Are you made of the right stuff?

Posted on May 31, 2011. Filed under: Companies, Customers, Funding, Investors, Startup | Tags: , , , , |

Endless Forms Most Beautiful

An ambitious and interesting project aimed at discovering the patterns at successful internet startups was announced on Saturday and is called Startup Genome. Over 650 businesses have been surveyed in quite some detail, so the results should be telling. The concluding reports will, I predict, turn out to be some of most influential pieces of research ever done on internet startups.

If you are a passionate internet entrepreneur you will have either already read the report or will do so soon. So, I’m not going to summarise the whole piece of work; not only is it substantial, but it is also a work in progress. Rather I’ll focus on parts that are of particular interest and make some interpretations of my own.

It’s important to state that this study is about internet startups specifically. There are lessons that other businesses can take from the report but one needs to be careful not to generalise. Also it’s important to remember that, as far as I know, the results are largely based on startups in Silicon Valley. As we all know, things don’t happen the same elsewhere: Availability of risk capital is much scarcer, for one thing. Also much of the initial report relates to companies that raised investment funding in seed and VC rounds. We can learn as much, if not more, from failures, of course. Some interesting findings, about that, have now been published here.

Six stages of company evolution are proposed as follows (personally I like this model), which I’ve paired with my personal take as shown in italics  :

1) Discovery: Create something useful and listen or die

2) Validation: Find ways to get customers to part with cash

3) Efficiency: Get more customers whilst burning cash effectively

4) Scale: Growing pains of every type

5) Profit Maximization: Milk your customers, oops sorry: Reward your shareholders

6) Renewal: Start your next venture

The authors propose four classes of startups, as follows, with some well known examples:

These classes are provided without a clear explanation of what they constitute, although helpfully, they have provided a list of example companies and typical characteristics. So, what the hell, let’s have a go at trying to clarify this thinking.

OK, I contend that all the classes of startups are aiming to provide:

  • More efficient & effective ways….
  • to do stuff….
  • for different classes of users

I would then propose to define the four classes as being focussed, on different users, as follows:

  • Automizer: Individuals and small groups
  • Social Transformer: Individuals, in a network, who interact and transact
  • Integrator: SMEs
  • Challenger: Enterprises in complex & rigid markets

OK, I’ve over simplified. But I think their classification of startups is interesting and insightful. I find it helps when thinking about my past experience and current activities.

At Century Dynamics (sold to NASDAQ: ANSS) where I was a co-founding technical director then managing director, we were definitely a “Challenger”. OK, we were largely pre-interweb but we were a software company selling globally, so the model still works. Also we were never funded by anybody outside the company. That’s one of the reasons it was a long road of bootstrapping and 14 years from startup to exit. It did not seem much of an achievement at the time but reading this post makes me question whether we actually did extremely well, particularly since we were selling to some glacially slow engineering sectors.

With the current startups that I am closely involved in, we are an “Automizer” (Pitchie) and a “Social transformer” (Tripbod).

Actually with Pitchie we are in our first month, at the Discovery stage, so it’s quite possible we will end up positioning differently: But to talk about that further would be revealing our plans for world domination, which we are keeping quiet about for now ;)

Tripbod is very much a social transformer. We are driven by our desire to cut out economic leakage in the tourism industry, where much of the money is taken by middlemen. We are all about connecting travellers directly with local travel providers making us a bona fide network business.

Part of the report findings were that Automizers and Social transformers have as their primary motivation a desire to change the world. Similarly the desire to build a great product was found to be the main drive for Integrators and Challengers. Tellingly only 8% of entrepreneurs surveyed said they care more about money than impact (68%) or experience (27%).

One of the main hypotheses, that the authors set out to test, is that success correlates with founders who are open to learning. Their initial findings are, they say, strongly suggestive of that and cite the following evidence, which is interesting but hardly conclusive:

  • Companies that track metrics effectively, and thus learn, achieved 3 to 4 times better growth rates of users
  • They considered that following thought leaders was a proxy for willingness to learn. Those companies that did so were 80% more likely the raise funding
  • Companies with helpful mentors were significantly more successful and raised around 7 times as much investment capital

The average funding received by company stage is shown below:

  • Discovery = $150,000
  • Validation = $600,000
  • Efficiency = $900,000
  • Scale = $3,000,000

The authors recommendations on what they think should be raised are $10,000 to $50,000 at Discovery and $100,000 to $1,500,000 at Validation. They further propose that nothing more is raised at the Efficiency stage. They suggest that the stark differences in the funding raised and what the authors recommend is due to angels over investing in startups. But remember this is in Silicon Valley: I don’t see that problem in the UK and neither does Scott Allison of Teamly.

Surely a difference today is that it costs a lot less to build an internet business than it did even two years ago. Many of the companies surveyed must have started out before that time.

Apparently there was no difference in whether investors were helpful or not on a daily basis. They conclude “We think this may be because investors’ main value add is their ability to increase the valuation in future rounds, and get larger exit sizes. Their help on a daily basis, which consists mostly of introductions and help with recruiting is not that significant because great entrepreneurs will find a way to get introduced to the people they want to hire and build a great team even if their investors don’t help.”

The most telling finding, in my opinion, is buried in the Miscellaneous section. They found a dramatic difference in the market size estimates made by the companies for their target markets, as shown here.

For companies that did not raise funding:

  • Discovery: $200Bn
  • Validation: $120Bn
  • Efficiency: $50Bn
  • Scale: $8Bn

For companies that did raise funding:

  • Discovery: $0.16Bn
  • Validation: $1.3Bn
  • Efficiency: $20Bn
  • Scale: $9Bn

Enormous differences you will agree at the first two stages! One is tempted to conclude that if you have failed to raise early funding then it’s very likely you are deluded.

