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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Companies, Stars and You can’t have it all

Posted on August 24, 2010. Filed under: Astronomy, Companies, Customers, Investors | Tags: , , , , , , |

CEOs, entrepreneurs & boards all struggle with how to satisfy 1) shareholders, 2) staff and 3) customers.

It’s hard to do that really well. Indeed most companies, with some lifespan, probably make a reasonable first of keeping two, of those three, stakeholders happy. Now I reckon striking a balance and keeping all three stakeholders happy, and importantly maintaining that balance, is nigh impossible.

I could bore you with a long post trying to prove this via examples.

Rather I’m going to can explain it conceptually, as a three-sided hill, looking like this from above.

 

Supernova remnant

 

Companies that gravitate to satisfying investors/shareholders and users/customers tend to expand (very fast in the case of VC fuelled growth), get well-known, achieve success for a (relatively) short while then, so often, fade from view: Let’s call them supernovae. Think MySpace or Boo.com, one of 10 failures you never heard of or forgot about. OK, the analogy is imperfect (supernovae are the death knell of stars) but you get the drift.

What about those companies that keep investors and founders happy but ignore customers? Well they end up building something customers don’t even want. Typically these companies develop a solution then go looking for a problem. There may be lots of energy, noise, activity and engineering going on in that company but nothing much comes out of it. A bit like a black hole really!

 

A star near us

 

Companies that look after their staff and customers well are more like stars: They often have a much longer life (like companies with a sustainable business) and have a more gradual start and end, when they burn out.

Indeed some stars turn into black holes and others get wiped about by supernovae.


You know it’s hard to keep a ball on top of a hill.

 

What do you think? Got some good examples? Perhaps you disagree with my broad thesis and can cite an example that disproves it.

Any comments are welcome. I don’t expect you, or anybody, to do so on this first substantive post, but go on surprise me.

Images sources: NASA and painting of Cerberus by William Blake


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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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