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Getting your startup through five years and beyond - how to avoid the 90% casualty rate.

This submission aims at highlighting the things you - as a startup entrepreneur - should pivot on without the frills, bells, and whistles.

May 2, 2021

Getting your startup through five years and beyond - how to avoid the 90% casualty rate.

Most of the articles around this subject are generalized. There’s little take-home value because the content dances around platitudes and seldom gets to the crux of the matter. Why? Because being brutally honest often creates conflict and pushback, and that’s a hard road to travel. Creating optimism is a far easier sell. This submission aims at highlighting the things you - as a startup entrepreneur - should pivot on without the frills, bells, and whistles.

What is a startup?

Ask a hundred startup founders that question, and ninety-nine of them will say, “A business launching an amazing idea that’s going to change the world.” Talk to them more. They’ll tell you about their visions of personal economic freedom for themselves and their team from earning millions or even billions of dollars. There’s little doubt in their minds that the funding for idea stage startup ventures is waiting in the wings - itching to ride on the bandwagon with a ground floor kick-off. They’ll tell you with bubbling enthusiasm that their models are the next big thing to drive innovation and growth in mainstream markets. In short, energized optimism is at the heart and soul of the startup culture. The same is true for every person buying a Powerball lottery ticket week in and week out. We all know what the odds are of those actions coming through as expected. Does buying into a startup idea carry much more hope? Let’s see.

Know the hard facts going in to give you the best chance of success coming out

Let's begin with a profound statement: While "startup" is the big buzzword around town, truth be told, it's the way you finish up that counts. That said, staying the course is a given. Nobody in their right mind creates a business with an expiration date. Everyone in the game enters it for the long haul. So, how many aspirant startups "finish up" as expected? Consider the following:

  1. 90% of startups see their (and backer’s) investment go down the drain.
  2. 75% of scaleups (VC-backed startups) never return cash to the investors.
  3. Of the failures, 20% don’t make it past one year.
  4. Three in ten blow out within two years.
  5. Half the aspirants bite the dust inside of five years - 70% within ten.

If that's not a sobering overview, then nothing is. Don't fool yourself that this will be an easy ride - a slam dunk, a breeze. No, the startup experience is highly volatile, with extreme highs and lows. It requires resilience, brainpower, and a sense of purpose. Most of all, it needs your "amazing idea" to be one that the market wants. Why? 42% of startups crash to earth because the market doesn't need it. Even if they do, watch out for the competition. They upset the applecart in 19% of those cases that don't make it across the finish line. According to failory.com (also referenced above for failure rates), a massive cognitive and emotional vacuum is the root cause of all this, namely:

Entrepreneurs rely on their "mind-blowing idea" (i.e., intellectual property) versus its ability to accomplish a product-market fit by 255%. In other words, optimism is overwhelmingly blinding one's logic in reaching a desirable goal.

Let's look at startups from the venture capitalists' viewpoint.

Suppose a startup accelerator or startup incubator fund has 100 companies in its portfolio. In that case, they're relying on only one emerging as a blockbuster success. They expect another nine of them to contribute something, but these together still do not add up to the winner's value. As for the other ninety, the write-off is more than worth it. They're playing the odds in a big-stakes game, looking for that running back deep in his own half of the field who will take the ball through all the defenders in one gigantic hail mary run. As a startup founder, just qualifying for the one hundred, where you have a ten percent chance of success, requires an extraordinary presentation.

How to validate your startup idea

The theme of the above sections says, “ face the facts - if you’re doing anything classified as disruptive or innovative, the chances are that you’re probably wrong.” Most ideas dissolve into thin air because they’re simply bad or otherwise the timing’s wrong. Nonetheless, do all the right things, and you can beat the odds. The success ten percent exists, so give yourself the best opportunity for inclusion in that number. Here are some thoughts:

  1. The first question not to ask is, "Can I build my product?" Instead, try this: "Should I build this product?" The “go-for-it” signal will emerge only if you can convincingly prove that your team is capable of developing a scalable and sustainable business around it. The first step to success is admitting to insurmountable obstacles. It will save you time, wasted energy, and, of course, money.
  2. Negative answers don't mean giving up. It signifies you should get ready to pivot. It also implies you need to throw off narrow-sightedness and rely on flexibility as your most compelling asset. Startups that pivot at least once or twice improve their chances of growing their customer base by 360% and finding investors by 2.5 times. Zero pivoting or changing your positioning too many times (i.e., more than twice) are tactics that disappoint much of the time.  
  3. So, what have we learned so far:

    - Springboard off your original idea but get ready to adjust, even radically, until you can show scalability and sustainability.

