If there is one part of the economy that's booming right now, it's the start-up space.
A recent Wall Street Journal article pointed out that there is such a high demand for start-up funding that even hedge funds, private-equity firms, and sovereign-wealth funds are investing in closely held start-ups.
And yet the failure rate for new ventures remains defiantly high, at around 80 percent. (Most official agencies put the number at about two-thirds, 66 percent or so, but these are based on the failure rate of those start-ups that actually get around to registering with the IRS or other agencies. Anyone involved in the start-up industry knows that very many new ventures fail so quickly they never get around to filing with anyone, thus understating reported statistics.)
Why do so many new ventures fail, even with so much money available? Because few start-up founders are clear-minded enough about three non-negotiable fundamentals:
1. Get the team right. When it comes to maximizing the chances of success, most new venture teams are constructed almost randomly. Whether it's dorm mates deciding let's do this, or guy with money meets guy with idea, or frustrated employee strikes out on her own and takes colleagues with her, such groupings carry little assurance that the team will actually be capable of building a successful new venture.
There is however a founding team combination that works--one that we've looked at previously. Every successful new venture needs a Visionary and an Operator at its heart. Get those right, and you're on the road to success; miss out on either one, and your start-up won't make it.
Numbers count, too: after over 40 start-ups, my personal experience is that two founders (especially if they are the Visionary/ Operator combo) have a much higher success rate than one founder on their own; three have a better success rate than two; and adding more has little impact--in fact, founding teams of more than four people are more trouble than it's worth.
2. Find a profitable, sustainable market. Here's a flash of the blindingly obvious: for a start-up to succeed it must find a profitable, sustainable market.
You'd think there would be little confusion about this, but the reality is that most start-up founders either (a) fail to see the fierce urgency of doing so, and instead get sidetracked by other non-essentials (new Aeron chairs - yippee!), or (b) compromise and end up with an unprofitable or unsustainable market, or (c) fall into the "Wal-mart just called" trap of mistaking a single big customer for a real, sustainable market.
Here's a cheesy suggestion that works: Get an old-fashioned gong, or a bulb horn, or a boxing bell--anything that makes a loud noise--and use it every time you do something that gets you closer to finding your profitable, sustainable market (a mailout has a high response rate; a product launch flops; a beta tester gives great feedback - anything that provides actionable data). If a day goes by without you scaring the bejaysus out of your neighbors, be worried. If a week goes by, you need to radically change tack.
3. Get out of the start-up ecosystem. There has never been a time when there was more help available for start-ups. The infrastructure around new venture creation has become incredibly sophisticated with not just funding, but accelerator programs, mentors, coaches, contests, events, workshops, conferences--you name it, there's a version for start-ups.
All of this help is fine in its place and at the right time. I was a co-founder of one of the earliest incubator programs way back in the 1980's, and I know how powerful they can be. But if you're serious about building a successful business your goal should be to graduate out of the start-up phase as soon as possible.
Which means at the right time (i.e., as soon as possible) saying goodbye to the cozy environment of your favorite co-working space; not schlepping off to the next funky start-up conference; forgoing the late-night kibitzes with the latest batch of start-up newbies. Can't let it go? Don't want to leave the comfort of the start-up biosphere? Then maybe you're a start-up junkie, and not a business founder after all.
Not a darn thing wrong with that, of course. Just don't confuse the two.