(A 14 point guide to build an enduring startup)
It was a hot summer day. The person seating in front of me looked broken, devastated. This is his first startup and he barely has a week’s worth of cash in the bank. If he can not raise a fund, he will have no other option but to shut down his company, let the staff go and two years of his life, spent in building this company will seem pointless. This is one of the most difficult spot in a founder’s life. I know the feeling…..I have been there.
And the fact is, most of the startups will have the same fate. Almost nine out of ten startups can not survive long enough to be a success. CB Insight did some data crunching and you can get a post mortem of startup failures here.
So, is it possible to develop a checklist that can make a company “fail proof”? Unfortunately not. There is a principle known as Anne Karenina principle based on Leo Tolstoy’s famous book, Anne Karenina. The books starts with the quote:
Happy families are all alike; every unhappy family is unhappy in its own way.
Meaning, there are many reasons for a family to be unhappy and a happy family escapes all these reasons.
This theory has been applied in different areas including “startups”.
There are many reasons a startup can fail, but to be a success a startup must overcome all and therefore the difficulty of being a success at anything, whether building a startup or a happy family!
Clearly, it is difficult to define a pathway to success. But following is a guide that founders can follow to eliminate some of the main reasons to overcome failure. This is based from my experience as a founder, working with startups in different markets as part of accelerators and also advisor/investor to startups…
This is not a comprehensive list and while I tried to place the steps in a somewhat chronological order, needless to say, it will not be same for every situation.
1.Identify the problem: Many founders jump into building a company without clearly identifying the problem they are trying to solve. This has been said many times in so many blogs and books that this has become somewhat of a cliche.
But the reality is, founders are sometimes so excited about their idea that they overlook to go to their “target” customers to test the idea — whether it is actually solving the problem.
Interviewing customers, trying to identify what is the real pain point and whether the product/service is actually going to solve the pain point is an important first step.
For example, if you are planning to solve the challenges of new mothers trying to get back to work force, you first need to do hundreds of interviews and find out what the actual pain points are. There will be many and the question is which one is your product going to solve in an adequate way.
Sometimes, founders themselves have faced the pain points and therefore have a reasonable understanding of the challenge. Even then, it is important to do the interviews and find out how deep the pain points are for other new mothers before trying to go out a build your Minimum Viable Product. You can do these research quite cheaply using social media and other low cost tools.
2.Minimum Viable Product: Once you have identified the problem, design and build your minimum viable product. You can find the definition here. The concept was introduced by Eric Ries in Lean Startup methodology.
The idea is not to waste too much money and time building a company before testing your minimum product proposition with your target group.
For example, you want to build an app that will help new mothers to connect, form a community and help each other to make the transition to work force. Once you build the prototype of the app, show it to new mothers and find out whether they find the features useful.
You may even build different versions of the app and see which one works better by doing A/B testing. You can find details of A/B testing method here. Once you have got enough feedback, tweaked your product accordingly and reasonably confident about the product/solutions, go and raise your first family round.
3.Family and Friends’ round: This is essentially your own money and people within your immediate circle, who are willing to back you to build out your product. They will be your immediate family members or some close friends. You may also use platforms like Kickstarter if available. Otherwise, if you have the cash, you can bootstrap. The idea is to have enough cash to turn the prototype into a marketable product and take the solution to markets. You need to decide on a name and brand. There are some good guidelines on naming your product in the internet. Follow those.
4.Find a cofounder: If you do not have a cofounder, get one. There are examples of people building billion dollar companies without a cofounder. But those are exceptions and the probability of failure goes up significantly without a cofounder. You can find some interesting statistics in a quora thread here
5.Build a pool of advisors: Advisors are people who are industry expert and have the experience and nerwork to help you solve challenges. Try to build an advisory panel for your startup. Maybe start with two or theee advisros. In your early days you will need a lot of support and a good advisory panel can be very helpful.
6.Register the product and form a company: Many founders skip this step but important to have this covered early on. This is one of the areas which may nkt seem urgent unless you are rasing a fund, but it saves a lot of effort down the line. Important that you keep your expense (cash burn) as low as possible.
