Author: Marta Guberna, Financial Consultant, and Patricio Hunt, Managing Director of Intelectium. Many people say that only 10% of startups are successful and that even a smaller number are more than five years old. However, these statements are often based on the number of ideas that are converted into products or services and reach the market and not on how many of those that are there are actually successful. The study carried out by Greg Stevens and James Burley in”3000 Raw Ideas Equal 1 Commercial Success” discusses this theory and, through the analysis of different cases, affirms that 99.7% of the ideas generated in the process of creating a new product fail, but that is measured from the creation of ideas, not once the company is created. At this point, the same study reveals that 60% of the projects (other than startups) that are launched on the market are successful.
Another study, in this case carried out by the Kaufman Foundation between business angels who invest in a group, found that by analyzing 1000 investments with their respective outputs, investors:
- they lost everything or almost everything in approximately 50% of them,
- they earned between 1 and 5 times what they had invested in approx.a little over 30%,
- they earned between 5 and 10 times what they had invested in about 10%,
- they earned between 10 and 30 times what they had invested in approx. 4% and
- they earned more than 30 times what they had invested at about 6%.
This study is important because it establishes that 10% to which so much reference is made, what it really means is that only 10% are projects that have a high enough return to compensate for what venture capital loses in those that are doing poorly. Although there is no ideal and definite path as to what are the best steps to follow to achieve success, there are a series of recommendations and advice to consider when you start to develop a business idea and get it to the market:
- Definition and differentiation
The first thing is a Good idea, which we define as a product that allows us to solve a problem that many people have and that they are already trying to solve, but in a more effective and efficient way than they can do it using existing products or tools. This Definition of a good idea it is very important because it includes the key elements of success: first it refers to solving a Existing problem, second to the fact that this problem has A lot of people (which is synonymous with a very large market) and third that Solve it in a better way (synonym for differentiation) .According to Professor Clayton Christensen, from Harvard University, there are two types of possible innovations, the sustained innovation, typical of large and established companies, that improves a product for a group of existing customers, or the disruptive innovation, characterized by launching products to the market addressed to a new customer segment that before the innovation did not consume this type of product. It is in this last group that startups are most successful since they are able to start working with low gross margins, which is what usually characterizes products that fall within what Christensen calls disruptive innovation.
- Team
To start a startup with a chance of being successful, in our experience, you need a multidisciplinary team consisting of at least three people with different profiles. This should be integrated with at least one profile technical, a profile specialist in the product or sector of the industry in which the company operates, and a profile of Marketing digital with computer skills. It is also essential that partners participate in the company full-time. Therefore, we could say that the dedication is another of the key factors that characterize successful startups and an indispensable requirement for investors.
- Business plan
It is clear that a startup to do well has to have a roadmap, embodied in the form of a Business Plan, where your strategy, Which is nothing other than how are they going to allocate resources over time... and what is expected to be the result of that allocation (user acquisition, monetization, or in short, net sales). The length and depth of a Business Plan depends a lot on the stage a company is in. For a startup that is just starting up, a basic idea of how it will allocate resources in the next 12 months and what milestones it plans to achieve with that money. After that phase, there is already a series of information in the company that justifies the development of more elaborate projections, at least for the next 2 years in view. Although in our experience, at that point it is already interesting to start projecting 5-year growth because - even if they are only experimental simulations - they allow us to start thinking about where we want to evolve the company and what will be necessary to get there. This type of exercise produces an interesting series of lessons because you have to answer yourself a lot of questions... and following these paths, several things usually come up that no one had thought of before. Anything to anticipate the problems that may be encountered later on is good for the company. In addition, this document is a good cover letter for investors.
