A few months ago I wrote a Post titled Top Ten Reasons Why Start-ups Fall-down.
The response was unexpectedly gratifying with some readers suggesting that I do a follow-up Post on the reverse scenario – i.e. reasons why start-ups succeed. One of the readers who made that suggestion also snidely assured me that he wouldn’t be holding his breath – which is just as well otherwise Tech Mahindra would have been mourning the loss of a great talent!
So duly incentivized and incited, I buckled down to some research and quickly realized that while Failure was somewhat open to formulation, success was a far more slippery customer. Hence the cya title of this Post!
Obviously the simple and slimy shortcut would have been to posit that the reasons for failure and success are two sides of the same coin. Ergo the same Top Ten reasons for failure are also the reasons why start-ups succeed. Unfortunately we Bongs have a different take on the concept of shortcuts. If in Kolkata you ask anyone directions to any place he will first tell you ‘the shortcut’ which usually involves baffling numbers of right and left turns and if at this point you start looking confused he will gaze at you pityingly and say “or you can go straight” – thereby confounding conventional geometry which thinks that the shortest distance between two points was a straight line. So in order to figure out the shortcut in this context I needed to configure the numerous turns. Problem was I wasn’t sure what or who to turn to.
Then I came across a TED talk by Bill Gross, a serial entrepreneur and founder of Idealab – a business incubator responsible for creating multiple highly successful – and some failed – start-ups. Gross surveyed over 200 start-up successes and failures, to identify and rank the major success factors. He came up with 5: The Idea, The Business Model, Funding, Team/Execution and Timing.
Now if I was to ask you to rank these five factors in order of importance and impact what would that table look like? So just for fun before reading the next paragraph mentally do your own ranking.
According to Bill Gross’s research this is how the 5 factors stacked-up in terms of the difference between Success and Failure:
- Timing – 42%
- Team/Execution – 32%
- The Idea – 28%
- The Business Model -24%
- Funding – 14%
So how does Bill Gross’s rankings compare with yours? Did you imagine that Timing will be a clear first and Funding will be a distant last? Or that The Idea will be third? An eerie coincidence is that the scores for prime cause of Success (Timing) as well as failure (No Market Need) were identical –both scored 42%.
While the score may be an eerie coincidence there is also a clear correlation between Timing and No Market Need. Because often No Market Need is due to Timing. For instance all the early online media entertainment sites failed because of the low penetration of broadband, but Netflix and YouTube timed it right. Bill Gross cites Uber and Air BnB as two poster boys of perfect Timing. Yet in the early days of their fund-raising most venture capitalists were convinced that there was No Market Need for either business.
In my rather jaundiced world-view, strategy is often a retro-fit rationalization of things that worked. So I wondered how much of Timing was retro-fit and how much was real. According to Gross, Air BnB’s timing was perfect because their launch coincided with the recession where both house owners and travellers were looking for cheaper options. And in the case of Uber it was because drivers wanted to make more money (which is quite disingenuous since drivers always want to make more money – in fact, come to think of it, most people always want to make more money!)
The reality, however, appears to be somewhat different. The founders of both Air BnB and Uber first encountered a Problem, the Solution to which segued into an Opportunity, which they executed brilliantly. And specifically in the case of Air BnB, Timing played a major role.
Here’s an abbreviated chronology of two of the world’s most valuable start-ups:
The Problem: The co-founders were struggling to pay the rent of the San Francisco house they shared
The Solution: During a design conference in San Francisco when all the local hotels were full they rented out 3 air mattresses in their living room floor and provided their guests breakfast.
The Opportunity: The ease with which they were able to attract 3 guest and change them $80 per night triggered the thought that there may be a bigger idea here.
The Timing: In the summer of 2008 the founders finished their website 2 weeks before the Democratic National Convention in Denver, where over 80000 people were expected to attend resulting in a severe shortage of hotel rooms. Within a week they had 800 listings.
The Problem: Legend has it that the co-founders were having problems getting a cab in Paris where they had gone to attend a conference. Public transport was not point-to-point and cab availability was unpredictable.
The Solution: Press a Button Get a Cab (initially, the idea was for a timeshare limo service that could be ordered via an app.)
The Opportunity: Between the inconvenience of public transport (uncomfortable, not point-to-point) and the unpredictability of cab availability there was an opportunity.
The Timing: I couldn’t find any data points or anecdotal evidence related to Timing
It should be noted that unlike the poverty-stricken cofounders of Air BnB (Brian Chesky, Joe Gebbia and Nathan Blecharczyk ) the Uber founders (Travis Kalanik and Garret Camp) were already millionaires. Kalanick sold his company Red Swoosh to Akamai for $23 million and Camp sold StumbleUpon to EBay for $75 million.
But what is common in the value pro position of both Air BnB and Uber are the 2Cs – Control and Convenience – related to a frequently occurring and problematic consumer experience. They both also have some common critical success factors:
- They have enabled trust between strangers through their platform
- They have managed to utilize idling capacity in a way that captures the demand & supply characteristics of their respective markets
- Both are yet to achieve true sustainable critical mass, but are leaders in their market sectors
- Their platforms have driven tectonic changes in consumer behavior
- Their platforms offer convenience to both sides of the sharing economy
Everybody has a plan until they get punched in the face – Mike Tyson
Very few start-ups have been punched in the face as often and hard as Uber and to a somewhat lesser extent Air BnB. But they have persevered and significantly extended and diversified their original offerings. In start-up lexicon the Shakespearean question of ‘To be or not to be’ is translated as ‘To Pivot or Persevere’. (Pivot Gone Bad is the 9th highest reason for start-up failure)
Both companies have done a bit of both. In the case of Uber the original concept of an apps-enabled limo-share service extended to cabs and cab-pooling to boats and pivoted to home delivery – but the core remained the same: Control and Convenience. In the case of Air BnB the Accommodation suite of offerings expanded and pivoted to Holiday Experiences, but here again the core remained the same 2 Cs.
