Back in the day there really wasn’t anything called a “startup”. New companies were just all called “small businesses”. That ended with the tech startup success of the Microsofts and Googles of the world, who rapidly created large, successful companies not all that long after they were started. These days we romanticize the startup and all it’s attributes. But the stone-cold fact of the matter is that even among venture capital-backed startups (considered startup royalty) the failure rate is about 3 out of 4. The rest of the startups not backed by institutional investors have it even worse.
So creating a startup and successfully growing it into a going concern is HARD. It’s important to understand what factors raise and lower the odds of success the most. One caveat: My list is built with the basic assumption that you’re basically on the right track, building a product that SOMEONE needs. Below we’ll take a look at a few factors that I consider most important.
The most important startup success factor: FOCUS
In my opinion, focus is probably the most important thing – within an entrepreneur’s control – to get right. Startups are always tenuous by nature. This brings with it the uncertainty that distracts normal humans, as well as makes them want to “hedge their bet”. That hedging may mean choosing two market segments in your initial business plan (one is ALMOST always the right answer). Or patenting five different ideas, when you can really only afford to develop one. Or spending too much time making financial projections, when they won’t matter anyway if you don’t find a way to shore up your marketing efforts.
The potential list of “de-focusers” deflecting you from tech startup success is practically infinite in an early stage environment. You’re starting everything from scratch so there is a huge number of things that need to be done, and only so much time and money to go around. Couple this with all the inherent uncertainty and it can be hard to know where to spend your extremely scarce time and energy. But you MUST figure it out. Distractions are very expensive in a startup. The ability to separate the very-important from the just-important is critical to success in this environment. Not only to understand conceptually where resources need to be expended, but having the discipline to truly focus your resource on the activity that is most important AT THAT TIME, is often the tipping point between the two potential startup outcomes, success and failure. There is often a very thin line between these two outcomes for a startup company, and they ability to focus can be the difference.
Some successful startups are run by planners who write long, detailed business plans with well documented quantitative projections. Others start and operate their business with a plan written on “the back of an envelope”. But regardless, the odds of everything developing as you originally envisioned it would happen are practically nil. Nearly every tech startup will be forced multiple times to adapt and maybe even make major pivots.
Because of this, there is a premium on a startup management team being able to “think on their feet” and change their game, without losing their minds in the process. Startups must be nimble enough to roll with the inevitable unforeseen punches from such forces as competitors, economic conditions and even luck. I find that being nimble is one of the most important factors in determining whether a startup survives and reaches the holy grail of profitability, or goes to the graveyard with the bulk of startups that fail in that quest.
There is an old saying in business that goes “if we could only get 1% of that X billion dollar business we’ll be rich” This is absolutely the WORST way to think about any startup. Try to do this and you will almost certainly lose your startup money.
The way to win as a startup is to define a market segment in which your embryonic startup can be (preferably) the LEADER of the market. But certainly, it’s important to target being within the top 2 or 3 competitors in market share. You do this by having an advantage in that target market segment. Because if you don’t have some kind of advantage, you’ll end up with negligible market share.
So define your business in a manner where you have real, defensible differentiation from the competitors already in that segment, whether that differentiation is technology, culture, operating efficiency or something else. To do this you must boil down the target market to that SEGMENT of the larger potential addressable market where you can truly have an advantage. There are many ways to do this successfully, which I’ve written about previously. So I don’t want to repeat myself; you can read the article on strategic advantage here. But once you’ve defined the market segment where you perceive you have enough advantage to become a leader, focus relentlessly on this segment until you’ve “WON”. Only then should you look to expand.
Funding which matches the task at hand
A boot-strapped startup SaaS or mobile software company is in a very different situation from Microsoft with respect to resources, to use a very extreme example. The biggest difference, of course is that Microsoft almost certainly won’t run out of cash, at least not anytime soon. If you’re a software startup, running out of cash is almost always the reason for your premature death. Think about it. There are lots of reasons that cause a startup company to falter, but ultimately what kills them is running out of cash.
So just raise more cash, right? Unfortunately, there is a downside to raising too much cash, such as shareholder dilution, the extreme amount of management time it takes to raise funds, pressure from investors to deploy all that capital, as well as the not-always-understood fact that too much capital can make a management team stupid. Just to name a few. So even if you could raise excess cash, it often isn’t a good idea. But of course we’re talking about “rich people’s problems” here. The issue for 99% of technology startups is the inability to raise what would be considered even adequate cash, let alone excess. Just finding a way to gather the minimum financial resources needed to survive and make it to breakeven is a huge challenge for all but a lucky few.