Finally here is an interesting statistic that is reported without explanation or context: 81% of entrepreneurs don’t care about rules.

What do you think, fellow troublemakers?

  • How would you classify your startup? Do you like the classification used? Is it helpful?
  • Are mentors important for your learning? Or are they just good for contacts, so raising funding becomes easier?
  • What are you going to do differently having read this blog post or the report?

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8 Responses to “Are you made of the right stuff?”

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Really interesting Colin – thanks for doing the summary!! I’m not sure of the classification is useful for MyChoicePad, if it had to be squeezed in it would be automizer moving into a social transformer. But I’m selling to families, schools and the government so I cross a number of markets from small to v.big.

I do think mentors are very important as I think I would go crazy without them. I don’t think I will do anything differently after reading this but at least I’m aware of the SV perspective.

Any yes -we are definitely rule breakers – I think if you’re going to create something that changes the rules of the game you’re not only going to have to break them but trample all over them! ;)

Thanks Zoe. You have proven my simplification was an over simplification with the first example :)

Are you not more tending towards the Integrator class? What you are doing is definitely social transformation, but I’m not sure that you fit into their definition: Is a there a network effect and transactions taking place?

Happy trampling.

[...] this is something that my friend Colin Hayhurst has highlight from this recent report on entrepreneurs that says: “Companies that track metrics effectively, and thus learn, [...]

Great article Colin. I hope we are on track with following our metrics at least. Mentioned this post in this article on my success with Twitter last week. Hope your readers find it useful or interesting.

http://www.pratperch.com/2011/05/amazing-week-twitter-rush/

Hope to chat soon. Samir

Samir, That’s a great blog post on the power of inbound marketing. Kind of you to mention me on it. It’s great that you got some good attention for your original post. Clearly that happened because it was great content that you provided.

A brilliant summary of a very insightful (if not lengthy!) piece of research

I find it interesting that results suggested “there was no difference in whether investors were helpful or not on a daily basis”. I think this must depend on:

a) The individual investor
b) The funding round

For example, I would expect angel investors to be much more hands on than VCs, normally as they are investing at an earlier stage, and often in support of the founding entrepreneur/s rather than the exit alone. In this capacity the angel is a hands on mentor as well as investor.

I have only experience of working with angel investors (disclaimer: and of those angel investors Colin accounts for >50%!) so perhaps others with later stage investment experience might share their conclusions.

However, I also find my experience contradicts that an investor’s support in recruiting “is not that significant because great entrepreneurs will find a way to get introduced to the people they want to hire and build a great team even if their investors don’t help.”

When it came to finding our stellar CTO, I met and was connected with a lot of very capable people, but finding the right fit without experience in hiring technologists was tough. It was here that Colin came into his own, leading the search and recruitment process, and ultimately guiding us through what had already become a very challenging process. ‘Hands on’ is a rather large understatement.

In response to the question, “Are mentors important for your learning?”, my answer would be ‘absolutely’. But anyone can class themselves as a mentor, based on their own level of experience and skills set. I think it’s a delicate balance between being open to guidance, as well as developing an ability to analyse all feedback offered with an objective mindset before deciding which pieces of advice to act on. This has to be one of the biggest challenges when starting out. Coupled with this is learning when to follow your gut instinct over the advice of a lauded mentor.

“What are you going to do differently having read this blog post or the report?”

Most likely decrease market size estimates by 90% ;)

Hi Colin,

Thanks for a compelling rundown of what will make a VCs or angels ears perk up. Very enlightening, and in my case, a little frustrating. I get the metrics and can do traction up the wazoo, but I belong in the nethers of the non-tech. Nowadays, that’s a lonely place to be, even with a kick*** service and thrilled clients.
I’ve been seeking funding for my venture and have a dossier in someone’s hands who must assuredly be doing his due diligence (or trying to figure out how to pitch me to his own partners); I haven’t heard anything in a week.

My biz is the ultimate Automizer biz, it caters to a narrow demographic (yacht owners, managers, brokers, luxury shipbuilders, designers and refit yards), but we’ve developed a new way of doing an age-old thing, and the response is great: thrilled clients and enthused press.
However, I find that in this growth stage of my business (a necessary move to Europe), I’m trying to fit into a “form” that’s seductive to VCs or angels, and the exercise has felt rather like putting a perfectly uninjured limb into a cast. It seems to me a waste of time trying to attract the attention of VCs and angel groups who are visibly seeking tech. Only tech. This is where I ask for advice: where do I find a financier who has a knowledge of yachting? Can you point me in the right direction?

Hhh. 81%,for sure.

Anne

Hi Anne,

Thanks for your kind words. I do love that expression “putting a perfectly uninjured limb into a cast” if not the feeling it invokes.

Yachting is an industry I know nothing about so my feedback will have limited help. It’s hard to point you in a direction without first asking some initial questions: 1) How much money are you looking to raise? 2) Where are you based? Email me if your prefer at colinhayhurst(at)gmail(dot)com.

One thing you do need is a web-site: You don’t need to tech for that. First thing any interested investor is going to do is check out your web-site.

Best wishes,

Colin


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    About

    I help entrepreneurs and small high growth potential companies in Sussex, Surrey, London & sometimes further afield. Flexible to your needs but typically help in raising investment finance and mentoring. Previously I was co-founder, CTO then CEO of a software company which we sold to a NASDAQ listed company

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