Top 10 factors influencing an internet startup’s chance for success

by Imre Hild

July132012

In 2011 something unheard-of happened in California: a handful of entrepreneurs with the help of some famous gurus of Silicon Valley (and Stanford University) conducted a study named Startup Genome (SG) in an attempt to assess what makes a startup successful.

Formidable task, knowing the intricacies of the trade. We all have our own recipe, what makes a budding team of entrepreneurs the next big thing – yet, it is difficult to come up with general, overarching truths.  So, the SG guys were up for a big task.  They conducted hundreds of interviews around the globe so now they are definitely closer to the ‘holy grail’ than anyone has ever been.  Their findings are often quoted and referenced at conferences, in white papers and investor meetings, which makes it all the more important. Of course, it begs the question: do their findings have a message which can be applied in this part of the world?

The SG team came up with two fundamental findings:

A. Startups move through thresholds and milestones in their development. One could say, no news there.  Howeve, they also found that the impatient startups which skip steps of development almost literally code their failure.

B. Not all internet startups are alike. The SG methodology differentiated between startups along the dimensions of customer acquisition and customer development. They also found that startups fall into one of four categories:

1. Automizer (Google, Dropbox),

2. Social Transformer (Facebook, Twitter),

3. Integrator (Hubspot, Uservoice) and

4. Challenger (Oracle, Salesforce).

These results are trivial yet profound in the way we look at internet startups.  Such categorization with the level of detail and analysis about each category has not been performed before and will affect how the venture world sees internet startups.

Besides the fundamentals they came up with some general findings about internet startups:

1. Attentive founders are more successful – those who thought of recruiting mentors, advisors early on and chose to listen to their input or learned from their own or others’ mistakes raise 7x more money and have 3.5x better user growth.

2. Investors often invest 2-3x more capital than necessary in startups that haven’t proven themselves yet. They also invest excessively in solo entrepreneurs or teams without technical cofounders although data shows that without them success has a lower probability.

3. Solo founders take a lot longer to scale and are a lot less likely to pivot, or, in other words, some ideas die hard.  This applies very heavily in this part of the world where solo entrepreneurship is so fashionable.

4. Well Balanced teams with one technical founder and one business founder are investor’s sweethearts. Comparatively, they raise 30% more capital form investors and have 2.9x more user growth.

5. Most successful founders are driven by impact rather than experience or money. This is an emerging theme in the past decade as the number of entrepreneurs who set out to change the world actually managed to change it a bit and walked away with some considerable pile of cash. Now these folks sit on the other side of the table as investors and still have a tendency to back startups which sign songs dear to their heart (and make a dent in the world’s pocket in the meantime). Even if changing the world will not start from this part of the world, it is good to know what makes the rest of it tick.

6. Founders overestimate the value of IP before product market fit by 255%. Well, looking at some business plans in and around our neighborhood this may be an understatement.

7. Startups need 2-3 times longer to validate their market than most founders expect. Which would be fine, however the founder’s unreasonable expectations towards themselves create an unnecessary time pressure – which later leads to premature scaling, the doom of many startups.

8. Startups that haven’t raised money over-estimate their market size by 100x. Also, they often misinterpret the market as new as a result of insufficient market and competition analysis. So, it is really worth asking for those competitive analyses a 100 times…

9. Premature scaling is the most common reason for startups’ poor performance. They hold up a target, which is unachievable and while the team and investors are cheering on they tend to lose the battle early by getting ahead of themselves.

10. B2C vs. B2B is not a meaningful segmentation of Internet startups anymore because the Internet has changed the rules of business. SG found that a more relevant segmentation is to look at the way these startups handle their customer acquisition and customer development.

These are the general findings which are applicable to most internet startups. The SG team prepared very detailed analysis of each segment and identified their typical behavior when it comes to time, product, market and team. Studying these segments can help startups realize their own ‘startup-identity’, the common pitfalls such categories face and the most common path to success. The SG team also prepared a new 2.0 version of the study which focuses on early scaling, the apparent death trap for most internet startups. In the coming weeks and months this blog will discuss many of these findings in more detail.

, ,