The ingredients for a successful startup

There are a couple of research reports out today which indicate the impact of a number of different variables on the likely success of a startup.  As with cooking in the kitchen, having the right ingredients doesn’t guarantee success, and equally a good cook can make a great meal out of almost anything, but high quality raw materials undeniably make success more likely both in the kitchen and in the world of startups.

However, in the kitchen it is generally well understood which are the ingredients where quality will make a difference, whereas in startups the relative importance of factors like the age of founders and the balance of the founding team have largely been matters of conjecture and ill-informed debate.  As an aside, in my opinion most business literature suffers from the difficulty of getting high quality data and is over-reliant on anecdote and case study, which is where the startup world has been.  Until now…

First up is a report called the Startup Genome which aims to ‘crack the code of innovation’.  The full report is worth a read, but here are a couple of highlights about the characteristics of successful startups:

  • Solo founders take 3.6x longer to reach scale stage compared to a founding team of 2 and they are 2.3x less likely to pivot. [I.e. teams are much better]
  • Balanced teams with one technical founder and one business founder raise 30% more money, have 2.9x more user growth and are 19% less likely to scale prematurely than technical or business-heavy founding teams. [We all new that a mix of technical and business founders is best, but maybe not this much better…]
  • Founders that learn are more successful: Startups that have helpful mentors, track metrics effectively, and learn from startup thought leaders raise 7x more money and have 3.5x better user growth.
  • Startups that pivot once or twice times raise 2.5x more money, have 3.6x better user growth, and are 52% less likely to scale prematurely than startups that pivot more than 2 times or not at all. [Interesting to note that few successful entrepreneurs get it right first time and that too many pivots is a clear negative indicator]

And here are a some common mistakes:

  • Founders overestimate the value of IP before product market fit by 255%.
  • Startups need 2-3 times longer to validate their market than most founders expect. This underestimation creates the pressure to scale prematurely.
  • Startups that haven’t raised money over-estimate their market size by 100x and often misinterpret their market as new.
  • Premature scaling is the most common reason for startups to perform worse. They tend to lose the battle early on by getting ahead of themselves.

The message here is clear, assuming the data is right, some founders would do well to reign in their natural bullishness a little (remembering also that founders who learn are more successful).  As I’ve said many times before, the most common way that venture backed startups get into trouble is scaling before the market is ready for them.

And finally, to the second report, which comes in the form of a blog post on Techcrunch from Adeo Rossi, founder of TheFunded.com.  He is reporting on data from the Founder Institute which had a couple of interesting findings:

  • Older age has shown in the data to correlate with more successful entrepreneurs up to the age of 40, after which it has limited or no impact. [I buy this overall, experience helps, but suspect that if the data was cut for truly revolutionary ideas and some of the more innovative market segments younger people might come out better.]
  • Fluid intelligence is a largely genetic trait that measures one’s ability to quickly learn a rule set and apply the learned logic to solve problems. It can also be referred to as abstract thinking
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  • Obviously got to say we fit pretty neatly into all the good bits (founding team size, age, skill mix, being learners/having fluid intelligence). Hoping we can avoid the mistakes, even maybe even already done so in part e.g. ensuring flexible scalability at both tech and business levels.

    The mistake I’m interested in getting more input on and thus help avoid, would be estimating market size; my training suggests that, depending on the product type, you should be able to identify the target demographic and then use available statistics to provide a decent estimate of the market for the product. Obviously that doesn’t work for all products (what’s the demographic for people that would actively Tweet?) but should for ours. Is that the wrong way to estimate the market? As a startup that hasn’t raised money, does this mean we are probably over-estimating our market by 2 orders of magnitude? Hoping not…

  • Hi Chris – if you can figure out who might buy your product and how much they might pay then you will be in good shape. The key is in not being too optimisitic….

  • Thanks for bringing this to our attention Nic.

    I found it fascinating that the biggest winner in terms of a metric (x7) was the ability to learn – and learn from mentors. This fits exactly with the ability and willingness to pivot the business in response to what is really happening (ie. learn from what the market is telling us) – but not so often that the entrepreneur is jumping from one idea to another.

    Equally, the need to have business and sales people on board (for tech startups) suggests that the founders have already taken on board the need to balance the team.

    So, are we getting a picture of the perfect team?

    Inventors (or tech people) plus marketing and sales people, lead by a CEO who can listen, can run a team in an open fashion and help his / her people learn from what the mentors, market and metrics tell them, and, when needed, pivot.

    Br
    Neil
    @neil_lewis

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