Startups and the insanity of hope

Startups and the insanity of hope

Nearly every new tech startup launched this year will fail within 12 months. So said Mat Shore, founder of global training and innovation firm, Outside In[1]. Just one in 100 new tech businesses will survive more than 12 months trading; the rest will fail because, said Shore, they are bringing to market “highly ingenious products that are utterly pointless”.

Almost every new app, gadget and electronic item to hit the shelves boasts cutting-edge technology that took years to design and bring to market. But too few are created with a view to satisfy the three principles that are fundamental to business success: need, want and demand.

Shore’s somewhat downbeat analysis of the tech marketplace is not new. In 2012, Shikhar Ghosh, Harvard’s Professor of Management Practice, reported that 75 per cent of VC-backed companies fail[2]. He defined ‘failure’ as not returning investors’ capital.

Ghosh, who studied more than 2,000 venture-backed companies that raised at least $1 million from 2004 to 2010, said that if you define failure as missing the projected return on investment, such as a specific revenue growth rate or break-even date, then more than 95 per cent of startups fail.

These depressing stats invite two questions:

  1. Why bother setting up a tech firm?
  2. If you did, what will make you one of the one in a hundred that survives?

The first question is a really hard one. I’ve started tech companies three times now. When I’m asked how I cope with the stress, I usually answer “what’s stress?”, which tells you that I’m either heading for a massive coronary and an early grave or stress can be diverted into positive energy to create change. Clearly, I’m banking on the latter, but I monitor my blood pressure just in case.

Much has been made of the psychology of the founder. Is it madness? Obsessive drive? Messiah complex? Delusions of grandeur? They aren’t even mutually exclusive.

It’s certainly not money, which is a bad motive. And it’s about more than just an idea. The idea alone isn’t enough. Growing a business in the fast-moving tech sector is perfect if you have a restless mind and endless curiosity. You can’t stand still, so it’s ideal for someone who doesn’t like to. But the fundamental driver is simply the notion of winning. Starting a business really isn’t about the taking part. You have to want to win.

Put it this way: if growing businesses is a drug, then succeeding is the high and failing leads to withdrawal. For me, so far, the highs have exceeded the lows, so I keep taking the pills.

Or there’s the real truth: my partner much prefers me out of the house.

The second question is more interesting. There are lots of reasons why startups fail, some of which are only clear in hindsight.

There are product reasons: no market for your widget, it doesn’t work properly or is badly priced. There are organisational problems, such as running out of cash, not having sufficient understanding of finance or operations, having no business model, or having the wrong one.

Then there’s the challenge of learning, very quickly, to be a CEO – perhaps you take advice from the wrong people or you don’t have good mentorship. As Reid Hastings, founder of LinkedIn, describes the learning curve: “You jump off a cliff and you assemble an aeroplane on the way down”[3].

Finally, there are psychological factors, like those mentioned earlier. Charisma is an odd trait, but it’s important to a founder’s success. Lack of charisma, like lack of focus, motivation or commitment, can all hold back a startup.

One key to success is the ability to change – and change quickly. I’ve often been asked by investors how many inflections, or pivots, my business has been through. It’s a good line of inquiry but the subtext is often negative: changing direction means you went the wrong way in the first place, which is bad.

But the reality is more nuanced. In the early days of any tech business the choice of product or service is often based on instinct and instinct is a cruel mistress. Instinct isn’t certainty. Instinct tells you your idea is a good one, but you have no proof. Instinct can fail. Evidence wins. But evidence comes only through testing, and testing comes about through trial (and error!). So, stop trusting instinct and work to a hypothesis that you can test. If you are wrong, change and change fast.

Or to quote that famous business guru Samuel Beckett (he of the impenetrable plays): “Ever tried? Ever failed? No matter. Try Again. Fail again. Fail better.”

Those around you must have the same mindset and your investors, should you need them, must also know that instinct is the enemy and failing swiftly is good if it helps you to correct course.

Fortunately, our business made its significant inflections some time ago but even now we build new features and new functionality with a ‘fail better’ mentality. We can both test and refine but, if we need to, we can reverse away from failure. The more we do that the more likely we are to steer towards success.

[1] https://www.bmmagazine.co.uk/opinion/nearly-every-new-tech-startup-launched-year-will-fail-within-12-months/

[2] https://immagic.com/eLibrary/ARCHIVES/GENERAL/GENPRESS/W120919G.pdf

[3] https://www.bbc.co.uk/news/business-12151752

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Dr Mark K. Smith
mark.smith@contactengine.com

Founder & CEO