Image source: Bidnessetc
What makes some startups succeed, while others flop completely?
According to Bill Gross, CEO of Idealab, there are 5 key factors that make or break a business. Here they are in order of importance according to percentage of successes relative to failures:
- The team
- The idea
- The business model
Check out his full TED talk here.
Gross’ research is purely anecdotal, but in his analysis of over 250 companies these factors were the most pivotal to understanding the success of businesses like Facebook, Uber and SpaceX, and the failure of companies that should have made billions of dollars but for various reasons never got there.
These stats may be shocking to you (they were to me), so I’ll draw on some real app examples to explain why Gross’ reasoning is bang on.
In Gross’ research, timing accounted for a massive 42% of the difference between success and failure, making it the single biggest reason why startups succeed.
Timing is so essential because it is basically the problem, the customer demand and the gap in the market bundled into one.
Releasing a product before consumers are ready for it is just as bad as leaving it too late, when the market is saturated and competition is intense.
It’s for this reason that there is much debate as to whether the ‘first mover advantage‘ does actually lead to leadership in a market.
Sure, you have a head start and the benefit of no competition. But you also have the burden of educating the market on your product or service (who may be resistant to change), creating new supply and distribution chains, and having no one to learn from.
That’s why some experts stress the preference of being a ‘fast follower‘ over a ‘first mover‘.
Many Asian businesses opt for this growth strategy. Rather than bleeding money into research and development of new technologies, they monitor the market and the market leaders closely.
This way, they are ready to adjust and match customer demands only when a new concept has proven its potential in the market.
“Never invent. Spot the trend, then do it better!” – Steve Blank, serial entrepreneur and pioneer of the Lean Startup movement.
So how can you spot the right time to launch your business?
There’s no easy answer, I’m afraid. The best strategy is to monitor your market, your competitors and customer attitudes, and be ready to jump on opportunities.
The ability to pivot, whether that be adjusting your business model, product offering, or marketing strategy, is crucial to getting timing right.
Launching too early=fail
Airbnb is a phenomenally successful company now (valued at over $24 billion), with an unique idea and business model. But did you know that the Airbnb founders were struggling to get that exact same idea and business model off the ground for years?
When pitching to investors and trying to scale their company, they were repeatedly told that no one would want to lend a room in their personal home to a total stranger. The idea was basically as far fetched as encouraging people to hitchhike.
Airbnb only took off after the recession, when people were so desperate to make money that the benefits of sharing their house finally outweighed the potential costs.
That trial phase was the chance Airbnb needed to prove itself as a legitimate, safe alternative to hotels.
By the time people were getting back on their feet after the recession, Airbnb had enough traction for continued growth. The right timing was all it needed to penetrate the market.
Despite early setbacks, Airbnb is undoubtedly a success story.
But what about startups that launched too early and never recovered?
Dodgeball.com was a mobile social networking platform that used location-based services to allow people to connect with friends. It was launched back in 2005.
Sounds like a revolutionary idea way ahead of its time, right?
Technically, yes. But Dodgeball failed hard.
It enjoyed some initial hype from early adopters in Silicon Valley and New York, but eventually fizzled out due to under-use.
At the root of Dodgeball’s failure was the fact that customers weren’t ready for it. It was launched before smartphones or Facebook even existed.
Without smartphones, users had to connect with each other via SMS messaging, which was non-user friendly.
And without Facebook, people didn’t understand why they should be excited to receive continuous updates on their friends.
Of course, since the introduction of these complementary technologies, this same concept is an enormous success in social media platforms today.
But it’s a great example of the relative importance of timing in a business venture.
Launching too late=fail
Leaving an idea too late can be just as costly to your competitive advantage as launching too early.
We’re living in a technology age where markets are more saturated than they have ever been before. Customers have so much information, choice and buyer power that if your app doesn’t solve their pain points better than an existing competitor, you won’t stand a chance.
This means that for a startup to succeed with a product or service already offered in the market, it must have a fantastic unique selling proposition to pull market share away from the leaders.
An example of a startup that launched too late and without a differentiated product offering is Pownce.
Pownce was the brainchild of Digg founder Kevin Rose, launched as a direct competitor to Twitter.
