Startup Success Formula

The Startup Genome project has issued its first report based on a study of 650 Internet Startup companies by the authors Max Marmer, Bjoern Lasse Herrmann and Ron Berman. Their goal was to lay the groundwork for a better understanding of how startups progressed through the business cycle. No doubt their hope is to better understand the likelihood of success by startup companies in the Internet space.

Their findings, though preliminary, would be of value to venture capital firms evaluating possible investment opportunities as well as those who might be considering a business startup. Though their studies involved only Internet businesses it is interesting to think how effective their finding might be in evaluating startups in other industries.

Based on a paper only recently published, they established two important foundation tools for evaluating the likely success of Internet startup companies. I think that those findings are valuable to all and I will share, with you my understanding of those discoveries.

To begin, they established a startup Life cycle consisting of 6 stages:

1. Discovery
2. Validation
3. Efficiency
4. Scale
5. Maximizing Profits
6. Renewal

The authors defined each stage and I believe it would be beneficial for us to review those definitions:

Discovery-Startups in this stage are focused on the understanding of whether or not their idea or concept has value. In other words, would anybody pay to get what the idea or concept would provide.

Activities that startups might be engaged in during this phase might be interview of those that make up the potential market, produce some prototypes of the product or service, joining and incubator or accelerator group, seeking financing from friends and family, seeking and establishing relationships with the fires mentors and advisors.

Validation-First attempts to sell the product or service and gauge the potential market and its value as well as experience in how best to achieve sales. Evaluate the efficiency with which customers can be captured and kept.

Activities at this stage are: refining the product, establishing the metrics, obtaining of seed funding and making the first key hires.

Efficiency-Customers must be acquired efficiently, product must be deliverable at a profit and business model must be fine-tuned.

Activities that are likely to occur at this stage are clarifying the value proposition, refining the customer experience, enhancing the growth process, and creating scalability or sales.

Scale- Attempts to drive firm growth aggressively

Activities at this stage typically are: A Round financing, executive hires, process refinement, and scalability improvements.

(Stages 5 and 6 were not discussed)

It was found that 5-9 months were required during each step and that activities vary, somewhat, by type of startup. However, the top challenge during each of the four stages was Customer Acquisition; Spotlighting the need for creating clarity around the value proposition and the sales process.

This brings us the second important finding of the study, the four types of startups. I found this most interesting and helpful in understanding how business might have different needs and rates of growth. The four types of startups are:

1. The Atomizers
2. The Social Transformers
3. The Integrators
4. The Challengers

The Atomizers-Common characteristics: Customer focused, product centric, execute quickly, and often simply automate a manual process. Examples: Google, Dropbox, Zynga, and Hipmunk.

The Social Transformers-Common characteristics: self-service customer acquisition, winner take all markets, and typically create new ways for people to interact with others.

Examples: eBay, Skype, Craigslist, Twitter and YouTube.

The Integrators- Common characteristics: take innovations from Internet and rebuild and fit for smaller organizations, high certainty of success, gather leads from inside sales reps and smaller markets. Examples: Uservoice, GetSatisfaction and Flowtown.

The Challengers-Enterprise sales repeatable sales process, rigid markets, and high customer dependency. Examples: Oracle, MySQL, and Jive.

Some additional finding that may be even more important to those of you planning a business start up are:

1. Mentors are important. The study found that business start ups who sought and found mentors were able to raise 7 times more money than those who did not. It almost seem like a given that someone starting a business would seek and get all the advise they could.

2. Many Investors Invest Too Much. In fact the study found that investors put 2.3 times to much money in deals. Translation? Due Diligence!

3. Development is faster with co-founders. Founding teams of 2 were 3.6 times faster to reach scale stage.

4. Sales driven startups are 6.2 times more likely to reach scale stage than product driven businesses

5. Balanced founding teams are more likely to succeed. Team of technical, and business founder raise more money and reach scale stage quicker.

In all the study, provides a foundation to better evaluate startups by standardizing terms and classifying types of organizations there was much, much more to be gleaned for the Startup Genome project and we will follow-up with you to share the wealth of knowledge provided by the project. Stay tuned for more of the Startup Genome project.