7.Start selling: Now that you have a company, brand and a product ready, start selling. This is where tire meets the road. Track your KPIs closely to find out how many sells are happening organically (i.e., word of mouth) and how many are through other channels. The more sells you have based on referrals from existing users the better. Build proper KPIs and dashboard to track different metrics. At different points, you may need to go to drawing board and rethink different features, sales methods etc. based on market feedback. There are many things that may go wrong. Remember,
What has survived the comfort of a room may not survive in the scorching heat of market
One of the key metrics to measure is Unit Economics.
8. Unit economics: This is probably the most critical KPI but often not properly tracked. Unit economics is the cost of producing a product and how much you are earning from that product (assuming you are charging for your product). That is, does acquiring each additional customer add to your bottom line or impacting it negatively. There are many strategies at play here. Some businesses prefer not to charge for a while till they achieve a significant volume, other may decide to be a loss leader till they change pricing upwards or average cost go down as fixed costs are spread over larger volumes. Whatever your strategy, you need to think it through very carefully. If you want to do some deep dive, you will find a slideshare presentation here.
9.Raise an Angel/Seed round: If the initial KPIs look good and moving in the right direction, it may be a time to raise funds from outside Friends and Family. This can be personal check from an individual (angel) or from a fund (seed). But these are investments coming from professional investors and the level of scrutiny will be at a much higher level. How you prepare for this raise is the topic of another blog, but suffice to say that be ready to take up hundreds of meetings before raising a successful round.
10.Build out your team: Once you have raised a successful round, build out your team to ensure you have enough capacity for continuous improvement on your product features. Hire selectively. Always keep cash burn as low as possible. You need to hit all your metrics before you can raise your next funding and you do not want to run out of cash before that. Your overarching target at this stage is to hit a product/market fit.
11.Product/market fit: This is the holy grail for founders. This is where your product is getting so much traction from word of mouth referrals that the business is growing without much investment in marketing/advertising. This is a situation where you suddenly notice a significant uptick in sales and struggling to build the capacity to meet the demand. This a dream come true for all founders.
A thumb rule is that it takes anywhere between 12/18 months to reach a product/market fit but of course, it can go either way.
Once you hit the product/market fit, it is time to scale.
12.Series A raise: It is time to go out and start meeting VC funds. You are armed with strong metrics and a possible product/market fit. You need additional funding to build the capacity to scale, from people to office space to production capacity (if you are in hardware). Again, be ready to meet many fund managers before getting the check for Series A. These will be larger checks and the investors will need to be convinced that this is one of the few checks they will be writing that year. The process will not be easy. Do your due diligence on the possible investors. Get the pitch perfect. By this time, you and your cofounder should be ready that one of you will be dedicated to fund raising for few months while the other continues to manage the business.
13.Form a board: Once you have raised a Series A round, it will usually come with a clause of board membership. Some angels/seed investor demands this earlier on, but by Series A , you will not have much of an option. So, build the board. Obviously, you major shareholder will be there but also try to bring in people who are industry expert, and can provide you the valuable guidance. The quality of the board oftentimes have a significant influence on the fate of the company.
14.Scale: Armed with series A raise, be ready to scale. Start building proper organization structure, processes, KPIs, revamped tracking tools so that your company can scale without an accident.
From scale and depending on the trajectory of growth, your company will need to raise subsequent fundings (series B, C etc..) and eventually to an exit. Like I mentioned at the beginning, there are many reasons to fail. So, even if everything goes well, you may ultimately not end up with an exit or your company may suddenly get hit by a regulatory challenge beyond your control and your company may collapse.
There are so many things that can go wrong in a startup lifecycle, that it is almost impossible to predict which startup will be a success.
At the end of the day, you startup will shut down when it runs out of money. So, always keep an eye to have enough runway before you go out for a raise or increase expenses, have the correct unit economics, and try to hit the profitability as early as possible.
Nothing beats the freedom of being profitable!