A startup is sometimes defined as a hypothesis for a business. Building it is testing that hypothesis. In reality it often feels like jumping off a cliff with a box of parts and attempting to build a plane before you hit the ground.
Unlike the ease of constructing something from Ikea, there are no instructions with this plane. And with startups there’s no guarantee that the parts will even make a plane.
Startups die. They die for all sorts of reasons. Ultimately what separates the living from the dead is an ability to see error and adapt.
All startups that get to grow up will go through three stages. Think of these stages as Survive, Sustain and Scale.
Survive: They will face the ‘Problem – Solution Fit’. Do I have an important problem worth solving?
Sustain: They will face the ‘Product – Market fit’. Have I built, or can I build, something that people really want and will pay for?
Scale: They will face the problem of scale. How do I attain significant growth?
From a funding perspective, these stages roughly hold true. Survival mode sees startups from pre-seed through to seed funding. Sustaining brings them on to Series A funding. Scaling is growth.
However, there are seven lessons to learn.
The first lesson is to survive – to ensure that you are solving a really important customer problem, and can build something that customers will really want. Most companies fall at this first hurdle. They die because they fail to answer the ‘So What?’ question. They die more from a lack of customers than from a failure of product development. The way to fix this is to focus, ruthlessly, on the customer and their needs.
One trap people fall into at this stage is the illusion that ‘if I build just one more feature then people will buy my product’. Des Traynor of Intercom has talked repeatedly about why product strategy is about saying no to features. A relentless focus on features without a clear understanding on customer needs is a terrible idea.
Amazon’s Jeff Bezos made the comment: “If we can keep competitors focused on us while we stay focused on customers, we'll turn out all right.”
Obsess about the customer, understand the pain they’re experiencing, make sure what you’re doing solves the customer’s pain point and, ultimately, brings them value. Companies that do this succeed. Think Ryanair and their customers’ pain point: cost.
The second lesson is to learn fast. It’s key to customer discovery. What separates the living from the dead is the ability to see error and adapt. We all carry models of the world around in our head and they’re all wrong. Fast learners can quickly figure out how wrong, and are ruthlessly determined to get back on track and build a better model of the world.
One NDRC founder talks about how he figured out why something wouldn’t work in six months in NDRC rather than likely 18 months on his own. But even using that language is the wrong thing in the early days. Focus on learning fast and iterate quickly.
One team I’ve been working with recently is running through a third significant iteration in their product in as many months. Their product is being used by a number of major companies and will generate more than €200,000 in revenue this year, and more than €1 million next year. One of the very best things about this company is how fast they learn. They are rapidly building on the pieces that are working and improving, or changing, the parts that aren’t.
All startups need to permanently prepare to pivot. YouTube started life as Video Dating Site, Twitter was a side project from a company called Odeo and even Starbucks started out by selling expresso machines.
The better team the better your chance of success
There isn’t a real work/life balance at the beginning of a startup. Eventually, as the company sustains and scales, there needs to be, but honestly I don’t think it’s possible at the start. Which is why the third lesson is to make sure you have a great team of co-founders. And sign a pre-nup (vesting agreement). Be aware that you’re creating the culture of your company from the very day you start it. Nobody does this alone, even if some people feel that way. The better team the better your chance of success.
The fourth lesson is to be careful about cash. It seems simple to say watch your money but money is like salt for a startup: too little or too much and you die.
One company I did some consulting work for burned through €1.5 million without building anything of any value. With a bit of work, we rebuilt their core product as an MVP for €65,000. I saw another company raise about five-times as much money as it needed to test its core value proposition. It managed to spend all that money before it died. And it did it without really understanding its customer (see lesson one) or learning to pivot quickly (see lesson two).
Ultimately the best cash is customer cash, because it gives you choices around what you do (and it is the real metric that will determine whether you’re creating value). However, revenue for integration work of specific customer features may mean the difference between survival in the short-term, or not, but you may end up with a company with lots of individual customisations that will find it really hard to scale (and it means you never really found Product-Market fit in the first place).
The fifth lesson is to make sure that you don’t die of ignorance. Learn the disciplines you don’t know. One founder I know likes to hire people who have worked in startups that have failed because there is so much experience they bring to his team.
Always as a startup do the simplest thing that works - be vanilla, especially with technology. Opening, one of the AI startups I’ve been working with, has half a million lines of code, multiple neural network learning models and real cutting edge technology. But, it also leverages a ton of infrastructure that Microsoft has created in Azure. Only invent what you need to invent.
Beware the technical team or CTO that wants to spend nine months building something in an obscure language that no one really understands. Most software that is built at the beginning of a startup is going to be rebuilt so do the simplest thing that works before figuring out how to build the best thing that scales.
Do not go around giving up five per cent of your company to multiple advisors, creating a messy Cap table – this will hurt your funding likelihood. Beware mentors who have never built a startup. Beware illusory investors. And please god, don’t try and change human behavior. Dick Costello, former CEO of Twitter, shut down his health tech startup after nine months because he figured out that people weren’t going to behave the way he needed them to behave for the product to work.
‘In God we trust, all others bring data’
The sixth lesson is to be disciplined. Be disciplined about all the things I’ve just talked about: your customer, your learnings, your product, your cash, your investors, your team.
Edwards Deming said: ‘In God we trust, all others bring data.’ That’s what discipline is about, a no-bullshit engagement with reality at all times. It’s also doing the basics, returning calls, writing emails and making sure the bills get paid. I have a key metric that I use with founders – how they respond to emails. Email them an introduction to an investor and the best ones with the best companies are the fastest to respond.
The seventh lesson, and this may seem counterintuitive for a startup, is to have a strategy. Strategy is all about mapping the landscape that the business operates in, understanding where the company fits in the landscape, how they can leverage opportunity and create value to create a scalable profitable business in the landscape.
Startups die and they die for all sorts of reasons. Hopefully some of the thoughts here may help avoid killing your startup for the wrong reason.