In his novel Anna Karenina, Tolstoy declares “Happy families are all alike; every unhappy family is unhappy in its own way.” This famous opening line suggests that there are common elements for a successful family; on the flip side, there are countless ways things can go wrong.
Analogizing this to startup companies can be illuminating. Having founded and run several startups, as well as having advised founders as either an attorney or board member, it has become clear to me that while a variety of factors are needed for an enterprise to be successful, there are several key factors that virtually every startup need to exhibit and embrace in order to be successful.
Accepted wisdom is that most startups will fail. So what makes the outliers successful? In my experience, there are five key factors, and I share them here.
1. Don’t start with a product, start with an open mind.
Thanks to lesson from the book the “Lean Startup,” the days of “if we build it, they will come” has thankfully passed. Most companies are founded on a “big idea,” whose founders are, understandably, passionate and committed to pursuing their dream. So what goes wrong? One survey of failed startups determined that 42% of them identified the “lack of a market need for their product” as the single biggest reason.
The brilliance of the concept that an entrepreneur should develop a “minimal viable product” – build something small, fast and cheap, and then test it – is its simplicity. Remaining nimble, flexible and open-minded cannot be overstated. (Equally important, of course, is to make sure the appropriate inventions assignment agreements and contractor agreements are drafted to ensure that your company properly owns everything your employees and contractors create).
2. To build a viable business, you need to build a successful team.
Psychological research is rich in the documentation and study of dysfunctional groups (think of Tolstoy’s “unhappy families”.) In the world of startups, many failures are due to discord among the founders. Although most founders are people with high hopes and good intent, when you bring into the mix the differences of personality, background and skills, combined with variation in expectations, conflict is to be anticipated. In most cases where the founders fail to resolve or work around these differences, the demise of the company is not far behind.
Thus, instilling teamwork skills and practice into your company culture is the key to its success. From a legal framework, a “founders” or shareholders agreement that delineates the rights and remedies of shareholders should disagreements or conflicts arise is also essential.
3. When adversity strikes, resilience is essential.
Things will go wrong, terribly wrong with your startup. This is not due to bad luck, rather it is part and parcel of launching a new enterprise. Startups operate in a rarefied environment in which market conditions, competition and circumstances (both macro and micro) are constantly in flux. Startup teams must possess the ability to change products, adjust to the changing landscape of competition, shift industries, rebrand the business, or even tear down a business and start all over again.
Resilience in the face of the headwinds of adversity is essential. There are many studies examining what makes one individual more resilient than another. One commonly identified trait is referred to as the “internal locus of control”. Simply put, resilient individuals believe that “they,” and not their circumstances, are the driver of success. So when things go wrong, roll with the “punches” and remain focused on success.
4. Keep your friends close, and your advisors closer.
I have helped many startups screen and engage advisors. Advisors and board members can make a significant contribution to a startups success. By providing an imprimatur of credibility, imparting insightful wisdom, making key introductions, or raising seed capital, an advisor can give the startup the foundation it needs to keep on track.
Unfortunately, the reality is that most advisors will not workout. He or she may overpromise, lose interest, or become consumed by competing commitments. You can insure that your advisor agreements provide adequate equity and/or incentives to secure the advisor’s engagement, but also have reasonable “cliffs” and milestones to warrant that compensation is tied to value received.
5. Show me the money!
All too often I have seen the never-ending pursuit of founders for money become the crucible that becomes too heavy to bear. Thus some very good ideas and promising companies fail to get very far. Since raising money is so challenging, my advice is to ask for more money than you think you will need, take money when you can get it, and in most cases use a convertible note to quickly (and cheaply, relative to other approaches) bring in the money so that you can focus on growing your company.
Once you have the necessary funds to get things underway, make sure you are disciplined in your spending. That means keeping overhead in line with your cash, recruiting key first employees with a modest (but competitive) salary and a generous equity grant. (And if you don’t have an equity compensation plan/strategy in place for key employees, stop reading this and go get one!)
Increase your odds of success.
Launching a startup is a momentous endeavor, and one that promises both excitement and heartbreak. While there is simply no “formula” that guarantees success, keeping in mind some of the above lessons may increase your odds.