Friday, March 22, 2013

You don't have to be crazy to found a start up, but it helps

As H.G. Wells said, “all progress is made by unreasonable men.” Of course, he was wrong. There are many unreasonable women! Each year, in the USA alone, there are over 100,000 start-ups. Only about 10,000 get any outside funding at all and only about 1,000 get VC funding. The biggest VCs only fund low single digits per year, and the small ones may only fund any every other year or less often. Even of those funded by VCs, about 50 will become real businesses, and probably fewer than 5 will pay back the investment in the multiples they hope for. So, almost all founders waste years on the business and lose a lot of money. A very few make a fortune, a few more make a living.

Nevertheless, were it not for such people, the country would not progress and grow. Fortune 500 companies, in aggregate, are job destroyers. It is the medium sized and small companies that grow employment and advance technology available to the market. Even the best corporate labs have only a small proportion of the technology they generate commercialized. So the country, and the world, needs start-ups to sustain our growing population, even at the cost of dashed dreams and bankrupt entrepreneurs. But why do intelligent people found businesses if the ods are so intimidating?

Perhaps, it is, as they say about lottery tickets, “you can’t win unless you buy a ticket.” That is probably one of the reasons, but there are others. Firstly, most founders do not know how slim the chances of success are. Secondly, they have an idea that they totally and passionately believe in. They usually over-estimate the quality of the idea, but it is still normally a good idea. Thirdly, they assume that both selling and getting investors will be easier than it is (after all, it is self-evidently, a brilliant idea).

As a result of this, founders can be unreasonable managers and partners. They are so convinced of the rightness of the idea that they do not accept anything that is at odds with their own vision. Now there are founders who are very different, but a balance is important. There are ten key guidelines that can make the success of a start up more likely. These are:
1.     A team of equals is more likely to succeed than a single founder. There is a lot of work to do and rarely can one person alone do it all. Furthermore, it shows that the founder(s) can work with other people, and the idea is good enough to get several people believing in it enough to put their lives on the line.
2.     Having a defined target market. If the business cannot narrowly define its market, it cannot optimize its product, its message, its pricing and its distribution channels.
3.     Solving a recognized problem in a new way. If the target market does not and never does, recognize a problem, then however technically brilliant the product or service, it cannot succeed.
4.     Openness to new input. Often founders are so monomaniacal that they keep on with a plan even when they get new input or experience problems. While constantly changing is harmful, openness to change is essential.
5.     Too much focus on product vs. acquisition of customers. Getting customers is key, as a source of revenue, but also it enables easier funding and continuous product improvement. Paying customers give better product feedback than ones that are trying it for free. Balance spending against sales and marketing with spending on programmers.
6.     Having too little money. It takes a lot of time to get funding, and if the founder does not get 12-18 months of money, then the he or she can spend all of his or her time chasing money.
7.     Spending too much money on the wrong things. Fancy offices do not matter, people can work from home if needed, as long as there are people who can make or deliver the product and people working on sales and marketing.
8.     Choose the right location. Not all locations are created equal. Too many founders pick a location because they live there, or want to. Just because it’s a big city, it may still be wrong – Chicago or Dallas is almost always a mistake for a start up in technology or fashion. You need a culture that is start up friendly and that has an infrastructure to support you. For example, investors would rather invest locally than have to get on a plane to attend a board meeting.
9.     Make all your early people feel like founders. They will have a stake in the success of the business rather than just being employees there for a salary.
10. Make sure that you and all on the team make this a serious, energetic effort. You can’t play with a start up on the side and expect that it will work. Too many people are dilettantes for years and even if it is a good idea, they drift for so long that they fail, still having spent lots of money and time.
So, if you have an idea, go for it. Recognize that it is hard, but the potential rewards are great. Do all that you need to do to maximize your chances of success, and balance some insanity with intelligence.