So the key is “rightsizing” the business plan to the amount of capital available. Conversely, you need to fund-raise to a level consistent with achieving this survival goal in your target market, with maybe JUST a bit of extra capital to allow for small mistakes. I believe that this is one of the most important and least understood aspects of startup success. If you give away the store to raise a lot of money, there won’t be much of a payoff at the end for all of your hard work and risk-taking anyway. But if you don’t raise enough to get to the finish line, the payoff will be zero. So it’s really, really important to “bite off what you can chew”; pick a market segment you can win in which is consistent with the financial resources that you can realistically muster.
Objectivity about weaknesses & relentless continuous improvement
No early stage company is perfect. Far from it. As we all know, no tech startup EVER has enough money. All management teams are missing key experience and/or skills in SOME aspect of the business. Unless you are truly a pioneer creating a completely new market (which has it’s OWN huge challenges), there will be existing larger and stronger competitors that appear to dwarf you in capability.
This means that the startup entrepreneur generally needs to be MORE critical of his own company’s performance than anyone else in the market. Trust me, no early stage company starts out executing the best in their marketplace; often not even well enough to survive in some functional areas of the business. So I find that another big difference between startups that make it and those that don’t is often the ability to look inward, self criticize and to ask yourself: “what are we doing sub-optimally, and how can we do it better?”. To some this seems obvious; to others it may sound like a negative approach to life. But in reality it’s very hard for many people to do, especially as you’re busting your butt and putting in 70 hour weeks.
Sometimes it helps to seek outside assistance in this evaluation. Outside advisors can often more clearly see issues that the founders can’t due to the startup haze you’re in, fighting daily just to survive. I find that the most successful startups are usually open to outside analysis and assistance. But whatever it takes, it’s the proverbial tortoise who steadily improves who often beats that hare that jumped out in the lead due to some disruptive technology or tactics. Of course, if you can both disrupt and continuously improve, all the better for your prospects!
Understanding internal needs vs. wants and necessary vs. nice-to-haves
Just like my discussion above about rightsizing your business plan and biting off what you can chew, it’s of corollary importance to keep that same mentality in your actual operations. Again, every startup feels they need “more” of everything. People, money, office space, etc. So it’s only human nature that when there is a little extra in the company’s proverbial pocket, to want to spend it on SOMETHING you’ve been yearning for. But in startup mode it’s really important to remember how precious startup capital is. In these earliest stages, it’s imperative to spend it only on absolute necessities, not nice-to-haves.
In my experience there is always a necessity expenditure required shortly down the road that you haven’t counted on. Once you get past breakeven it’s OK to breath a bit and maybe go for a few of those most wanted “luxuries”. But while you’re still a business that has a “burn rate”, don’t do it; as controversial as this will be to those following typical VC-backed startup practices . In this phase, startup capital needs to be rationed like food in a bomb shelter. If you don’t, you’re likely to starve before the danger of premature failure has passed.
Startup success & luck
So this one will be very controversial to many readers. Many entrepreneurs out there strenuously object to the idea that luck plays any role in the success of a startup company. Many times you’ll read the story of a successful startup company that reached great heights and luck plays no role in that story. But remember, the winners write history; in my experience the stories told down the road doesn’t always match the reality of what actually happened.
Sure, you do “make your own luck” by working hard and “surviving long enough for luck to find you”. But luck plays a big role in practically everything in life, and tech startup are particularly susceptible to the whims of lady luck. Whether or not you met that perfect VC for your company at the one networking event you chose, out of ten you could have attended. Or whether you introduced your new product a week before, or a YEAR before Gigantic Software Corporation announced something all too similar. Or you opened the company’s doors two months before a worldwide pandemic. The startup success rate is definitely higher among the lucky! Luck almost always plays a role.
How you react to GOOD and BAD luck is of course hugely important to your ultimate fate. But you can only control what’s within your power, and not everything is. So be prepared to roll with the punches, because every startup CEO experiences some hits that they weren’t expecting and don’t feel are fair. Such is life on startup lane.
There you have it, my list of 7 critical areas for a tech management team to optimize for startup success. This is my list, but it’s certainly incomplete. You may view other factors as equally or more important than those on my list. So what makes your list? Please fill us in using the comment field below.
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