This is a widely discussed question in the start-up community, and one with no straightforward answer. And for good reason, otherwise entrepreneurship wouldn't be so hard, and the success rate wouldn't be so low! Start-ups follow the reverse of the Anna Karenina principle: all successful companies are different, since they figured out how to solve a problem in their unique ways; but all failed companies do so for the same reasons. This also explains why it is hard to define deterministic factors of success; at best, they are probabilistic. There is no magic sauce, or as Thiel puts it, success is not a statistically measurable event, since every example is unique and you can't analyze a sample size of 1.
According to Paul Graham, successful founders "live in the future and build what seems interesting". For Peter Thiel, it's about uncovering secrets, finding problems that everyone else has overlooked.
Let me preamble by defining what I mean by success, in negative terms: I do not mean a start-up that exits on a 2M acquisition; I also do not mean a start-up that derives just enough revenue to keep the lights on. Start-up success follows a power law: a few companies make it huge, and the rest form the tail end of the distribution. For that reason, the average return of a start-up is much more noteworthy than the median one, since most start-ups are doomed to failure or anorexic growth.
So what ARE positive predictors? One approach to answering this difficult question, and by no means the best one, is to look at a start-up along five dimensions:
1. Team
2. Problem-solving
3. Timing
4. Difficulty/Barrier to entry
5. Defined market
Necessary factors
A strong team
Creating a start-up is a challenging, iterative process. There are so many ways your execution can go wrong, whether it be the business model is not valid, the product does not meet expectations or there is internal conflict within the team. Having a team composed of talented, motivated individuals who get along with each other will guarantee that no matter what change of plans occur, you will find a way to iterate and jump back into the game. Most highly regarded incubators, angels and VCs pay close attention to the team and consider it the most important factor in whether they should invest. Some go as far as to say, it doesn't matter if the company changes it's business model completely, as long as there is a superstar team leading it. Make sure your team is well integrated (otherwise communication problems arise which can lead to implosion) and composed of A players.
Problem Solving
This seems like a reasonably easy concept to understand, but many start-ups fail to address this basic requirement: create a product/service that solves people's problem. In other words, create something people NEED, rather than creating something people may want. How many consumer apps have been DOA (dead on arrival) because they attempt to address a superfluous issue or commoditized area (games, social)?
The most natural way that entrepreneurs discover that need is by noticing it themselves in their daily life. They look to solve a problem they themselves encountered, which provides some evidence that the problem does indeed exist.
At the end of the day, the majority of customers will only pay for what they need, and this is especially true in an environment where most platforms operate on a 'free trial' or 'freemium' model.
Timing
This is probably the most tricky aspect of start-up creation. If you consider innovation as a series of successive waves, your job as an entrepreneur is to catch that wave.
If you attempt too early, you may not have the (hardware and software) tools necessary to implement your vision, or the consumers may not be ready to use it (it is too 'avant-garde'). It is not so important to be the first mover into a market as it is to be the last mover. Facebook is a perfect illustration of this phenomena. The product itself was not novel - Friendster had come and gone years before - but the combination of right timing and a focus on a niche user base (colleges) propelled Facebook into massive growth. In 2005, every college student had a laptop and access to internet, making user adoption inherently viral.
The more obvious way to fail is to come into a market too late. I believe this is what is happening with social/mobile start-ups right now: the market is so saturated, the odds are stacked against you from the get-go. You will have a very hard time displacing the major players.
Other important (but not necessary) factors
Difficulty
PayPal, Google, Apple, SpaceX... All these are examples of companies that tackled difficult problems and did not shy away in the face of complexity in order to establish themselves as the leader in their field. The issue with many start-ups these days is that they want to solve easy problems or develop simple platforms - not simple in the sense of the implementation, as every product should strive for simplicity, but rather simple in the amount of effort required to get it off the ground - exposing themselves to cutthroat competition and extreme time-sensitivity to roll out their product. Sure, you could attempt to build the new gold standard in social or task management apps, but considering thousands of engineers could beat you to it at any moment, you are setting yourself up for an uphill battle.
Rather, you should probably aim to solve a difficult problem, become an expert in it and put a great deal of distance between you and any potential copycats. A very good take on this issue is Graham's short on 'Schlep Blindness'.
Approaching a challenging problem will not only put a high barrier to entry for any other start-ups vying to break into your market, but it will also make the learning process more worthwhile.
