Startup Founder Or Startup Flounder

For the past decade, business news has been dominated by the rise of the startup, the new world; the birth of the elusive unicorns. We’ve seen the rise of some amazing companies such as Uber, AirBnB, Netflix and before that the new world giants such as Amazon, Google and Facebook. The immense success of these companies have displaced giants like a modern tale of David and Goliath, but in this tale David then becomes Goliath. These patterns draw the crowds, they draw investments. 

Before these stories existed, startups were known as small businesses, residing on the edges unable to compete with giants, with much less attention. ‘Startup‘ is now a badge of honour, for optimists to pay attention to. It’s no wonder then when people say they run a startup and label themselves as founders or entrepreneurs, they do so with pride and attempted association to those other champions. There is a benefit, a social kudos, badges of honour which is inherited somewhat from these other greats. Despite this, the data states that most will fail and become distant memories never to have gone further and a few motivational talks. 

Entrepreneurs/founders, often declare they know better than the existing companies and can draw away their customers with their superior solutions. By focusing on the failings of others and the breakages in the market, confidence is inspired and attention is drawn; where can I sign up?

However, where there is perceived knowledge, there is a vastness in the needed capabilities behind the mask. Are those problems touted as market opportunities really fixable, is this founder the person to make it work and are the new solutions enough to entice away existing customers who have a lot invested in existing behaviours? Is there a real market beyond the novelty of early adopters? Is there a sustainable business model to discover and get behind? All these questions need to be answered.

Focus Or Fail!

Business is hard. Success requires relentless persistence, tenacity, ingenuity, intellect, social skills, and most of all leadership to know when and how to build teams to support growth. Knowing when to explore and when to scale. Touting great ideas, able to pitch confidently with charm and sophistication is simply not enough and there is no substitute for detail. As stated by Thomas Eddison “Vision without execution… is just hallucination”.

My empirical knowledge tells me that those who make it are laser focused on the business first and foremost. They don’t waste their time in founders clubs or engaging in activities which involve telling others of their greatness unless it can explicitly benefit their business. They focus all their efforts on getting things done and building their business. Thats’ not to say they don’t speak to peers for ideas, but they only do so with intent. They’re in it to win it, not to bask in the glory before crossing the line.

Looking Behind The Curtain  

Reviewing the common reasons for startup failure by CBInsights across 101 post mortems, the top reason is stated as ‘No Market Need‘ as 42%. I find this expected and reassuring and speaks to my deep respect and admiration for those who see the opportunity and seek to explore it in the face of such uncertainty. The pioneers, the game changers and the new worlds are born in this space. 

An early-stage startup is speculative so this would be expected and should be the main area to test as quickly and cheaply as possible. So with this reasoning, from a seed fund perspective, the release of capital should focus on this being the first event any founder should prove, before requesting further funding and is commonly the case for the more successful investors. 

Using Lean Startup practices and reflecting on the Lean Product Lifecycle examples, we have seen that this can be achieved with a smart cheap and disposable range of customer focused experiments for <$250k and this often <$50k. Of course these should be supported by some coaching and experienced advisory services on research skills. Spread bet for opportunity reach and double down investment with evidence.

Where Leadership Can Change The Odds

Looking further at the list of reasons, not a single item is stated as being leadership of founder management skills. I’m not intending to look for blame here, but I’m simply looking to see where training and support could be provided to help those who need it to increase the likelihood of success for founders and investors. This is where I see the value in accelerator programs. In an attempt of association to this I would identify the following as related reasoning where mentorship could significantly help steer the ship to avoid the rocks :

  1. Ran Out Of Cash 29%
  2. Not The Right Team 23% 
  3. Pricing And Cost Issues 18%
  4. Product Without A Business Model 17%
  5. Poor Marketing 14%
  6. Ignoring Customers 14%
  7. Lose Focus 13%
  8. Lack Passion 9%
  9. Burnout 8%
  10. Failure To Pivot 7%

Each of the reasons above could be reduced by good management and leadership practices. I’m not saying eliminated, but I do believe these could be reduced. These aren’t inherited conditions. They are inflicted upon businesses all the time and require good judgement, skills, experience and passion to overcome them. These aren’t restricted to Startups, but applies to all businesses even enterprises. You could argue well that’s not the job of investors and the model expects an 80% failure rate so it’s offset by the 20%. However, I believe the tide is changing and investors will be more accountable to these practices when the numbers get bigger.

The Downstream Effect Of Investment

Consider the relatively recent SoftBank situation regarding their investment into WeWork. There were probably many leading indicators that the performance of WeWork would raise a few questions to, but were these overlooked? Was the data there, but decisions fell victim of blindness of previous successes. According to the public statements :

“Son last month said he misjudged Neumann’s character, after WeWork – formally The We Company – and other sputtering bets saw his $100 billion Vision Fund report an $8.9 billion second-quarter operating loss.” 

When questioning the root cause of this, much of the investment reasoning was gut feeling. This gut feeling led to success in the past with investments into Jack Ma’s Alibaba. 

“However, Son’s instincts have been questioned lately, with billions of dollars from SoftBank’s Vision Fund being poured into tech unicorns that have suffered recent setbacks. This includes WeWork’s closely-watched downfall and Uber’s unstable stock since the company went public earlier this year. Not to mention, the ongoing bailout SoftBank has been forced to dole out in the aftermath of WeWork’s sharp valuation decline” 

This behaviour is a costly. As stated by the great mind that is Bill Gates “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.”

