Nine out of ten startups fail. Or, if you prefer to look at the bright side, one out of ten startups succeeds. The crucial questions is now: what could you do to increase the odds of being the one in ten? There is no easy answer, and you will get ten different answers, if you ask ten different experts.
All I can do is offer you my take on the question, together with the advice to get answers from different people, compare them, review them and adopt the ones that make sense to you and fit your startup’s situation. At the same time, you should also be aware that even if you do everything right, provided there is anything like “right” in this context, there are still external circumstances that may undermine your plans and business activities. Nevertheless, even then, you can increase your adds through good strategic decisions.
After this preamble, here are my five recommendations for increasing the odds of startup success:
1. Keep your goals and structures flexible
Every startup is beginning with an idea of what products and services it wants to provide to which customers. As important as it is to start with a good idea and a clear purpose, getting fixated on your original idea could undermine your success.
The early phase of a startup is mainly a learning experience. It would be quite exceptional, if you could get the fit between your products and services on the one hand and the market demand by customers as well as the business model on the other hand right from the start. Don‘t worry, if you don‘t belong to this seemingly lucky group. Even renowned companies like PayPal (launched in 1998) and Flickr (launched in 2004) didn‘t find their purpose immediately – Paypal started in security software for handheld devices and Flickr in online gaming.
Thus, as long as you are still on a journey to discover your enterprise’s real purpose, you should avoid casting your organisational structure in stone. Instead, you should keep your structure flexible, in order to nimbly adapt to changes in the direction and purpose of your firm.
Responsibilities and personal accountability are important at every stage of a startup. However, you should avoid that people get too comfortable in a certain niche that might disappear when you decide to change the purpose and structure of your company.
2. Create a culture of focus and purpose
While the purpose of your startup may change once or twice in the initial phase, it is important that everyone in your enterprise is fully motivated to jointly implement the current goals.
You are out on a journey into uncertainty, and you will only make progress, if you are going jointly with a high level of energy in the same direction. If your own and your staff‘s attention is spread across numerous daily activities without a clear sense of purpose, you run the risk of being all very busy without gaining traction towards your business goals.
As an entrepreneur, your main challenge is to avoid spending time and resources on secondary activities. Things like office furniture and choosing a CRM system may be fun to do, but they are usually secondary, if you don‘t have many visitors and many customers yet. On any matter of secondary importance, you should be pragmatic, trying to go for simple and cost-effective while leaving the option to scale up later when your company is growing.
3. Define clear roles and responsibilities
Startups often begin their entrepreneurial journey with a small staff. However, even if you are just three or four people, everyone should know what their role and responsibility is. Make sure, important roles are adequately covered. Let us assume you are three developers developing a new gaming app that aims to be the new “Angry Birds”. It would be understandable, if all of you want to get equally involved in the programming of the app. Yet, this would not be effective.
While it may be unavoidable that everyone of the three will have multiple roles, there should be only one main responsible for every major aspect of the business: one, for example, could be CEO, CFO and HR manager, another one could be COO and CIO, while the third covers marketing and sales. Failing to clearly assign each important role runs the risk of neglecting important tasks. For example, if you don‘t assign the CFO role, there is a risk that you lose control over your finances and you burn capital faster than you should.
4. Plan your capital needs and sources
One of the important strategic decisions you need to make when launching a startup is whether you make do, at least initially, with the capital you can raise among your founder partners, or if you go for outside capital. In order to make that decision, you need to plan your short-term capital needs and make financial forecasts for different growth scenarios. While it may sound great to get outside capital, you should perform an analysis of the pros and cons.
Pros include mainly that your startup could move quicker and grow bigger as well as build your dream team with the qualified people you really need. However, there are also some cons to consider: going after venture capital can be time-consuming and always involves a loss of control to a certain degree. Venture capitalists don‘t give you their money for the goodness of their hearts, but in order to get a return out of your company. This often entails that you will be pushed to go big. If this is in line with your plans, go for it. However, if you have more modest ambitions, at least for the near future, you might be better off without venture capital.
If you go for venture capital, make sure your startup is investor ready. I wrote a checklist on investor readiness that you can access, if you are a subscriber of Strategic Business Insights (enter the access code sent in SBI issue 45 when prompted; if you are no subscriber yet, consider to subscribe for free).
In this context, you should be aware of the differences between business angel investors and venture capitalist firms (VCs). Business angels are individuals, often senior business people, who invest their own money. VCs use other people’s money, which they raise by offering investors a chance to take part in a fund that is then used to buy shares in a private company.
In general, business angels are most likely to invest at an early stage. VCs typically come on board at a later stage, when the business concept has been proven and initial revenues have been obtained, in order to accelerate the growth of the company.
5. Have a convincing exit strategy
Having an exit strategy is a must for startups looking for outside capital – investors require it, as the exit is what gives them a return.
There are different exit strategies. The four most common are:
- Initial Public Offer (IPO): you sell a part of your business to the public in the form of shares.
- Private Offering: you conduct a private offering of your shares to individuals or a select group of investors to raise capital.
- Merger: the option to merge with another company becomes relevant in case your company’s cash flow or liquidity become an issue.
- Cash Cow: This is rather a postponed exit strategy. Cash cows are firms that have a high market share in an industry characterized by low growth. They are able to sustain enough capital to stay afloat for the foreseeable future, as they promise years of increased profits.
Be aware that investors will want to know how they will get their money back before they invest in your company. Thus, you should present a credible and convincing exit strategy when you pitch to them.
There is no guarantee that you will be successful with your startup. However, if you apply the five recommendations above, you will increase your odds. And even if your first startup does not succeed, you improve your chances that you will not fail for avoidable reasons under your own control.
Thus, even if your first startup is not successful, it will at least improve the quality of the lessons you get out of your initial entrepreneurial experience and will help you be more successful with your next startup. The lessons learned, a good strategy, a dedicated team, and the determination to succeed will finally put you on a success path.