95% of startups fail: how to succeed as the 5%
Developing a high growth startup is a roller coaster. Anyone who’s been in the driver’s seat will tell you it’s no piece of cake. The ups and downs of startup life are inescapable. As an entrepreneur, I know about failure. When I started my last company, I took hundreds of wrong steps, bled thousands of dollars and was nearly bankrupt.
Despite what you see in your news feed, the hard truth is that most startups fail. If you’re going to spend your time creating a startup and living out your entrepreneurial dreams, make sure it’s a solution to a problem that is market-ready and needs to be solved.
I refer to the startup trough of sorrow as a reminder of why so many startups end up failing. If we look at the general happiness level of people in early stage startups you’ll see excitement wears off quickly and, once reality sets in, the not-so-sexy startup life begins.
Surviving the trough is a difficult task and the majority of entrepreneurs are first-time busts. Valuable high-growth startups create products where no such products existed previously. Naturally, this highly uncertain, risky path can lead to few successes. The 5% of startups that do succeed exude a number of actions that set them up for unicorn stardom.
These six actions are common throughout those successful few:
1 Set the right foundation
From the onset, creating a strong base for your startup is often overlooked by founders. The success stories you read in the news can be owed to more than dumb-luck and chance. Everyday, there are micro decisions that affect the chances of your startup falling within that 5%. These decisions are evaluated by investors when conducting due diligence on your company. Investment decisions to questions such as:
- Is your cap table clean?
- Who is on your founding team and what makes them good co-founders?
- Are you creating this startup for the right reasons?
- Do you have the right advisors?
- Do you have enough money to keep the startup going?
- Are you able to de-risk your startup?
- Are you using effective strategies to validate or invalidate key assumptions early on?
The 5% of startups that do make it, incorporate the needs of their customers into the design of their business. Some tools that startups use frequently are empathy mapping, lean canvas, and user journey maps. Empathizing with your customer and visualizing their day will help you see current failures and more importantly, find areas of improvement, greatly reducing the risk of failure.
Lastly, structuring your startup with the right people builds a core foundation. Partner with people that have your weaknesses as their strengths. It is often uncomfortable to work with people who are opposite to you. There will be a clash in principles, styles, and personalities causing tension and arguments, but the difference in perspective will cover your blind spots, which will remove chances of failure.
2 Build a Minimum Viable Product (MVP)
Having a MVP that only shows the minimum amount needed to display the most results leaves out one key component: viability. Does your product hold up in the market place? Are you showing early customer demand and are you truly creating value for your customer?
One of my favorite examples of a concierge MVP was by Airbnb founders Brian Chesky and Joe Gebbia. The two founders couldn’t afford their San Francisco rent and needed a solution. They decided to rent out their apartment during a major conference using a simple platform they called AirBed&Breakfast. Before they knew it, they had three people booked for the following week. This concierge MVP allowed them to gain valuable insight into consumer experience and demands. More importantly, it allowed them to validate key assumptions initially made and, as a result, reduce the risk of failure. As speculated, not only college students preferred a homestay over a hotel.
In a very simple and inexpensive way these founders tested their market’s demand. The main goal of a MVP is to maximize learning without spending too much money in the wrong place. Brian and Joe used their MVP to make bookings. It was actions like these that moved them out of the 95% category and into the 5%.
3 Unwavering perseverance
Looking back at the startup trough of sorrow and the 95% of startups that ultimately fail, perseverance is an important characteristic that aids in weathering the storm. The ability to stay true to your vision and push through the hurdles will drastically increase your chances of succeeding.
The late Jobs convincingly stated that “… about half of what separates the successful entrepreneurs from the unsuccessful ones is pure perseverance.”
For those of you thinking of joining or venturing into your own startup, think deeply about roadblocks that will allow you to persevere. Having children, obligations, and lack of funds may hinder your available time. The Four Hour Workweek by Tim Ferris sounds great in theory, but the truth is that high-growth startups feast on your free time. They pull strings on relationships around you, your health, and your state of mind. When growth kicks in, it’s difficult to think of anything else. Most successful startup entrepreneurs have their loved ones understand the road they are on so they can plough on with their support.