The response to these changes is surfacing a higher level of scrutiny. SoftBank has been already more scrupulous with their portfolio and it’s showing. These changes will hopefully increase their immense portfolio health, but these changes won’t be limited to SoftBank.

Now you could argue that SoftBank is a problem for later stage invesment. I would argue though as more diligence is applied downstream, it will push left upstream. If the earlier investors can’t hand off and recover the investment from later-stage investors, they will inevitably be under pressure to improve their governance to see where there is potential or not. The cost of not doing this could be that the failure rate of 80% rises for Seed investors, which could offset the portfolio margins for many early stage investors, particularly the smaller ones.

So How Do We Get Better At Separating The Wheat From The Chaff ?

Now although this article is an attempt to objectify the issues from an investment perspective, I hope that if you’re a founder or budding entrepreneur you will be able to take away the practical aspects to help you fight the challenges you have ahead. Afterall this is about getting the desired outcomes on your idea to build a new business with the support of investors.

A. Use Accelerators And Coaches For Objective Contribution

Some of the better-known investors already do this well with inbuilt or associated accelerators and incubators such as the infamous YCombinatorTechstars and AngelPad. The skills and experience these camps provide can be invaluable. Programs like these, if you’re fortunate to gain a place, will not only quickly and relatively cheaply put an idea to the test, but founders will gain accelerated personal development.

If you’re reading this as an investor or founder without a program, I would strongly advise forming partnerships with a network of trusted coaches and independent programs. There are a number of options of different scales and sizes including such examples as Unboxed, ThoughtbotMade By Many and many more.

An important point to note when choosing a partner to support founders is to seek the experience of those who focus on experimentation and follow an objective evidence-based approach. Be mindful of partners who don’t challenge opinions and can’t materialise a level of detail beyond buzzwords. A partner should be influenced by building a reputation for outcomes over outputs, results over aspirations, which means being prepared to deliver bad news.

B. Look For The Love In Numbers

I once worked with a very confident founder who really struggled with basic financial awareness. Their unfathomable self confidence led to a belief that they were in control and resulted in performance blindness. It was sadly a huge risk to their own business. They were presented with the evidence that the company was going to run out of cash based on the unit economics and revenue trends. There was an option to achieve positive cashflow as the unit economics were profitable, but a minimum sales throughput was needed to take the burn to equilibrium before cash burn out. However a good marketing campaign could have yielded the numbers and there was a budget for it. Not only that, but the additional numbers would have accelerated business validation with statistical significance. A situation most startups would dream to leverage for positive cashflow, but no….

When presenting this, they seen the increase in marketing spend a risk and responded with “I’m the CEO and I know the finances of my company. The revenue forecast has nothing to do with cash flow, we simply need to reduce costs.” A sentence that revealed why this business had not seen progress for years. In a desperate panic, the CEO pivoted the company, removed all the skills in the top 50% cost percentile, weakening the company and then moved offices to reduce costs further. To top it off, they invented a new brand on top of the existing core competency to distract investors which required a whole new customer funnel. Without doubt to dazzle more investment. I feel this was a simply a feeble attempt to fall back to what they knew how to do which was a belief in wowing investors with promised stories as a fast way to get cash. Another belief I had was that this founder was afraid of validating their own business as it would switch operations to execution; something which they had never seen or been part of. I would hope that future investors see the risk here, but who knows, gut feel right…

I’ve yet to see a situation where a successful company was born where the leader didn’t respect and get involved in the financial health and detail in the P&L. Financial numeracy is a crucial core competency to develop. You need to know your unit economics better than anyone as this is the core component of your business model evolution and experimentation. When folks talk about releasing and MVP, the V means Viable!

You need to know the detail, changes, opportunities in all costs of partners, channels and revenue streams etc. Combining this with market insights will create the basis for your future. If you can go to any investor at say I’ll give you $5 back for every $1invested over this trajectory if we can reach X% of the market in X amount of time, investors will see the potential. It also expresses confidence and capability in you as a person to lead this effort.

C. Simple – Business Before Self

One of the biggest risks of all is the intent. A founder who is in it to be a founder and not build a business, won’t build a success. Simply they won’t have the resilience, grit, respect from others or humility to lead. It’s difficult to understand a person from short structuted engagements, but time will reveal all. No matter how confident, capable and self-aware a person appears, their true self is in the behaviours.

Here are some of my observations of determining whether you have a leader or imposter to build a success :

  • Pivoting to oblivion based on emotion with no data
  • An absence of experienced heads in the team around them and/or an inability to keep good talent
  • When the founders insist on placing their personal profile on the home page or as the first paragraph on job descriptions.
  • Blaming the team for not delivering or stating they are not ‘startup’ people to right fit
  • Signals of absence from the business with little or no explanation 
  • Justifying high staff turnover as expected behaviour for startups
  • Attending important board and strategic meetings with partners without the support their lieutenants 
  • Playing the victim of others ‘Why Me ?’
  • Stating they know what customers want, without demonstrating or providing market evidence from engagement.

By focusing on behaviours over statements, it’s easier to see through these issues. Leadership requires the ability to know one’s strengths and weaknesses. Whilst improving weaknesses is a good path, no one person is flawless. Therefore great leaders capitalise on their strengths and build a leadership team around them of people who can compensate weaknesses and can bring people together on that journey. Teams not individuals build great companies.

If you have experiences you would like to add, please comment below.

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