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In this episode, we dive into Chapter 2 of the book “Why Startups Fail: A New Roadmap for Entrepreneurial Success,” which focuses on the Catch-22 situation that early-stage startups face. The author explains that for startups less than three years old, it is challenging to pursue a novel opportunity while lacking resources. The founder is short on some, if not all, of the resources necessary to exploit a new opportunity, such as co-founders, team members, investors, and strategic partners.
To attract these resources, the entrepreneur must convince multiple parties that committing to the new venture will deliver an attractive payoff. However, the founder can’t pursue the opportunity until they have the necessary resources, creating a Catch-22 situation. To overcome this impasse, the author suggests employing four tactics to reduce resource requirements while resolving, shifting, deferring, or downplaying opportunity-related risks.
The first tactic is Lean Experiments, where founders use minimum viable products to validate assumptions about an opportunity and resolve uncertainty about the new venture’s viability. The second tactic is Partnering, where entrepreneurs may be able to “rent” resources from a strategic partner. The third tactic is Staging, where venture capital-backed startups raise capital in stages, deferring risks. The fourth tactic is Storytelling, where charismatic founders can persuade people to commit resources under terms favorable to their new venture.
The author warns that each of these tactics contains potentially destructive downsides. To determine whether an entrepreneur has identified an attractive opportunity and determine what types of resources are required to capitalize on it, the author introduces the diamond-and-square framework. The diamond breaks down the startup’s opportunity into four parts, and the square denotes the venture’s key resource providers.
Join us in this episode to learn how to navigate the Catch-22 situation and choose the right tactics to build a successful startup while minimizing risks.