The decision to start a business in tech can be a radical, albeit a highly profitable one, especially if the startup can take on the trajectory of a disruptive scale-up. The allure of lucrative returns is a pulling draw to the startup grind, but there are other draws as well, notably, a stellar idea, financial independence, or the opportunity to solve an inert problem. Hence, the startup journey always starts with a novel concept and the dream of stratospheric returns.
On the heels of the last tech bubble, this past decade can be dubbed as the “tech boom 2.0,” with innovative tech up-and-comers overtaking traditional powerhouses such as Ford and Marriott. Although those firm valuations are up for debate, the truth of the matter is that the tale of startup success stories is a sensational one in the markets. But alas, as with any fairytale story, there is another grim side to the tale: that of the multitude of startup failures. So, why is it that in the pursuit of the ultimate disruptive technological company, so many fail while even fewer prevail?
To answer this question, it must be understood that once the initial concept is formulated, the firms veer onto their own courses, taking decisions to suit their firm’s needs or to align with their personal resources and knowledge. This brings up the question, what are the various paths in the journey of a startup?
Differentiating Path 1: The Firm Setup
Once the idea is narrowed down (with some level of market research to test the idea’s viability), the startups can choose to set up or conduct their operations in a myriad of ways.
Path A: The Lean Startup Setup
In the lean setup, the original idea-master will choose to develop a prototype or minimum variable product (MVP) in the very early stages of the firm’s operations. To build the MVP, the risk taker can choose one of two paths:
a. find a co-founder, build a small team, and then develop the MVP or,
b. he/she can choose to develop the prototype singularly.
The MVP offers the young entrepreneur(s) the chance to compare it to their original product idea, as well as beta-test customers for valuable insight. The MVP development process also allows the firm to problem-solve and become more attuned with their production process, allowing them greater flexibility in their operations. Normally, startups use little to no external funds in the MVP development process or a minimal seed/Series A funding.
The key to success for the startup going down this route is to develop the product within a short time-frame (possibly 1-3 months) so that series A (and future) investors are reassured of the firm’s abilities to deliver fast results. Once the prototype is perfected, a private beta launch can be arranged (preferably by the fifth month) and subsequently, some key hires can be made. A good option is to offer equity to these newcomers; the option of offering equity instead of regular salaried benefits lures in the top-notch candidates and help with the firm’s retention rate. Some firms can choose to get Series B funding prior to expanding the team or a public beta launch.
Once the team is assembled and the public beta launch is initiated, the next milestones that need to be reached include a target % growth rate in daily visitors, users, subscribers, or sales (depending on the firm’s product and KPI). These milestones should adhere to the SMART goal paradigm. Once the relevant milestones are reached, this will most likely conclude the firm’s first year’s journey. The following years from years 2-5 are then supplemented by series B-D funding, further growth, product improvements, or product expansion as well as other synergistic growth strategies such as mergers and acquisitions.
After facing numerous rejections from investors, Drew Houston, CEO of Dropbox, decided to make a video explaining the seamless Dropbox experience to convince both venture capitalists and users alike that Dropbox was different from other cloud-sharing solutions. His simple video drove up their beta users’ waiting list from 5,000 to 75,000 people overnight. The video was Dropbox’s MVP and since then, it solidified the firm’s status as one of the hottest firms in Silicon Valley.
Path B: The Traditional Setup
Another approach to the startup process is to follow the antithesis of the lean startup setup: the traditional setup. This antiquated arrangement focuses on building a business plan before developing a prototype. Going down this route slows down the founder’s momentum after their initial eureka moment (of idea conceptualization), and the young firm will find themselves engulfed in the minute details speculating variables and scenarios that it does not yet have experience handling (while writing the business plan). Preempting unforeseen event projections from beforehand is not the most congenial for startup businesses, because the firm will find themselves anchored down by the initial business plan, having trouble adapting and thinking on their feet like in the lean setup.
It is, however, imperative to gauge the importance, relevance, and viability of the product; thus, an in-depth market research is a good outcome from this route. However, a full-fledged business plan is redundant, since it does not build investor confidence. A one-paragraph elevator-pitch-like business plan should be crafted instead for a succinct summary of the business. Venture capital and angel investors prefer seeing results, such as initial sales figures or an MVP, rather than reading lengthy business plans.
However, traditional investors usually do take a sheen to business plans, thus banks and other traditional financial institutions would be willing to disburse funds if the firm can report positive results from market research and financial projections. Young talent is reluctant to jump on board a still teetering firm without any solid results; thus the firm might struggle to attract and retain talent in this route.
Path C: The Ill-Fated Setup
Yet another method to starting up is to abandon the diligence of any market research or an MVP development process, and instead focus on securing the funds first. This route is fraught with mistakes. Not only does the firm have a limited understanding of the viability of the product (because of the lack of a market research), the firm will also lack the demo product that would have enabled it to test out its idea. On top of that, with no financial projections, it will be extremely hard to secure funding, hire talent, etc. Thus, the difficulty of attracting funds and talent increases with the lack of a product, business plan, research, and financial projections.
