By Francis Moran and Leo Valiquette
“A startup is ultimately … not just about whether an idea or a product works, it is about whether or not you can create a business around it. Whether or not the ecosystem will support it, the customers will buy it, if the channels will support it, and if the manufacturers will actually create it. And because of that, we need to be able to test all these different facets of our business model, and do so quickly.”
This comes from someone Forbes calls “the most powerful woman in startups,” Ann Miura-Ko, co-founding partner with FLOODGATE. In October, she gave a lecture at Stanford University titled “Funding Thunder Lizard Entrepreneurs,” which is filled with so much insight we were tempted to just transcribe the whole damned thing and offer it up as a blog post of its own. However, her talk is available as a conveniently indexed webcast.
Perhaps her comments resonate with you as common sense of the most practical sort. Perhaps they don’t. Regardless, it’s much easier to talk in theoretical terms about what it takes to successfully launch a startup and bring technology to market than it is to follow through and execute effectively.
Next week, we will recap some practical bits of advice that have emerged from our interviews and research for this series. But first, we will explore some of the common factors that have spelled the doom of many a startup and refer back to Miura-Ko’s Stanford lecture for some insight on how current realities have impacted the art and science of entrepreneurship.
Why do startups fail?
It ain’t rocket science. You don’t have to look far to find some compelling answers to this question.
In their September 2009 report for Canada’s National Angel Capital Organization, “Understanding the Disappearance of Early-stage and Start-up R&D Performing Firms,” authors Douglas Barber and Jeffrey Crelinsten interviewed the senior executives of 18 R&D-intensive tech companies that had disappeared, either through bankruptcy, liquidation or merger. Among the key factors attributed for the demise of these companies were:
- No revenue from customers
- No input from customers on R&D performed or on the product or service being developed
- Misreading of markets (e.g. overestimate size, delay market entry)
- Product not needed or not simple enough for the application
- Poor sales and marketing decisions (e.g. distribution channels vs. direct sales, delay going global or going global too quickly)
- Timing wrong; the product or service was too early or too late.
- Unaware of competitors and changing market conditions
But, gentle reader, don’t leap to the hasty conclusion that this lack of sufficient market research and customer engagement is in any way unique to Canada. Many moons later, a similar study in the U.S. by the self-professed data geeks at ChubbyBrain surveyed 32 startup entrepreneurs about the factors that had contributed to the demise of their failed ventures. The majority of respondents were U.S. based, with a few from India and Europe. The results were distilled into the chart below:
As you can see, issues related to market research and customer engagement ranked high. These and many of the other common factors revealed though ChubbyBrain’s research often cropped up during our interviews for this series.
‘The democratization of innovation’
What does Miura-Ko have to say about how market research and customer engagement, or a lack thereof, can mean the difference between success and failure?
Much of her lecture revolved around “the democratization of innovation,” which has three key components:
- The collapsing cost of product building. This should not be confused with the cost of company building. This is characterized by open source, commoditized technology, crowd-sourced infrastructure and elastic computing power thanks to the cloud. “I see my students all the time just taking out their credit cards and building a product, rapidly prototyping something and seeing if it works,” she said.
- Rapid business model testing. This is illustrated by her quote with which we began this post. She went to say, “The beauty of the Internet is that you can have a direct dialogue now with your customer. In one of my classes, if I ask my students to test out a web startup. They can go out and interview 300 people in the bat of a eye and be able to tell you if that product was attractive to that group of people or not. And it is not unusual for our students to do so. Think of the people who have actual resources to put to bear on that.”
- Running out of iterations. This gets into Steve Blank and Eric Ries’s concept of “lean startup.” This is the notion of customer development and agile programming and how you bring it together to achieve rapid iteration. This allows you to experiment quickly and effectively to stretch your dollars further. “It’s not that you’re running out of cash when you’re an entrepreneur, you’re running out of iterations … you run out of iterations, you don’t have any hope anymore.” (We will explore the lean startup methodology in more detail in a couple of weeks.)
In other words, traditional enterprise sales models have been collapsed by social and new media channels that facilitate early customer engagement and shorten time to market. The “collapsing cost of product building” has made it far easier to bring a software service or product to market compared to 10 or even five years ago.
Even for hardware plays, greater capital efficiencies can now be found thanks to fire sales of equipment and IP from companies claimed by the recession, by outsourcing low-cost components and by the shifting partition between hardware and software.
It can be argued that there has never been a better time than now to bring technology to market. But as we explored at the outset of this series, all of these advantages will only pay off if the startup is focused on the right starting point – that potential customer it hopes will ultimately buy the product or service it wants to develop. Every effort must be made from the outset to determine who they are, where they are, what they want, and how much they are willing to pay. Market development must be carried in tandem with product development.
To once again quote Ronald Weissman, chair of the Software Special Industry Group at one of Silicon Valley’s oldest angel organizations, Band of Angels, “Great companies constantly test the market, for validation and feedback.”
This is the eighth article in a continuing series that examines the state of the ecosystem necessary to successfully bring technology to market. Based on dozens of interviews with entrepreneurs, venture capitalists, angel investors, business leaders, academics, tech-transfer experts and policy makers, this series looks at what is working and what can be improved in the go-to-market ecosystem in the United States, Canada and Britain. We invite your feedback.