The concept was the same as the micro-blogging service, but it allowed users to share much more than they originally could on Twitter – embeddable photos, videos and MP3s.
Except it shut down after traffic stopped to a halt, while Twitter was only gaining momentum.
Twitter was attracting non-techy users and making money out of it, while Pownce was finding it hard to attract a dedicated user base. People were basically using it as a second resort to Twitter.
2. The team and execution
What do all the tech startups who hit a $1 billion valuation within 5 years have in common?
They all have founders or angel investors with impressive resumes to get them noticed, and teams with the ability to adapt their product to the market.
Slack CEO and co-founder Stewart Butterfield is something of a celebrity in Silicon Valley – the simple chat app for work teams is the youngest billion dollar company in the world, raising funding to a $1.12 billion valuation before its first birthday.
Its customers include big names like Dropbox, Pandora and Salesforce. Oh, and Buzinga!
Slack is clearly a unicorn, which startups shouldn’t strive to build from the outset. (It is sometimes fondly referred to as ‘the billion dollar accident’).
But what made Slack such a success can’t entirely be pinned down by a great idea, or even great timing.
Real-time messaging apps have been around for years – On a basic product level, Slack has absolutely no differentiating features to Skype Messaging or HipChat.
It was the team behind Slack that stood out to investors.
Smart investors know that ideas and revenue models are subject to change in this fast-moving industry, so the team is often what makes the difference between success and failure.
The core team behind Slack largely comes from the founders of Ludicord, the company that created Flickr and sold it to Yahoo for $25 million.
Who wouldn’t be impressed by co-founders with that under their belt?
It certainly would have had a bearing on getting Butterfield through the door to investors like Google Ventures and Andreessen Horowitz.
On the opposite end of the spectrum, a profitable business can easily fail if it’s run by the wrong team.
Mt Gox was a Tokyo-based online exchange which was once at the forefront of the Bitcoin movement. It had 80% market share in 2013 and traded up to US$25 million a day.
The company’s leader, Mark Karpeles, was an engineer uncomfortable with playing CEO, with no experience or interest in the day-to-day running of a business.
A string of poor business decisions and oversights left Mt Gox vulnerable to hacking, and the company’s share prices plummeted overnight when $460 million was stolen from its coffers.
It collapsed into bankruptcy.
Mt Gox’s story is a high-profile example of the dangers of founders trying to ‘wear too many hats’, but mismanagement is a common cause of failure in business big and small alike.
That’s why it’s important your business partner has complementary skills sets to yours, and why you should strive to attract the right kind of team members and investors who are compatible with your business’ mission and values.
3. The idea
It can’t be argued that a strong idea is the backbone of a business.
But what’s surprising is that a fantastic idea alone doesn’t account for startup success as much as the team behind it and the timing of its launch.
A classic example of a startup idea that pivoted multiple times before it found its niche is Instagram.
The #1 photo sharing app in the world began as a Foursquare knock-off under the name Burbn, but flopped completely.
After a few weeks of tinkering and a couple more beta launches, founders Systrom and Krieger basically cut everything in the Burbn app except for its photo, comment, and like capabilities.
What remained was Instagram.
It only took 8 weeks to build, but when it was launched it was an immediate hit – check out how Instagram became the number 1 photo sharing app in 8 hours.
Instagram’s story is testament to how common it is for an idea to be reworked to make it unique to the market.
When the app first launched, its main differentiating feature was its filters.
At the time, the iphone’s camera capabilities were quite poor, so filters worked well to differentiate it from its main competitor Hipstamatic.
Systrom realised that the only way to stand out from other photo apps was to make the photos themselves look stunning, basically allowing any amateur with an iPhone to produce high quality photographs.
However, it must be mentioned that the idea was bolstered by perfect market timing.
It launched in the midst of the smartphone revolution and exclusively to iOS, capitalising on the hip iPhone user trend (back when iPhone’s weren’t the mainstream!).
It also waited until Android reached nearly 50% market share before it finally launched a much anticipated Android version, which was promptly downloaded 1 million times in 12 hours.
