Long time readers of this blog will know we have been covering research on the underlying system dynamics of what really drives successful startups in a quantitative way. We have always thought this was a good idea, and today we look at the output from the Startup Genome project (WE covered a similar idea,
YouNoodle, in 2008). They have just released a report (more details over
here), herewith a summary of their initial findings (with Broadstuff comments in italics):
1. Founders that learn are more successful: Startups that have helpful mentors, track metrics effectively, and learn from startup thought leaders raise 7x more money and have 3.5x better user growth.
As Darwin noted, survival is not the “fittest” but those that are most adaptable
2. Startups that pivot once or twice times raise 2.5x more money, have 3.6x better user growth, and are 52% less likely to scale prematurely than startups that pivot more than 2 times or not at all.
Must say I found this initially counterintuitive, then I realized it represents a startup going up the learning curve of “playing the game”and giving investors what they want to hear
3. Many investors invest 2-3x more capital than necessary in startups that haven't reached problem solution fit yet. They also over-invest in solo founders and founding teams without technical cofounders despite indicators that show that these teams have a much lower probability of success.
See comment to 2 above – also adds credence to what I have long suspected, ie that investors by and large don’t know what they are investing in, and that “the great team” of VC lore is just so much bollocks.
4. Investors who provide hands-on help have little or no effect on the company's operational performance. But the right mentors significantly influence a company’s performance and ability to raise money. (However, this does not mean that investors don’t have a significant effect on valuations and M&A)
In other words having respected backers begets other respected backers, but the “we provide added value” story is overplayed
5. Solo founders take 3.6x longer to reach scale stage compared to a founding team of 2 and they are 2.3x less likely to pivot.
Many brains are better than one, and there is probably also just a pure work cycles thing – but what is missing here is the founder payout, ie does the slow-to-build solo founder do better financially?
6. Business-heavy founding teams are 6.2x more likely to successfully scale with sales driven startups than with product centric startups.
i.e if your product is techie, you need techies at the top……
7. Technical-heavy founding teams are 3.3x more likely to successfully scale with product-centric startups with no network effects than with product-centric startups that have network effects.
……and similarly techies by and large don’t get the sales techniques necessary for selling network effect services
8. Balanced teams with one technical founder and one business founder raise 30% more money, have 2.9x more user growth and are 19% less likely to scale prematurely than technical or business-heavy founding teams.
This really rings true with my experience in startups and large company initiatives, techies tend to gold plate the thing and thus miss a market, sales guys tend to forget that you can’t gold plate a turd. There are only 2 key things a business must do – produce something and sell it. Clearly in the early days getting that balance is key, we tend to forget that Bill and Steve would not be where they are today without Paul and Woz.
9. Most successful founders are driven by impact rather than experience or money.
I think this is another way of saying materiality – if you are going after a big thing, even a small success (which is far more likely than a big success, unless you genuinely find a seam of gold no others can see) equals big numbers
10. Founders overestimate the value of IP before product market fit by 255%.
Perhaps, but the history books are full of entrepreneurs being ripped off by all sorts of weasels, from IBM and NCR 100 years ago onwards. Paranoid is probably good for survival
11. Startups need 2-3 times longer to validate their market than most founders expect. This underestimation creates the pressure to scale prematurely.
I recall the first book on starting a business I ever read, decades ago. .It said work out your “realistic” worst case costs and timescales, and double them, then add 50% contingency. Plus ca change……
12. Startups that haven’t raised money over-estimate their market size by 100x and often misinterpret their market as new.
See points 2 and 9 above – having done market research and market entry strategies for many startup businesses, I think it is absolutely true to say you don’t know who is swimming in your pool until you get in. Also no plan survives contact with the enemy (the market), so see 1 above.
13. Premature scaling is the most common reason for startups to perform worse. They tend to lose the battle early on by getting ahead of themselves.
It is a very old truism that it is as easy to kill a business by growing too fast as by decline - it can rapidly outstrip its meare resources (cash, human cycles, ability to grow).
14. B2C vs. B2B is not a meaningful segmentation of Internet startups anymore because the Internet has changed the rules of business. We found 4 different major groups of startups that all have very different behavior regarding customer acquisition, time, product, market and team.
An interesting assertion - our experience is that B2B Enterprise 2.0 problems are by and large the same as Enterprise 1.0, ie it is about basic business dynamics. Comms is a part of this, but it is not the biggest part except for specific cases. In our view B2C has so far been far more impacted by the internet.