4 Achieve flow
What is flow? Flow is that moment when the gears are shifting, the machine you’ve built is working, you’re at peak performance, and every person on your team is in sync. The feeling of flow is similar to the ‘pump’ you get when working out intensely. It’s that moment in your day where things click and you get deep into a rhythm of work. In startups, it’s that moment where every person on your team is 110% committed and working as if the world is ending. Flow is when you know something bigger is taking place. It’s a state of mind. Deep down every person knows what it’s like to reach flow, but achieving flow isn’t easy.
The key to achieving flow is assembling the right team to build the product. This means not only are you looking at past experience and education qualifications, but work ethic and personality. When working in a high pressure environment for long hours such as a startup, it’s easy to bump heads with teammates. Having emotionally intelligent core team members will help ease the tension and allow you to achieve flow more easily.
It’s also important to note that flow is the key ingredient for Product Market Fit. It’s a turning point in your startup that will take you up to hockey stick growth. Getting your team to flow is how a thirteen person team sold Instagram to Facebook for $1 billion in 2012.
If you expect to become a high growth startup but in reality are just coasting along you may want to consider becoming a lifestyle business instead. Reaching flow is absolutely critical and is exactly what you need to know to become one of the few startups to reach billion dollar valuations.
5 Be part of product development
Ben Horowitz explains the importance of being part of the product development process perfectly: “Bill Gates sat in every product review until he retired. Mark Zuckerburg drives the product direction at Facebook. Steve Jobs famously weighed in on every important product direction at Apple.”
It goes without saying that as an entrepreneur, being tied to your product is crucial. However, as startups grow and additional people are added this becomes less obvious. Overtime, the original entrepreneur will become further removed in order to focus on other areas of the business. It’s okay to get less involved in the product, however, it’s important to remain informed and attend key product updates.
When the entrepreneur stays tied to their product, it allows them to bring fresh ideas to the table. It’s their vision and culture that was initially injected to get the startup moving. As the team executes on that vision a strong founder crafts the features and solutions of the future. Staying tied to your product will allow you to de-risk your startup and create opportunities for growth. Some tactics include: empowering your team to make production decisions, not giving product feedback individually, and maintaining a high quality of output.
6 Know your intentions and have strong principles
Startup CEOs are driven by something greater than money that pushes them into their pursuit. This higher purpose can be anything from solving a key problem they faced, to building something that adversely affects the lives of thousands of people.
I started my first business as a 16 year-old high schooler with my friend Tommy. It was an apparel company called Pasion (a play on the word passion), and we branded it towards others doing what they were passionate about. We designed our t-shirts with guitars, hearts, and inspirational quotes. Within a few months, we had sold over 2,000 t-shirts and were sitting on a nice chunk of cash. Greed got in the way and pushed me to take all the money earned and invest it to make even more money.
I was convinced that this was our time to make some big money and go to new heights with our clothing brand. We started to talk about partnerships with PacSun, Nordstroms, and Urban Outfitters. We doubled down and put all of our cash into our next launch and found that our early teenage adopters did not have additional cash to spend on fancier apparel. For the next six months we sat on $5,000 worth of embellished sweaters, hats, and t-shirts. Failing made me realize that my motivation to make big money got in the way of why we originally created the business. This fundamental flaw brought us crashing down. Had I kept my intention to inspire people to do what they loved, Pasion could have had a different ending.
If your startup weathers the storm and survives, congratulations! You are part of a small club of people. One of my favorite games, Texas Hold’em no limit poker, is something I refer to as ‘the game of life’. At times you are a big stack (possess the most chips) and at others, you are a short stack. The moves you make within the game decide your fate. Was your bluff called? Did you play conservatively and get chipped away slowly at every round? Did you use statistics and mathematics to increase your chances? Are you mentally prepared to win? I find that the people who win the most use a combination of strategy and luck. This is not dissimilar to creating a successful startup. Those who play their cards well and position themselves correctly end up winning the game.
Seriously evaluate your reasons for creating a startup. Set the right foundation to build a product with a strong market fit. Do what it takes to get your team to flow; the momentum which will carry your startup to success. Higher principles will allow you to persevere when your startup reaches low times. Keep these in mind and you’re on your way to being in the 5%.