Moral of the story: A thoroughly revised idea is essential to startup success, but without the right timing, execution and team behind it, it’s unlikely to reach full potential.
4. Business Model
Unsurprisingly, having a business model isn’t as big an indicator of startup success as it once was.
That’s because you can start out without a business model and then demand one later if customers want what you’re selling.
Andrew Chen argues that of course, business models are important, but they’re now a commodity.
Ask any consumer mobile/tech startup product with millions of engaged users how they plan on making money, and they can offer dozens of pre-packaged solutions. There are more than 200 ad networks to choose from alone!
Instead, what makes startups succeed are their activities in business areas that can’t be commoditised – ie: building and marketing a great product.
That’s how startups like Pinterest and Snapchat were able to be evaluated on market size and ability to grow to 100 million active users, rather than on monetisation methods.
This is particularly true in app development. Paid apps are dying, so many apps launch their first version with no revenue model or existing source of income.
They then add one later when they have loyal users, traction, and more data to go off.
The most popular example of a startup that ‘put off’ its business model for as long as possible is Pinterest.
Source: Black Dog New Media
The visual social media platform is famed for raising its $762 million in venture capital before it made even a cent.
4 years after its launch, Pinterest finally introduced its revenue model, Promoted Pins, which allows advertisers to pay for prominent placing on users’ feeds.
Its founders and investors were true believers in the potential of monetising the platform, which is heavily female-dominated, armed with data that Pinterest users are not only 10 percent more likely to buy than those sent from other social channels, but they spend twice as much.
Pinterest is keeping quiet about its revenues, as its still early days since the launch of Promoted Pins, but analysts predict the platform could be pulling in US$500 million in revenue by 2016.
Evan Spiegel, founder of Snapchat, is practically the poster child for going business model-less.
Nothing screams confidence more than turning down a $3 billion acquisition offer from Facebook before you’ve made any revenue at all!
The trick with Snapchat’s business model was launching the ‘Stories’ feature months before announcing a monetisation method.
Advertisers were finally able to get excited about messages that didn’t disappear immediately, so when Snapchat’s revenue model was finally introduced many jumped at the chance to target Snapchat’s young audience.
This isn’t saying you should do away with your business model altogether. Obviously, businesses need to make money.
But focusing on growth and delighting existing users will get you a lot further than focusing on getting paid.
Source: Fuse Brampton
And in last place we have…Funding.
The fact that funding came in last place as a key success factor is another non-shocker.
A company that is underfunded at launch will always be able to get funded later if it’s gaining traction and a user base.
In fact, it’s much easier to get investment in later business stages (product going to market, requiring commercialisation, requiring scaling) than it is to get funding for an idea.
Just as the business model is no longer a necessity to launching an app, raising capital no longer needs to be done in traditional ways.
For one thing, the sharing economy has given startups access to a range of platforms to raise money – from crowdfunding, to peer to peer lending, to online platforms that connect startups and investors at no signup cost.
The opposite situation also holds true – Just because a startup has a lot of funding doesn’t necessarily guarantee its success.
Secret was an app that allowed people to announce secrets anonymously, and was poised to be the place to leak hot insider gossip on important news.
Once a favourite in Silicon Valley for leaking a few major technology stories, the app raised $35 million in funding but slid down the charts as news became increasingly more trivial, overshadowing the good stuff.
Similarly, Pets.com had millions in funding but launched too early.
The concept of an e-commerce site to sell pet food and supplies online was a good one, but this was 1998!
Pets.com relied too much on the assumption that pet owners knew how to use the internet, which was nowhere near reaching mainstream adoption.
Their market research was also inadequate. Customers couldn’t see the benefit of purchasing pet food online and waiting 3 days to be delivered, when they could just drive to the supermarket and use it immediately.
Clearly, bad timing and a bad idea can’t be offset by lots of funding.
Gross’ research is pretty compelling.
It’s important to remember that if anything should be taken from it, its that these 5 app success factors feed off each other.
A fantastic idea is only as good as the team behind it, which will only get funded if it penetrates the market at the right time.
While timing may be the best indicator of startup success, if you can show that you’re excelling in all 5 areas, you’ll have a better shot at being the next billion dollar startup.
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