The Audacity of Zero & the Miracle of Negative
In general, the reaction of most start-up entrepreneurs after getting ‘punched in the face’ is to basically stand still for the next punch –i.e. do nothing different to avoid the punch. Eric Ries, the author of ‘The Lean Start-up’ confesses that he has never been able to convince any founder of any failing start-up that his/her strategy could be wrong! This has partly to do with entrepreneurial ego (imagine the promoter CEO of a consistently and increasingly loss-making start-up drawing an annual salary of over Rs 45 Crores). The other part relates to what Ries terms as The Audacity of Zero, which he explains as follows: “… it is often easier to acquire other resources when you have zero revenue, zero customers, and zero traction than when you have a small amount. Zero invites imagination.”
But there is another phenomenon even more baffling than The Audacity of Zero. It is known as The Miracle of Negative –i.e. The higher the burn-rate including the CEO’s salary; the higher the loss, the higher the valuation! A couple of years ago a perspicacious Deputy Governor of RBI compared the funding process of start-ups to ‘musical chairs’ and prophesied that when the music stops someone will be left holding whatever is left over to hold.
A Close-to-Home Example of Start-up Success
Analyses of Uber and Air BnB are from secondary sources and therefore relatively distant.
So how about a much closer-to-home example?
For over 30 years I have been in some way or other involved with one of India’s most iconic and sustainably successful start-ups and have had the privilege of working closely with the founder. Looking back over time the correlation between Bill Gross’s 5 success factors to my close-to-home example is either incredibly coincidental or just plain incredible:
Bill Gross’s Success Factors vs. The Iconic Indian Start-up
- Departure of IBM & ICL from the Indian Market
- Leadership team – perfect-fit of complementary capabilities
- Early investment in fresh talent from IIMs and IITs
- Bare-bones funding ensured continuous focus on and compression of the core Order-to-Cash business cycle
- To create a mass market for computers by exponentially widening the potential buyer/user base
The Business Model
- Focus on First Time Users – attractively priced, user friendly interface packaged with generic application software.
- Relentless focus on product development & innovation
- For well over the first 15 years’ of its existence and growth the prime generator of funds – apart from short-term Working Capital – was the products it designed, manufactured and sold and the cash that was collected.
Success Factors vs Drivers
Looking at the table above I realize that I am a victim of my own definition of ‘retro-fit rationalization of what worked’. I also realized that ‘factors’ need to be driven to success – which is quite different from just ‘doing it right’. So what you need is a Driver. In my close-to-home example the driver was the seemingly amorphous ‘entrepreneurial spirit’ – a term that seems to have gone out of currency presumably because it decayed, by virtue of its intangibility, into a cliché.
Often when I have asked B-School students about the meaning of ‘entrepreneurial spirit’ the responses primarily hovered around stratospheric vision, risk-taking ability and unfettered freedom devoid of any discipline, structure or process. Sounds familiar?!
Well here is my memory of how the amorphous attributes of ‘entrepreneurial spirit’ were tangibly translated to drive success in my close-to-home example:
Mega-2-Minute: Big Picture Vision precision-executed to realization by the 3 Ds – Details, Deliverables & Deadlines
Making It Happen: Infusing an intense culture of ‘need-to-achieve’ and ‘ownership’ in every individual across the organization
Doing More with Less: Bare-bone funding (only working capital + a low equity corpus) meant that business sustainability and growth were funded by what was designed-manufactured-sold-collected
The Siege Mentality: An engendered belief of “Us against the World” which served to bond and bind the entire organization focused on the twin goals of survival and success
Shared Mythologies: Stories of achievements against seemingly impossible odds (mostly related to sales & marketing and product R&D) that embedded themselves into the organizational psyche creating pride and the urge to achieve in order to be embedded in the shared mythology.
Minds on Fire: This was an image created by one of the top graphic teams of the time which became a mnemonic symbolizing the profile and attributes of every existing and potential employee. The articulation of the mnemonic was effectively used to attract best-in-class young talent from IIMs and IITs and also as a motivator to drive a stratospheric growth curve.
There’s no success like failure….and failure’s no success at all – Bob Dylan
As I was writing the last couple of pages this line from one of Dylan’s songs floated into my mind. Yes I know it is typical Dylan-speak where syntax often supersedes sense, but even then there always dangles a tantalizing hint of some deep underlying meaning.
So have I been able to identify some reasons why some start-ups succeed?
Yes, but does that mean they guarantee success?
Unfortunately no! The reason of course is that both failure and success are post-facts. And while failure can to some extent be attributed to either not doing certain things and/or not doing them right, success is not guaranteed even if you did those certain things and did them right.
Does that make sense?
Or does some deep underlying meaning in Dylan’s lyrics begin to appear vaguely in the distant haze?
Eric Ries – The Lean Start-up & Various Presentations
Bill Gross – TED Talk Vancouver
Tim De Jong – Critical Success Factors for Peer-to-Peer Platforms in the Sharing Economy (Amsterdam Business School)
My Post Top Ten Reasons Why Start-ups Fall Down