Over the years, I’ve collected guidelines from my professional experience at working at start-ups, building a start-up, selling a start-up, and working at a large corporate post-acquisition as a senior executive.
Although succeeding at start-ups has a huge luck component, second-timers have a higher success rate than first-timers (almost double, at least according to this very old article: https://hbswk.hbs.edu/item/performance-persistence-in-entrepreneurship).
I believe that the experience component is very substantial, and that experience comes at two flavors: What company to build, and how to build it. I will be focusing on the former on this article since I believe it’s both more critical and more important to address early on.
Here are the basic guidelines for how to pick an idea to focus on — at random order.
1. Use your relative advantage
Although I did say random, I will note that I consider this one the most important one.
To succeed at a start-up, you must be the best at what you do in the world. Often your start-up will be acquired only after an acquiring company looked for the best company there is in the market. Or alternatively, gaining enough market share for a start-up to actually succeed (which usually goes for niche products or “feature” type products) is very hard if you are not #1.
To be #1, you must use your relative advantage because there’s a high chance that the entrepreneurs that are more capable than you in what you want to do will do better than you. Competing start-ups, like mushrooms after the rain, tend to grow together, since you can never have an “original” idea if you actually succeed in solving a problem that many people already have.
Not using your relative advantage puts your start-up at second place from day one — and since you can only focus on one thing, it’s just not enough to be second place at that one thing.
Here’s an example for using your relative advantage: let’s say you’re an engineer at Facebook, and that you’ve managed to write a new DSL for big data stream processing. You’ve open sourced your technology and have found out that there’s a lot of traction in the project, since it’s the only solution in the world that solves that type of problem. You’ve empirically proven that you are #1 in the world in building this type of technology — which means that if you go and raise money for starting a company that builds a product that utilizes this type of methodology (a DSL for stream processing in this case) then you are much more likely to succeed (and do it faster) than others who will attempt to do the same. By the way, venture capitalists would absolutely love this and would invest in you immediately.
2. Consumer start-ups are high-risk but high-reward
From one side, there is no way to predict how humans will respond to a new product. But if you try and build a product that already works, you’re at a huge disadvantage from day one. Therefore, the first option is the only real option for building a consumer start-up. There are a few caveats though:
- Building a consumer start-up that takes an existing concept and applies it to a new platform: A good example is a company called Lightricks. They have built a set of mobile applications that allow a novice user to photoshop their photos with ease. Their technology is very defensive as it is extremely complex, so not many others can replicate their apps. The need to photoshop is an obvious one, so they have used their relative advantage (see point #1) to ensure that they’re the market leader in providing a solution to such an obvious need on mobile. Keep in mind, though, that there are still risks involved in product market fit which they have successfully overcome (e.g. the need to photoshop on mobile does not imply that their apps will generate revenue).
- Knowing an industry secret: Peter Thiel mentions this type of knowledge in his book Zero to One (highly recommended). A good example would be gaming companies who cracked the “secret” of generating successful gaming start-ups. By learning and experimenting with how to develop profitable games, successful apps can be developed with much less risk compared to developers who do not have that type of experience. A good example would be “Clash Royale” by Supercell, a game which swept over $2b in revenues. There was little doubt that their app will be successful, as they’ve managed to “find the formula” for building a completely new game with a new concept and ensuring with high probability that it will be a worldwide hit. Things they’ve managed to learn are things like what type of casual games can be adjusted to be fun on a mobile phone, how to build an in-app purchase system that will generate high amounts of revenue by creating gamer addiction, etc.
3. Enterprises LOVE process
As companies scale, the need to be more and more organized grows linearly. For a 50 person company, you can just ask the administrative assistant to take care of the flight arrangements for your employees. For a 50,000 person company, you need to pay for a service to do that or buy a SaaS product that lets employees book flights and hotels on their own.
Large enterprises build process around just about everything, and it will rarely be their focus to develop internal products to take care of these processes. Yes, they will default to doing it, unless they find a service or software to take care of that process for them.
Over the years, the “vertical SaaS” golden age has begun. Enterprise companies started to outsource their processes one by one to external SaaS vendors in just about any field: procurement, travel, expenses, R&D needs, etc. There’s no better time to look for a process that needs to be taken care of and outsourced for an enterprise company.
4. Founder to founder fit is an order of magnitude more important than founder to market fit
I’ve met several people who gave me some pretty neat insights into this one. First of all — one of the highest risks by far for a start-up is founders that don’t get along. Although statistics can’t be accurate at predicting the chances of a pure mismatch between founders as other factors can come into play when founders decide to break the deal, it is definitely one of the leading causes of failing start-ups.
What you want to do is to start a company with someone you trust blindly. Someone who you can not check up on for a year and be just about fine with it. Someone who you can delegate 50% of what a company needs to take care of. If that’s not how you feel about your partner, then you better find someone new.
I’m not saying that founder to market fit is not important as it directly violates principle #1. I am saying that you should choose a smart partner who you blindly trust over a person who has a better-looking resume for solving the problem you want to solve.
I also believe that soft skills for an entrepreneur are critical, as you cannot be a good leader without good soft skills — especially as your company grows.
5. There is a high correlation between ease of sale and integration to the success of a company
Getting someone excited about a solution to a problem is one thing. Having him pay and install it is a completely different thing.
One of the most interesting stories I’ve heard about this is Adallom’s success story by Assaf Rapaport. Adallom was acquired by Microsoft for $320m USD.
Assaf’s story began with their first product — an in-line proxy that secures connections but requires to install a very intrusive product. IT and security teams were afraid of it, and the installation was hard and tiring due to that. Once they’ve moved to a non-intrusive product their sales skyrocketed, and not a long time after that they were acquired.
Start-ups don’t have a lot of time. You need to prove yourself quickly, and you simply do not have the time to let companies on the other end delay the sale and the integration.
I hope this was useful. Please feel free to comment or suggest more guidelines.