This article first appeared on Xconomy.com.
February 2014 will go down in history as a month with two huge startup exits: Nest (acquired by Google for a whopping $3.2 billion) and WhatsApp (acquired by Facebook for an even more whopping $19 billion).
If you haven’t caught the startup bug, there’s a good chance you will have caught it after this. What’s everybody waiting for? Let’s all go start companies!
Lest everybody get carried away with these success stories, let’s look at some statistics. In May 2013, Paul Graham, founder of Y Combinator—arguably the most prestigious incubator in the U.S.—tweeted an interesting piece of data: 37 of the 511 YC companies to date had valuations of, or had sold for, $40 million or more. That’s great for the companies in the list (which includes Dropbox). But what about the 474 left off the list?
Not to be a wet blanket, but this statistic basically says an elite startup, incubated by the best of the best, has a less than 1 in 10 chance of becoming a big success.
Now, I am sure many of the 474 companies are either too young to have hit $40M or are still going concerns at a healthy valuation below $40M. So 1 in 10 may be harsh. What does the real picture look like? Let’s look at what the National Venture Capital Association has to say:
“It is estimated that 40 percent of venture backed companies fail; 40 percent return moderate amounts of capital; and only 20 percent or less produce high returns.”
These odds should dissuade anybody who wants to found a company to make a quick buck. Neither the “quick” nor the “buck” is a given. Moreover, starting a company to get rich is absolutely the wrong motivation. Instead, founders should start a company only if they are truly passionate about what they are trying to achieve, are comfortable with the high-risk, high-gain nature of entrepreneurship, and can tolerate the uncertainty, hard work, and emotional challenges along the way.
Timing and personal circumstances matter too: in order to succeed as a founder, one must have enough flexibility from a personal-obligations and finances standpoint to go with minimal (or no) pay for a while. Or find a way to bootstrap the early stages of the startup with other sources of income, like a funded development project, a government grant, a robust savings account, or family members with deep pockets.
For some people with entrepreneurship on their minds, the time may not be right to start a company. My advice to these folks would be to learn everything you can learn about entrepreneurship, and then begin to incorporate entrepreneurial thinking in your everyday work. There are several great books on the topic, including the following:
- Disciplined Entrepreneurship by Bill Aulet
- The Lean Startup by Eric Ries
- The Startup Owner’s Manual by Steve Blank and Bob Dorf
How can you apply entrepreneurial thinking to your day-to-day work? In my mind it’s all a subtle shift of mindset. Instead of focusing on the functional discipline you work within—be it marketing, sales, engineering, or the like— broaden your interests and perspectives to include the business itself. Talk to people in other departments in your company and learn about what they do and what they see. Ask lots of open-ended questions.
Here are some of the questions you might want to pose.
- Who is the economic buyer for our product or service?
- Who are the end users?
- What are the end users’ needs, wants, and expectations?
- What are the top 3 use cases surrounding how your end users use your product or service?
- Are the buyer and the user the same or are they different?
- What is the buying process for your product or service?
- Who all are in the value chain?
- How long is the sales cycle?
- What is the perceived value by the end user and the economic buyer?
- Does the perceived value match the actual functionality delivered by your product or service?
- How do the operating expenses stack up against revenues and profits?
All this represents a healthy curiosity about the target market, customers, end users, business model, and economic value of the product or service you are working on. Building knowledge around these areas gives meaning and context to your day-to-day tasks and activities in your area of expertise. For many people, especially those with a technical background, this is a brand new way of thinking. But focusing on economic value is the first step to successful entrepreneurship.
One last suggestion for people looking to learn entrepreneurial thinking: get engaged in primary market research. If you are an engineer, and your product management organization is interviewing customers, ask to tag along as a “fly on the wall.” Observe, listen, and learn. The more you understand the end users and the target environment where the product or service is purchased and used, the better equipped you will be to do your own job and the more successful you will be. And, the more you incorporate entrepreneurial thinking in your own work, the broader your perspective surrounding your employer’s product and business. All these new skills will serve you well when you are ready to become a founder yourself.