It’s widely accepted that start-ups are high-risk investments and that somewhere close to 90% will fail. It’s difficult to start your own business: your personal finances will probably be shot. You’ll possibly be in debt. You’ll conceivably fall out with your partners. Your personal life disappears. Your family life is in shambles. It can be ugly, real ugly.
What they don’t tell you is that it’s addictive. The passion, creating a product that adds value to peoples lives, building THE product, changing the way people do things, and being in control of your own little world. The money? It’s part of the equation, but at the very end of motivations. It’s an emotional rollercoaster and it gives you an addictive rush to challenge the status quo.
Reasons for failure
No real market
Business model failure
Management team lacks the right skills
Running out of cash
It's like going to war without an opponent, without weapons, without generals, without ammunition, and ending up on the wrong battleground altogether. Maybe it’s time to look at Start-Ups differently. Follow the money…
Pre-seed financing, seed investors, and rounds 1 capital, all the stakeholders will be looking at Profitability, Repeatability, and Scalability. If the numbers and the potential look interesting at first glance, they will conduct a due diligence to ascertain that the fundamental assumptions are valid. That means essentially market opportunity, market relevance, market fit and assumptions made in the business model. Let’s face it, if you don’t have validated information (not data but information) at best you have a hunch, an idea, a hope, or a wish: not a start-up.
A mediocre idea with a solid team is likely to attract financing and will probably succeed.
A brilliant idea without a good team will probably not make it to seed financing. People invest in teams as much as they do into ideas. Teams make things happen.
So let’s go back to the generally agreed reasons why start-ups fail. 1, 2, and 5 relate to validating assumptions regarding demand, the market, and product fit. 3 relates to getting the right team together. 4 – the lack of money – is probably a resultant of 1, 2, 3, and 5.
To parry these shortcomings, entrepreneurs are directed towards accelerators whose goal is twofold: first to alleviate immediate concept shortcomings by mentoring, tutoring, and guiding them through a hostile environment, and second to act as a bridge with potential investors. Most will provide pre-seed money in exchange for a part of the company’s equity.
Do accelerators beat the odds?
The average start-up survival rate in the US is around 40% after 6 years. In comparison startups fostered by Techstars in 2012 had a survival rate of 75%. Y-Combinator start-ups had a survival rate around 70%.
Data also seems to show that companies that go through top tier accelerator programs are stable and secure after 4 to 5 years. Non-accelerator start-ups on the other hand continue to fail past the 7th and 8th year. M&A activity show a higher percentages for accelerator start-ups versus non-accelerator (startup-accelerator.com and seed DB).
Different markets will have different characteristics; different success/failure rates and accelerator program are not born equal. One way of looking at it is time. It usually takes about 4 years for an accelerator to evaluate its performance. The longer the accelerator program has been in business, the more likely is it to perform above average. There are exceptions of course.
A start-up is tough work, ultimately worth it for those who succeed, and the only way to succeed is to get as much help, advice, and support, from people who know what they’re talking about. Advice is free, and it’s up to the entrepreneur to sift through it all with one massive purpose in mind:
VALIDATE EVERYTHING !
You can change the product and you can tweak, switch, and change business models. What won’t change (at least immediately) is the market. Validate that and you should be on the right track. Ask early adopters and potential customers as many questions as you can. One entrepreneur set up an Internet site for his product (before actually having a product to sell) just to analyze the feedback he’d get. Another ignored praise from friends and family to focus on actual feedback from people who couldn’t care less about his start-up. Others test marketed prototypes to evaluate prospective customer feedback. There are hundreds of ways to validate information.
Whatever you think you know will be proven wrong.
Adjust, correct, and beat the odds. Products fail. Business models fail. As a start-up test them and validate them. You can always work on a new product and you can always develop a new business model. Let them fail but don’t let the start-up fail. It’s not about the idea; it’s about the market you are catering to. Let the market tell you what to do.
You are not the market; they are.
I would love to read about your own experience on validating assumptions. Was critical to success? Did you have to adjust your aim? Was it a team effort?
In one of my start-ups we were so convinced that our product was a sure thing that we did not validate the market. All our friends agreed that it was as brilliant as sliced bread. It wasn't... People tried it and never came back for more. Profitable? Check. Repeatable? Scalable? ... Not.
The supporting actors stole the show - repeatability - and took 20% of the UAE market in less than two years. It was a stroke of luck but also kudos to my partner who made it succeed; i wouldn't be surprised if he takes a sizeable share of the GCC when he cracks the scalability issue.