Defined market
Many start-ups like to pose themselves as the intersection of multiple markets, with no clear delineation of their relevant market. They try to narrow their market and tell intersection stories: "my company is LinkedIn meets designers meets online fashion". This sounds like a great concept in theory, but will this company be truly competing in a niche market? Or is it actually competing against LinkedIn and all online retail websites out there? Founders must be careful to think about their relevant market and indirect competitors even if their business model seems unique - otherwise, they may end up creating a product nobody will use.
- Nathanael
According to Paul Graham, successful founders "live in the future and build what seems interesting". For Peter Thiel, it's about uncovering secrets, finding problems that everyone else has overlooked.
Let me preamble by defining what I mean by success, in negative terms: I do not mean a start-up that exits on a 2M acquisition; I also do not mean a start-up that derives just enough revenue to keep the lights on. Start-up success follows a power law: a few companies make it huge, and the rest form the tail end of the distribution. For that reason, the average return of a start-up is much more noteworthy than the median one, since most start-ups are doomed to failure or anorexic growth.
So what ARE positive predictors? One approach to answering this difficult question, and by no means the best one, is to look at a start-up along five dimensions:
1. Team
2. Problem-solving
3. Timing
4. Difficulty/Barrier to entry
5. Defined market
Necessary factors
A strong team
Creating a start-up is a challenging, iterative process. There are so many ways your execution can go wrong, whether it be the business model is not valid, the product does not meet expectations or there is internal conflict within the team. Having a team composed of talented, motivated individuals who get along with each other will guarantee that no matter what change of plans occur, you will find a way to iterate and jump back into the game. Most highly regarded incubators, angels and VCs pay close attention to the team and consider it the most important factor in whether they should invest. Some go as far as to say, it doesn't matter if the company changes it's business model completely, as long as there is a superstar team leading it. Make sure your team is well integrated (otherwise communication problems arise which can lead to implosion) and composed of A players.
Problem Solving
This seems like a reasonably easy concept to understand, but many start-ups fail to address this basic requirement: create a product/service that solves people's problem. In other words, create something people NEED, rather than creating something people may want. How many consumer apps have been DOA (dead on arrival) because they attempt to address a superfluous issue or commoditized area (games, social)?
The most natural way that entrepreneurs discover that need is by noticing it themselves in their daily life. They look to solve a problem they themselves encountered, which provides some evidence that the problem does indeed exist.
At the end of the day, the majority of customers will only pay for what they need, and this is especially true in an environment where most platforms operate on a 'free trial' or 'freemium' model.
Timing
This is probably the most tricky aspect of start-up creation. If you consider innovation as a series of successive waves, your job as an entrepreneur is to catch that wave.
If you attempt too early, you may not have the (hardware and software) tools necessary to implement your vision, or the consumers may not be ready to use it (it is too 'avant-garde'). It is not so important to be the first mover into a market as it is to be the last mover. Facebook is a perfect illustration of this phenomena. The product itself was not novel - Friendster had come and gone years before - but the combination of right timing and a focus on a niche user base (colleges) propelled Facebook into massive growth. In 2005, every college student had a laptop and access to internet, making user adoption inherently viral.
The more obvious way to fail is to come into a market too late. I believe this is what is happening with social/mobile start-ups right now: the market is so saturated, the odds are stacked against you from the get-go. You will have a very hard time displacing the major players.
Other important (but not necessary) factors
Difficulty
PayPal, Google, Apple, SpaceX... All these are examples of companies that tackled difficult problems and did not shy away in the face of complexity in order to establish themselves as the leader in their field. The issue with many start-ups these days is that they want to solve easy problems or develop simple platforms - not simple in the sense of the implementation, as every product should strive for simplicity, but rather simple in the amount of effort required to get it off the ground - exposing themselves to cutthroat competition and extreme time-sensitivity to roll out their product. Sure, you could attempt to build the new gold standard in social or task management apps, but considering thousands of engineers could beat you to it at any moment, you are setting yourself up for an uphill battle.
Rather, you should probably aim to solve a difficult problem, become an expert in it and put a great deal of distance between you and any potential copycats. A very good take on this issue is Graham's short on 'Schlep Blindness'.
Approaching a challenging problem will not only put a high barrier to entry for any other start-ups vying to break into your market, but it will also make the learning process more worthwhile.
Defined market
Many start-ups like to pose themselves as the intersection of multiple markets, with no clear delineation of their relevant market. They try to narrow their market and tell intersection stories: "my company is LinkedIn meets designers meets online fashion". This sounds like a great concept in theory, but will this company be truly competing in a niche market? Or is it actually competing against LinkedIn and all online retail websites out there? Founders must be careful to think about their relevant market and indirect competitors even if their business model seems unique - otherwise, they may end up creating a product nobody will use.
- Nathanael
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