    - Don’t get hung up because your brainchild shifts gears or hands over the reins to another one in left field. You started the process, so that’s reward enough in itself.

    - Going back to the drawing board sometimes is your best bet. Too many pivots are counter-productive. It signifies that the seed idea wasn’t a good one to begin with - a disappointing but valuable early warning signal.
  4. Once you’re through steps one and two, face up to the competition. It’s a significant obstruction, one you can’t afford to ignore. Questions you should ask are:

    - Who is it exactly I’m disrupting?

    - How will they react?

    - How easy can they copy my idea?

    - Who else is in the startup category doing what I am?

    - How strong is my patent pending?

    These are fundamental questions. One of the most significant startup errors is believing there isn't any competition; not far behind comes underestimating it. For example, if a competitor can clone your idea in a heartbeat without consequences (or the remedies if they do are unaffordable), pioneering it may be a fool's errand. When you approach investors, don't be shy to tell them you're using the money to build a proprietary fortress. Show them how you will hold your ground against all-comers. They want to see you've executed a comprehensive competitor analysis.
  5. Most startups begin their lives with $10,000 - $25,000 of the founder's funding, mainly in a home office. On the other hand, your vision includes a team generating millions of dollars, with profits and ROI wowing your stakeholders. There's a glaring disconnect, so how do you, as a startup’s founder, convince hard-nosed financiers to fill in the gaps. Primarily when you know they know they’re likely investing in you to fill the ninety failures on their rosters. How do you convey that you're the unicorn their investor database is thirsting for - the blockbuster that will compensate for the bombs? Two things - passion and a finance-centric business plan.
  6. Before we go into any detail, you should appreciate that it’s not unusual for a typical startup to go through three rounds of funding before Series A. Each time, the founders’ equity dilutes somewhat, so you have to give it your best shot - even for the angel and micro VC rounds. A recommended approach is as follows:

    a. Tell the funder that you expect to validate your market in Y number of months, but your plans center on it ending up at three times Y. Believe me, before you walk into the VC’s conference room, they’re in sync with that reality. However, making them aware that you are as well will boost your chances of a raise considerably.

    b. Let the projections show that you intend to invest all your sales revenue back into marketing and some of the VC funds for at least the first two or three years. Emphasize that it's to:

    - Show the competition you mean business.

    - Get brand traction in the quickest time.

    c. From the fourth year onward, marketing can drop to 50% of sales but never allow it to go to much less than that. Acquisitions for growth become a more crucial consideration for fund application at that point.

    d. Generally speaking, the startup process travels through four phases, namely: Discovery, Validation, Efficiency, and Scale. When you are on the road to get funds for your startup, you’re facing a highly selective and savvy audience (as noted in numerous situations above.) Alert signals sound off when presenters look inconsistent. Conversely, green lights flash in favor of those holding the line with a disciplined approach (i.e., the opposite - consistent startups).

For example:

  • Inconsistent startups regularly throw out $10 million valuations before reaching Scale. Consistent startups show valuations averaging $800,000. It's a potential kill-point before anything more is said.
  • Inconsistent startups look good in the early stages with robust paid user statistics (75% above the average). Consistent startups outstrip them by 50% at the point of Scale.
  • There's no comparison where the money flows to when big numbers are on the table (i.e., Scale). Consistent startups overwhelm Inconsistent startups by eighteen times.

As a final overview, VC and other funders will scrutinize the team for the caliber of technical knowledge, permanence, motivation, and any internal friction. This, to an extent, slots into the passionate side of the activities. Inconsistent startups demonstrate cracks in the talent framework, which can implode an otherwise promising presentation. Consistent startups will impress on this score from end-to-end. Teamwork accounts for about as many startup calamities as the competition. Don't underestimate its impact on your survival. Make up your mind early in the process to establish consistency and avoid all the actions that could stamp you as inconsistent.

Conclusion

Running out of cash is the second biggest enemy of startup survival (behind no market fit). You must do everything within your control to make sure your progress goes as planned. No matter how much seed money you start with, it's a given that fundraising rounds are an integral part of the process. Twenty-nine percent go under because the gravy train comes to a screeching halt.

Most startups take two years or more before they have a semblance of self-funding - commonly called burn rate. Profitability becomes a possibility once gross revenues peek above $600,000 annually. Cash flow, like in any regular business, is a startup's lifeblood. Without it, the venture will wither and die.

The startup strategy revolves around making a favorable VC (or similar) impression in everything provided above.  Indeed, it's a consistent approach to all stakeholders, including customers, employees, and associates. Startup success rides on reputation created in every facet of the business. That way, the chances of entering and maintaining a top 10% position are as good as they will ever get.

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