I was recently sent the attached initial report by a group who are attempting to create a new framework for understanding why startups succeed. It was based in Silicon Valley using the survey responses of 650+ web startups but can perhaps serve as a proxy for discussions and analysis of the issues and opportunities most startups encounter.
I’ve excerpted the Key Ideas, Summary of the Main Results and Summary of Additional Findings below which will give you a flavour for this First Report:
The three key ideas we set out to test were:
1. Startups evolve through discrete stages of development. Each stage can be measured with specific milestones and thresholds.
2. There are different types of startups. Each type evolves through the developmental stages differently.
3. Learning is a fundamental unit of progress for startups. More learning should increase chances of success.
I. Summary of Main Results The goal of the report is to lay the foundation for a new framework for assessing startups more effectively by measuring the thresholds and milestones of development that Internet startups move through.
Through analyzing the results from our survey we found that Internet startups move through similar thresholds and milestones of development, which we segmented into stages. Startups that skipped these stages performed worse.
We also identified three major types of Internet startups with various sub types.
They are segmented based on how they perform customer development and customer acquisition. Each type has varying behaviour regarding factors like time, skill and money.
These 2 findings lay the foundation for us to begin organizing and structuring all of a startup’s customer related data, which entrepreneurs can use to make better product and business decisions. A first product based on this framework is currently in development. Contact us at firstname.lastname@example.org if you would like to know more.
Summary of additional findings:
1. Founders that learn are more successful: Startups that have helpful mentors, track metrics effectively, and learn from startup thought leaders raise 7x more money and have 3.5x better user growth.
2. Startups that pivot once or twice times raise 2.5x more money, have 3.6x better user growth, and are 52% less likely to scale prematurely than startups that pivot more than 2 times or not at all.
3. Many investors invest 2-3x more capital than necessary in startups that haven’t reached problem solution fit yet. They also over-invest in solo founders and founding teams without technical cofounders despite indicators that show that these teams have a much lower probability of success.
4. Investors who provide hands-on help have little or no effect on the company's operational performance. But the right mentors significantly influence a company’s performance and ability to raise money. (However, this does not mean that investors don’t have a significant effect on valuations and M&A)
5. Solo founders take 3.6x longer to reach scale stage compared to a founding team of 2 and they are 2.3x less likely to pivot.
6. Business-heavy founding teams are 6.2x more likely to successfully scale with sales driven startups than with product centric startups.
7. Technical-heavy founding teams are 3.3x more likely to successfully scale with product-centric startups with no network effects than with product-centric startups that have network effects.
8. Balanced teams with one technical founder and one business founder raise 30% more money, have 2.9x more user growth and are 19% less likely to scale prematurely than technical or business-heavy founding teams.
9. Most successful founders are driven by impact rather than experience or money.
10. Founders overestimate the value of IP before product market fit by 255%.
11. Startups need 2-3 times longer to validate their market than most founders expect. This underestimation creates the pressure to scale prematurely.
12. Startups that haven’t raised money over-estimate their market size by 100x and often misinterpret their market as new.
13. Premature scaling is the most common reason for startups to perform worse. They tend to lose the battle early on by getting ahead of themselves.
14. B2C vs. B2B is not a meaningful segmentation of Internet startups anymore because the Internet has changed the rules of business. We found 4 different major groups of startups that all have very different behaviour regarding customer acquisition, time, product, market and team.
I hope if nothing else you will find it to be an interesting and perhaps eye-opening read.
Larry Innanen Founder and President Innplay ~ Angel Investment | Consulting Services | Strategic Advice