had recruited an Operations Manager and his salary was burning through my cash reserves at a rate of knots. If I didn’t act quickly it would be game over.
I had failed to recognise an almost universal law of business start-ups. More than 9 out of 10 businesses become successful doing something different to what they started out doing.
I had wasted valuable time and money writing a 5-year business plan with detailed projections and then tried to fund it from scratch.
I had to back pedal fast – what I needed was time to figure out how to get my proposition right. Some people were buying a coffee but only a fraction of what was needed to make each site profitable – for me or the retailer. I slimmed down my business (I had nearly 30 machines dotted around the UK – another mistake) and had to say goodbye to my only employee. These were tough decisions but I had to stop the cash burn and get back to a minimal monthly spend. That would take the pressure off me so I could find the breakthrough I so badly needed.
My mistakes were now clear to see. My original idea made sense but I had not tested it on a small low cost basis before running away with plans, accountants and investor pitches. My research had been rudimentary which then meant my business plan was full of flawed assumptions. It was a professional enough looking document but was basically rubbish. I had then tried to raise money for this flawed plan and started to recruit people because that’s what I had said in the plan.
What I needed was evidence that I had a compelling offer that people would pay for and come back and buy again and again. For this I needed no more than a handful of machines which I could have paid for out of my own money – that way when I had the proof I could secure investment at a much better price.
I got out and spent my time listening to customers and observing. The answer did appear and I replaced four of my instant coffee machines with real espresso making equipment grinding the beans fresh for each cup and with fresh milk. My sales took off. I now had the facts I needed – sales volumes, drink prices and great customer feedback all of which I could incorporate into a simple business plan to raise seed capital. In one day I was able to raise £100k from business angels and my bank matched this with a £90K small firms loan.
Most start-up entrepreneurs think they need money when in fact they need evidence. Money is the last thing they need. The danger is that they’ll succeed in raising money and are then committed to implementing a flawed plan. It then gets really hard to look yourself in the mirror and your investors in the eye and admit you were wrong. You then need more money to survive and buy you the time to work out the answer but the best you’ll do is more money at a high price. Massive dilution usually results and founder motivation starts to disappear. This fate sadly awaits many entrepreneurs.
Remember, plan A almost certainly won’t work – it took me to plan F before I had the finished product. Conserve cash and use it sparingly to undertake low cost trials to get the evidence you need to take you to the next stage. Those great results give you added confidence and momentum. Confidence underpinned by strong test market results attracts investors. Learn to distinguish assumptions from facts. Don’t gamble finite resources on a dash to get trading before you know if your idea is a winner.
Martyn Dawes is the author of Wake Up and Sell the Coffee: The story of Coffee Nation and how to start, build and sell a high-growth business, published in January 2014 by Harriman House.