The Enigma of the Valley: What makes a startup succeed ?
The Early birds.
The 1970’s was an interesting time. A time where the western youth had acquired a taste of the counterculture movement, with their distaste for materialism and regression, accompanied by a fondness for long hair, psychedelic colored clothes and Bob Dylan’s music.
It was also a time that saw a small group of companies take form. The sort of companies that were brimming with potential and went on to define their respective industries for generations to come such as Apple, Microsoft, Atari etc
Apparently, the term ‘Startup’ was coined in the 1970s by Technologists and Venture Capitalists to refer to similar companies - a company with enormous potential for growth. However, in my opinion, a startup is much more than just potential.
A startup, in my opinion is a group of people coming together to build a better future than the one we live in right now, with an unwavering belief in achieving that outcome.
And while the world witnessed these companies grow from nimble organizations to massive corporations, they would not be the only ones at the pinnacle of technology. The 90’s advent of the internet - The phenomenon of letting a computer connect to another computer anywhere else in in the world created a wave whose ripples are felt even today in the world we live in. Adoption of computers increased from 15% to 35% from 1990 to 1997. In the minds of the people, a computer went from being a luxury to a necessity, and companies that let us navigate and utilize this new technological marvel started to rise - with Amazon, Yahoo, Netscape starting to take form. People started taking every possible company online, from pet stores to groceries. The late 90’s was a crazy time, where it was possible for promising internet companies to go for an IPO, or raise massive amounts of capital without ever turning a profit, or in some cases, materializing revenue.
However, in life, what goes up must come down. The 90’s dot-com boom was closely followed by the dot-com burst in ‘ 02, where the market had a greater fall than poor old Humpty Dumpty. This resulted in investors being skeptical about pouring money into internet technology companies for the next few years. Suddenly, the money started drying up in the Valley.
However, akin to Darwin’s survival of the fittest, this paradigm altering shift in investor’s beliefs regarding the potential of internet and technology companies created some of the biggest companies that mankind ever witnessed.
The fervor with which these companies grew brought about an optimism in investors and founders alike, where young children that watched Star-Wars and read about hitchhikers meandering across the Milky-way were now setting their eyes on changing the world.
And today, even though this optimism has resulted in startups being an ever-present entity in the technology ecosystem, there is still a mystery that surrounds them: What makes a startup succeed ?
The Fundamentals
The basic building blocks for a successful startup are intuitive yet extremely difficult to get right.
The foundation of a successful startup is based on something that is in even more shorter supply than bravery: truth.
Every great startup is based on an enduring truth.
Let’s take Amazon as a prime example. (See what I did there ?)
Even though Amazon started off as an internet book-store and eventually expanded into grocery, cloud, music and now competes in almost every vertical comprehensible, it’s core business is still based on an enduring truth: A customer will always want to pay as low as possible, for any particular product or service. Hence, Amazon is always focused on providing the lowest possible price to the customer.
Let’s consider Google as an example.
Started by two Stanford Computer Scientists out of a small garage in Menlo Park, Google is now a household name, synonymous with Internet Search and Browsing, along with a dozen other industries. However, a deeper look into the business gives a glimpse of the enduring truth that sits at the core of the Search Giant’s products: A user will always want to search for information in a quicker, easier and more accurate manner than they could in the past. And it is this mantra that formed the basis of some of its most successful products: Google Search, Google Chrome, Google Maps etc
This is not to say that businesses without an enduring truth at their core will not succeed. Outliers will always exist, however, usually companies with lasting success usually have an enduring truth at the core of their business, and utilize tools at their disposal such as capital or technology in order to sustain and maintain that truth as the core of their business. In essence, an enduring truth as a foundation of a business idea ensures that if all else is done well, a business will have a stronger chance to succeed and outlast the people who created it.
However, along with the idea of a company based on an enduring truth, it is extremely important to get 3 other factors right in order for a company to be a success. They are:
1. Choosing the right Market
2. Having the right People
3. Building the right Product (Idea).
Market vs People vs Product:
There has always been this age old debate amongst Founders and Venture Capitalists alike with respect to what is more important: Market, People or Product ? and the most well-known answer is: All of them are equally important.
And of course, it is common knowledge that a successful startup requires that all three components go correctly at the very least in order to succeed. However, in the ideal world, some startups may not get all three right on the first try, and this is where some factors become more important than the others.
Product vs Market:
“Great markets make great companies” - Don Valentine, Founder of Sequoia Capital
This quote by arguably the Greatest Venture Capitalist of all time, dubbed “The Grandfather of Silicon Valley Venture Capital” still holds true to this day.
