What can we learn from the startup efforts of companies that became wildly successful? What lessons can we take from the successful companies in the innovation hubs?
I am talking about the massively successful startups – the ones that become unicorns (worth $1 billion or more).
I’m not talking about smaller-scale, less ambitious startups. Mostly only those with unicorn potential.
Startup land is a dynamic field. What works now and has worked in the past may not be a good template in the future. A lot of what succeeds in one time and place may not work in another.
That being said, here are some attributes of startups that have been wildly successful in recent years.
Use an easy-to-understand business model.
The whole idea of what a company does and what it provides for customers should be explained in one or at most two sentences. It should not be complex, but SIMPLE. This has so many advantages.
- A simple business model makes the branding message easier and more communicative.
- It keeps costs lower by making back-end operations work smoother and simpler.
- It is easier to raise money from investors. Complexity scares away investors. Even the more sophisticated, experienced ones.
- The technology may be (not always) easier to develop.
- A simple business model makes the startup easier to manage and execute to plan, reducing risk.
This is just a list I came up with in literally seconds. There are so many other advantages not listed here.
Don’t worry about making money, but make sure there is a path to eventual profit.
Being able to lose money for very long time periods – maybe indefinitely – can be the ultimate competitive advantage for a startup trying to reach unicorn status.
This technique is sometimes used by large established companies with strong financial resources to gain market share. The strategy is to undercut your competition on price. Wait until the smaller firms with fewer financial resources capitulate. Move in on the failed firm’s market share. Raise prices to make a profit, which is then possible because of the reduced competition (the competition is gone!). I’ve seen this done many times.
In the tech startup world gaining market share, users, and activity is the initial goal. Get to scale. Even give things away for free. Having immediate profit is not needed right away. After you have enough activity and scale, then figure out a way to monetize. In the internet business, this often means selling advertising. However, the method can vary.
In order to find a way to monetize all this activity, I would refer the reader to the concept of the ‘Pivot’. That is an over-used term (that you undoubtedly have heard of) but makes the point well in one word (great communication!).
The point is to get to scale with lots of customer activity and then figure out how to monetize later.
Again – have a path to eventual profit.
Running without profits is usually dangerous for the majority of startups. The majority of startups will lose money at the beginning regardless of industry and geographic location. The cash to do this must come from somewhere.
This concept really only applies to those startups with a big enough idea that they can disrupt entire industries (or industry segments). And generate lots of scale and customer activity.
Startups with the potential to only grow moderately large (or just provide a good living for its founders) must be careful. For those, I would suggest running a loss for only a little while keeping a very close eye on when and how the profits will arrive.
But if you have a world-beating, industry-disrupting (simple) business model then the game is different. The investors are different, the scale is different. Then the profit-loss strategy will work better.
Use experienced investors only.
Money is supposed to be fungible. True enough except in this case.
If you are going down a strategy path of no-profits for the foreseeable future (to gain scale), then you cannot lose just any money. It needs to be special money. The capital you are going to lose should be provided by a sophisticated, experienced investor that understands what you are doing.
Why is it better to take money from a sophisticated investor rather than someone who is merely wealthy? The more sophisticated investor has seen this before and understands what is the strategy. They will be patient. They will have bought into what you are doing. Be diversified in their early-stage investments. And they will have nerves of steel.
The run-of-the-mill wealthy investor will not necessarily be patient, buy-in on your business model, or have the steely nerves needed. They will only be useful for the more garden-variety startup with the usual profit ramp-ups.
Further, there will be multiple rounds of financing. Having an experienced investor that knows this and has the contacts/skill/resources to help with multiple rounds is a huge advantage.
So assess who is your investors and whether they can help you long term.
Of course, be wary of this advice unless you have the right type of startup located in the right place!
The above strategies are more common in some industries and geographies than others. If you are located in a geographic location with a conservative, risk-averse, capital preservation mind-set then your chances of success are diminished.
If your industry works in that risk-averse way, view it as an opportunity, not a hindrance. If your geographic location has that cultural mindset then the chances of success may be challenged. Note my earlier posts on where most of the VC money in the USA is going – 80% of all VC investments occur in just four states. There is a reason for this.
And remember – sometimes more modest goals with a startup that will “at best” deliver a very good living for the founders and excellent return for early investors may be the best after all! Unicorns are more common than they used to be, but are still relatively rare when compared to the entire startup world.
