Risky Business: Startups are different
I’ve worked in 12 startups from new business units in Tier One companies, to early and later stage companies, to my own VC-backed company here in Silicon Valley plus I’ve advised quite a few more. A few common mistakes have shown up more than a few times across many of them. Key challenges that startup leadership face are fairly consistent across startups even in different industries.
The startup industry offers very clear data about the odds stacked against startup teams even with the best funding names backing them. If having enough funding or the right funding was the answer, we wouldn’t being seeing massive failures such as this year’s closure of Quixey Inc despite their $133M in funding, a smart and incredibly talented team and a bright vision. Past flameouts too numerous to count with brilliant backers included Webvan ($375M), Pets.com ($147M), Drugstore.com ($157M), Digital Convergence ($185M), Quirky ($185M), Coraid ($114M), Terralliance ($296M), Lilliputian Systems ($150M) just to name a few of the $100M+ flameouts. I truly believe that given the odds, startup success is no accident and managing risk, (or a lack thereof) was a key contributor to these failures.
Startups are risky business and I propose it takes an investment-oriented mindset to run them well because of this higher risk. Problems that I feel are clearly avoidable often happen as a direct result of the risk-management style of the entrepreneurs and the teams that follow them. My hope is to provide a point of view with valuable insights that could help new entrepreneurs or start-up teams in either small companies or large enterprises avoid at least some of these mistakes. By viewing what is happening in their start-ups through the eyes of an investor, start-up teams can more effectively identify, embrace and manage risk to increase the likelihood of success.
Everyone understands the risks entrepreneurs and their teams faced are generally much higher than working at a later stage company but more nuance exists around what “higher risk” means and how to embrace and manage it. Depending on the source of data, we know 90% of start-ups fail and a sea of helpful content is published as to why and what to do about it. But the failure rate is still high despite this vast ocean of start-up advice. Having learned these lessons the hard way with my own failures along that journey (I earned an M.S. in Aeronautical Engineering, an MBA and a PhD at the School of Hard Knocks), in retrospect, I believe that having an “investment” prism through which we/I could have managed our start-up operations would have gone a long way to avoiding many of the mistakes I(we) experienced. When I did manage through the filter of an investment mindset I succeeded.
To set the context for this startup investment perspective I think it is important to understand how startups are different and distinct from established companies in terms of the risks they embrace.