Differentiating Path 2: Procuring Funding
A startup will need funds at various stages in its lifecycle. It can start off with a shoestring seed funding and then subsequently acquire funding in either of two ways: as milestones are reached or as part of a preconceived timeline. The pitfalls of following a timeline instead of a milestone-based approach is that resources are underutilized in the former method, and investors prefer to see milestones ticked off.
Since 2007, the average cost of setting up a startup has been declining, making it easier to sustain operations today than ever before, but the biggest reasons for startup failure remain heightened cash flow burn rates and the accumulation of losses. Thus, sound money management is imperative for startup success.
Path A: Angel Investors, Venture Capitalists
If the firm secures funds from a venture capitalist or an angel investor, then the firm registers their first accountable authority figure or mentors. As a company shareholder, the investors have a say in the company’s operations – which can come in handy if the investors are experienced, but troublesome if they are inexperienced or intrusive.
Angel investors differ from venture capitalists (VCs) in that they usually provide small sums such as $10-50,000 while VCs can fork up any sum upwards of that threshold, depending on their fund size and cycle. VCs’ own investors typically seek 25-35% returns, and thus the main business behind venture money is to maximize returns once the startup scales up with the most profitable exit or growth strategy (discussed below).
These investors have their own ideas on how to choose the firms they want to invest in, based on their positive outlook about the idea, cash-flow projections, and sales figures. Otherwise, they might find confidence in the entrepreneur and the industry. The most exciting VC firms of Silicon Valley include Sequoia Capital and Y Combinator – both of which boast a startup portfolio that includes Airbnb, Dropbox, and Reddit, although Y Combinator might better be described as a startup accelerator rather than a VC (discussed below).
Path B: Bank Loans
Procuring funds through the traditional means of bank loans or loans from other financial institutions comes with a monetary burden. This liability may be hard to fulfill for startups with limited or negative cash-flows. Startups usually find it difficult to find their break-even point in their formative years, thus taking on due loans might not be a good route, setting up a possible cash-flow conundrum for startups.
Path C: Miscellaneous Micro-Funding Sources
Yet another option is to crowdfund or take donations from friends and family such as Jeff Bezos, Amazon CEO, who managed to procure a hefty $300,000 from his family. But long-term series B-D funding is not possible from this route.
Differentiating Path 3: Office Location
Before courting investors and sometimes even before developing the MVP itself, the firm must make the critical decision of where to set up its shop. Instead of starting out in the basement à la Apple’s founding days, the present practice is to operate under a co-working space such as an accelerator or an incubator. These “programs” offer valuable resources such as an extensive mentorship network, seed funding, legal counsel, and PR coverage.
Path A: Accelerator
Accelerators, like their name suggests, “accelerates” the startup’s operations in a limited timeframe. Startups join accelerators after a stringent application process for their program, are offered seed funding in exchange for 3-8% equity in their firm, and are given access to the mentorship and education program. In addition to Y Combinator, the top-ranking accelerators include the likes of TechStars, 500 Startups, and AngelPad.
The fast-paced accelerator program, as well as the rigorous networking events, can be distracting for some startups, but there are more success stories recorded from these programs to suggest their overall benefit.
Path B: Incubator
The incubators differ from accelerators in that they do not offer seed funding and their residency does not have a specified timeframe. Their main prerogative is to get the startups to meet its milestones or scale to a size where it can sustain itself. VC firms usually setup their own incubators for their startups, and some successful incubators include Lightbank and Sandbox Industries.
Path C: Traditional Office Space
The traditional office space devoid of mentors and miscellaneous other supporting resources is a lesser-trodden path today, but there are exceptional success stories from this option as well: notably that of Facebook’s humble beginning in a Harvard dorm-room and subsequent downtown Palo Alto office space.
Differentiating Path 4: Growth/Decline Strategies
As firms survive their first year of operations or after they tick off important check-marks on their milestone to-do list, the startup is ready to transition to a scale-up through the right growth strategy. That is, if the startup follows the lean setup, finds the right incubator/accelerator, and secures funding at the right time from the right investors. If everything does not pan out like this, then firms need to prepare for their inevitable exit which can arise from poor cash management, the wrong business model, or being unable to meet their proper milestones.
Path A: Growth/Expansion
The option to grow comes to reality in years 2-5, i.e., once the first-year hurdle is overcome by the startup. Improving the existing product can be a form of growth as well as marketing to increase sales or customers. Still more ways of expansion can be to expand the product line through new product development or through acquisitions and mergers. Mergers, if not for synergistic growth, do not bode well for startups that are yet to achieve maturity status.
Path B: Decline/Exiting
The ignominious path in the startup journey is to exit the firm by selling out to bigger companies or declaring bankruptcy. Yet another way to opt out of the startup slate is to shut off operations and close the business (if there are no liabilities). However, it is not quite right to call these exit strategies ,ignominious because tech stalwarts such as Elon Musk was able to sell PayPal to eBay in favor of founding Tesla Motors and SpaceX, thus exiting and looking outwards to a new project can be beneficial for the initial idea-master. Although the firm might die out in existence, the lessons that its stakeholders acquired throughout its journey as well as its intellectual properties might live on in other enterprises.
Although it appears that there is little room for error in the lifespan of a startup, there is no right or wrong path to ensure startup success. Time, cash, and resource management as well as timely procurement of funding, mentorship and talent are the only sure-fire ways to possible-unicorn status.