Is there a recipe for startup success?
It’s a known fact that the majority of the launched startups fail within the first years and very few of them get to have a meaningful impact. The numbers are grim, but despite that, more than 100 million new businesses are launched every year. That is around 3 per second!
So, it’s only natural that if you’ve ever wanted to build a product or launch a disruptive startup, you have probably asked yourself at some point “what can I do to increase my chances of success?”. Are there any recipes, patterns, rules or processes that successful founders follow in order to get where they are? Can you do anything to maximise your chances of making it? Rather than focusing on a general rule and trying to identify the profile of an “ideal founder”, we will focus more on dispelling some common myths around big-time founders and provide some guidelines where needed. For this particular article, we will focus on founders that have started companies that are evaluated at over 1 billion dollars (unicorns). A lot of the insights presented here are taken from Ali Tamaseb’s 2021 book, Super Founders: What Data Reveals About Billion-Dollar Start-ups, which we recommend.
Studies matter… somewhat. Bill Gates, Steve Jobs, Michael Dell and Mark Zuckerberg are all college drop-outs. Admittedly, two of them are Harvard drop-outs, which does tend to sound a bit better. These guys were visionaries, driven and motivated to see their ideas succeed. So much so, in fact, that they’ve decided to drop out to pursue that. But how many founders of billion-dollar companies drop out of college actually? Only about 6%, while about 1-2% never actually enrol in college education. The remainder 92-93% have at least a bachelor degree, with 22% also having an MBA, 15% having a Master’s degree and around 8% have a PhD. About 3% are actually professors.
Being alone is not the rule. Solo founders are usually advised not to embark on this journey alone. Only about 20% of billion-dollar start-ups were founded by solo founders, and a significant percentage of those are experienced entrepreneurs who already had a successful exit. The rest had at least 2 co-founders. Having one or more co-founders shows that at least a few people believe in the idea and it makes you more trustworthy in the eyes of VCs.
Work experience is relevant… sometimes. If you want to start a company in health or biotech, data shows that 75% of CEOs have had relevant work experience before starting those businesses. However, in enterprise tech or in consumer industries, roughly 40% and 30% of CEOs respectively had directly relevant work experience. This goes to show that in some industries deep knowledge is more important, whereas in others a certain set of skills is what sets you apart, such as hiring and managing talented people, devising impeccable strategy plans, excelling at marketing and sales and so on.
There are many industries that produce unicorns, but among them, there’s one that stands out: Software. More than 50% of billion-dollar startups operate in this industry. The rest of the big players are, in descending order: consumer, healthcare, business products, finance and energy. This number is perhaps of little use since the software in itself is such a big umbrella. Looking at the largest subsectors in this industry, we find among the top players:
- business/productivity software
- social/consumer software
- application software
You may have heard the saying, “Make painkillers, not vitamin pills.”. As it turns out, 2/3 of unicorns indeed make painkillers. The remaining ones, however, make vitamin pills. Companies such as TikTok, Snapchat and Instagram create products that are nice to have for some people, but you certainly don’t need to have them. That’s the difference. A painkiller solves a big need in the market, e.g. try getting to a place you’ve never been to before without Google Maps.
The market and market timing are also important. More than 60% of the billion-dollar companies were in large markets, while the remaining were medium or small. Not only that, but 55% of them had at least another large company as a direct competitor. Only about 15% of companies are de facto monopolies, while the rest have fragmented competition or are competing against start-ups.
Facebook was not the first social network, Tesla did not build the first electric car and Google was not the first search engine, yet these are all household names now. Timing is of the essence because sometimes the infrastructure is not in place yet or the market is not mature enough for that kind of product. Either way, looking at companies with a similar value proposition that have failed before should be a good starting point when researching an idea. Take your time to do the due diligence. It’s not really about being the first to market, but rather being the first to product/market fit and then scale.
CB Insights did a follow-up analysis of 1119 startups that raised seed rounds between 2008-2010. Out of those companies, only 12, or about 1% reached unicorn status, while 13 companies exited for over $500 million. In fact, 51% of VC investments actually end up losing money and 31% only make 1-3x the initial investment, which for VCs is not all that great, since they’re in a high-risk, high-return sort of business. Only 1% of their investments end up creating more than 20x the initial investment.
While most people know that it is crucial to raise capital in order for your business to thrive, for some the exact numbers might be a bit unclear. Over 90% of billion-dollar companies get VC funding in the first four years of existence. In 2021, Carta’s Private Market Report shows that the median cash raised in a seed round is $2.4 million and in a Series A round is $10 million (a 61% and 58% increase respectively from 2015). The median post-money valuation of a company in a seed round is $12 million and $45 million at Series A (a 47% and 79% increase respectively from 2015). The median time between a seed round and a Series A is 400 days (around 13 months), while between a Series A and Series B is around 500 days (another 16 months).
In a paper written by Paul Gompers, William Gornall, Steven N. Kaplan and Ilya A. Strebulaev, also published in the Harvard Business Review, VCs identified the following lists of factors as the most important ones in early-stage investments:
- Team: 53%
- Fit with the fund: 13%
- Product/Technology: 12%
- Business model: 7%
- Market: 7%
- Industry: 6%
- Investor’s ability to add value to the startup: 2%
When you pitch your idea to investors, the design of the pitch deck and how you present your story do carry some importance, but it’s more about you and your co-founders, the problem you’re trying to solve, the market and the business model. Thoroughly analyzing these aspects should at least put you on the right track.
PS: Yeah, we know that correlation is not causation, but these are solid insights. 😉 Good luck!
Rareș enjoys working with founders to help them navigate the early stages of product development. He has experience in a mix of machine learning, mobile-first products and aerospace engineering. When he’s not thinking about products and VCs, he’s reading or playing tennis.