- Investing
In order to start operations, it is clear that startups need capital. The most common thing in start-up companies is that the first round of funding Cover it the people closest to entrepreneurs: what we usually call Family and Friends. These people invest in people and not in companies. This is why it is common for them to finance a company even if it has neither a prototype nor metrics. When early-stage startups need a large amount of capital, they are often very difficult to finance. The usual thing in these cases is to start with the F&F round, test the concept quickly, achieve sufficient traction and a minimum notion of 'unit economics' and quickly seek a round with professional business angels, if possible complemented by active co-investors (generally specialized units of some banks) and public funding (ENISA, IDEA, ICF, IFEM, CDTI, etc.).
- Incubation and acceleration
Due to the high volume of startups that are emerging in the Spanish ecosystem, there are more and more support options for entrepreneurs. This is the case of incubators or accelerators. These are, basically, companies created or in which successful entrepreneurs who are dedicated to helping other entrepreneurs, or by large companies, that seek to innovate on the periphery of their own businesses so as not to miss the train of the future. Since there are no precise definitions, incubator activities are often overlapped and confused with those of accelerators. Incubators are organizations that welcome people with ideas and help them to focus them and assemble teams to undertake them. Accelerators accommodate teams formed with commercial companies already registered in the commercial register and operations launched in the market. Accelerators usually add value by bringing entrepreneurs closer to the ecosystem, introducing them to successful entrepreneurs, investors, setting up an advisory board and helping them — especially through brand partnerships — to attract investors to their capital. Accelerators usually ask for a percentage of companies' capital in exchange, ranging from 5% to 10%. The important thing for entrepreneurs is to be very clear about the value that each incubator or accelerator can actually bring them. To do this, there is nothing better than talking to old companies accelerated by them. And not only do you have to talk to successful companies but also to those that haven't been so successful. Also, recently, another type of company is entering the market, the”Venture Builders”. These are organizations that carry out all the initial activity of selecting the field and the business model to be launched on their own, then looking for groups of complementary entrepreneurs who can undertake these businesses and help them with their own and third-party capital to launch them. In exchange, they usually hold between 70% and 50% of the company's capital. Like everything else, these concepts evolve all the time and so do their business models, as they adapt from the concept that guided their launch to the reality of the market.
- Pivoting
Steve Blank defines startups as temporary organizations in search of a scalable and replicable business model... Therefore, the most normal thing is for the organization to undergo all kinds of adaptations in its search path. These changes can be both at the team level and at the business model level. When changes occur at the level of the business model, they are called “pivots”. Pivots are nothing more than changes to the product in order to adapt it to a group of emerging buyers. Therefore, we usually refer to these pivots in the context of what is called the “product-market fit” process. For the entrepreneur, it is very important to undertake this process with full awareness. While it is clear that the product they have launched does not meet the needs of any group of customers, we must reorient the company's activities to find what customers really need. Entrepreneurs who want to delve deeper into these issues can turn to authors such as Steve Blank but also and, above all, to Clayton Christensen and Tony Ulwick, true gurus of these subjects. In addition, it should also be noted that Once the product works, it will have to scale up, to make sales of the product grow but that they don't do it at the same time as the costs. At this point, the key for companies is to implement processes that allow them to enter and develop new markets using the least amount of capital possible.
- Do not despair but persevere
Although advice can be given, the path is not decided and each idea is a completely different world. It is very important to be patient, keep in mind that it is increasingly difficult to succeed in a such a competitive market like that of startups, and believe in the value of perseverance. If we carefully study the history of the most successful companies, in all of them we can find a moment of very high difficulty in which the level of passion and above all the determination of the entrepreneurial team made the difference between success and failure. Apple is an emblematic case... let's remember that the company was in serious difficulties when Steve Jobs returned to take the lead again to undertake what is one of the most notable business successes in history. Those who want to learn more about the topic of “founder perseverance” have a good article here: http://www.huffingtonpost.com/jd-gershbein/founder-perseverance_b_8010086.htmlIn short, the ability of the entrepreneurial team to undertake the 7 steps mentioned and, above all, to effectively manage the process and the interactions between them - innovative and differential idea, team, plan, investment, being willing to receive help, focusing on the product-market process and persevering — the development capacity of a successful startup will depend.