Identifying a market which sits at the intersection of huge demand and low/nigh competition is invaluable for a startup to get right at the earliest. The importance of choosing a good market is such that Peter Thiel in his book, “Zero to One” states: “The most successful companies are monopolies. Competition is for losers”
Let me provide an example to support this argument. Imagine that you’ve founded a startup that has a great team (Intelligent, hardworking and passionate people who may/may not have the right experience in the field) and have a great product. However, the bad news is your market size is small and filled with a ton of competitors.
In order to capture this market, you would need to constantly compete with other startups to acquire customers and grow your business. You would constantly need to invest in innovation to make sure your product is better than the competition, and/or spend on marketing/sales in order to differentiate your product. All this, while also banking on the fact that competitors aren’t doing the same. Your customers have a ton of choices, and one slipup in terms of execution would mean that they would easily go from your product to a rival.
In simple terms:
The amount of money ($) made from a customer in their lifetime (Customer Lifetime Value or CLTV) should be more than the amount of money ($) used to acquire that customer (Customer Acquisition Cost or CAC) in order for a startup to make money.
CLTV - CAC = Profit made per customer
In a market with high competition, CLTV is usually low due to customers moving to other products simply because of the amount of choices and/or CAC is high because of the spending on sales and marketing that a company has to do to differentiate their product from their peers, reducing profits.
This brilliant quote by the Oracle of Omaha sums up the perils of choosing the wrong market
When an industry with a reputation for difficult economics meets a manager with a reputation for excellence, it is usually the industry that keeps its reputation intact.” - Warren Buffet, Founder of Berkshire Hathway
Conversely, imagine that you’ve founded a startup that has a great team (Intelligent, hardworking and passionate people who may/may not have the right experience in the field) and a great market (Huge demand, and low/nigh competition). However, the bad news is your product isn’t great (Either the product is low quality but solves the right problem OR it solves the wrong problem altogether).
Well, let me tell you, this isn’t as bad as choosing the wrong market. Willbur Labs, a San Francisco based startup studio, surveyed 150 founders and revealed more than half of them (55%) reported that they had to pivot, and even though they were initially skeptical of the pivot, almost 3/4th (75%) of those who pivoted saw success. Instagram, Netflix, Pinterest, Slack, Twitch are mainstream examples of how a timely pivot has managed to turn the company’s growth from a turtle to a rocketship.
But..how ? They didn’t even get their product right at first ! Well, the good news is that it is almost practically impossible to get into a market and build exactly what your users or customers want on the first try. What is important is to build a quick feedback loop process, in order to figure out that you have built a bad product or the wrong product by talking to customers as early as possible, and the market conditions will provide you with enough time to either improve your product’s quality or pivot and build a better product. A great team usually acts as a catalyst for this process of identifying product flaws and fixing them as soon as possible.
In this market with low competition, CLTV is usually high due to customers not moving to other products simply because of the lack of choices and/or CAC is low because the company does not have to spend much to differentiate their product from peers, thus increasing profits.
This is not a guarantee that you will succeed even after starting with a good market, but it will give you a much bigger chance than if you started off with a bad market in itself.
Building the A-team:
But, what if we get both the market and the product right, but have a team that is not so great ?
Well, let’s focus on the positives first. In this case, you have found something even rarer than an admissions letter from Hogwarts. You have found the mythical product-market fit. Your market has huge demand, no competition, and you have a high quality product that your users are craving for. In essence, your startup seems setup for success. Marc Andreessen, one of the co-founders of Andreessen-Horowitz, the legendary Venture Capital firm summarizes the importance of Product-Market fit in this extremely succinct quote:
“The only thing that matters is getting to product-market fit” - Marc Andreessen, Co-founder of Andreessen-Horowitz
The great news is when you have product-market fit, and don’t have a great-team, it’s alright because it is much easier to replace certain members of a team than it is to find product-market fit in the first place. However, it is imperative for a startup to have intelligent and passionate individuals, who may/may not have experience in the field. Now, experience in the field that you are building in, always helps. However, usually intelligence and passion should triumph experience especially for building startups, and let me explain why. Startups that are disruptive/on the path of disruption are usually tackling radical ideas which have a high chance of failure. This is because they will be tackling problems that may not have been tackled before. In such cases, we need to ensure that we have individuals whose intelligence allows them to look at the problem from various angles, and their passion helps them persist while solving novel problems in the long-run of the startup’s journey.
And even though every investor and founder has their own way of evaluating a startup’s potential, I believe that focusing on having a great market, followed by hiring the right people and lastly building the right product, with an enduring truth at the core ensures that a startup has a higher chance of having a leg up on an abrupt end, and turn into a legend.
Thank you for reading !
