Startup success is harder than you would expect
Research data suggests that over 70% of startup businesses fail to provide a return to their initial investors within a 10-year period. This failure rate is high, and while clearly disappointing to the founders, it also represents a loss of economic potential to society. This failure rate is surprisingly unchanged over the last 50 years despite the training going on in business schools around the globe, the ubiquitous availability of knowledge around startup key success factors, and the ever-reducing cost of critical input resources to support a startup. It seems that execution still matters.
Dynamic alignment between the opportunity and available resources is critical
Understanding root causes for failure is rarely as simple as many observers try to make out and is highly influenced by the perspective of the observer – e.g. whether they are the founder, or a strategic investor. What is highly likely in a failure is that the necessary dynamic alignment between the opportunity (i.e., customer value proposition, go-to-market strategy, technology and operations plan and the cash flow formula) and the available resources (i.e., founders, startup team, outside investors, and strategic partners) has not been maintained. While discrete causes are difficult to generalise, there is more commonality in patterns of startup failure that can range between; good resources and poor opportunity, good opportunity but inability to muster the required resources, and an opportunity that is too narrowly defined that prevents sufficient scaling to drive a sustainable economic engine.
The need for financial sponsors is a common denominator for startups
A common denominator of any startup, regardless of whether it is creating a widget or wadget, or if it is in Namibia or the USA, is that the available resources are rarely enough to build out the full business ambition. Invariably, startup founders need to bring a range of financial sponsors and strategic partners along for the ride. This may be as primal of passing around the hat amongst friends and relatives or engaging with a spectrum of capital providers in both equity and debt markets. This is rarely a one-off interaction, but more commonly, a continual process of engagement as the startup secures capital to move progressively through each phase of its development cycle from proof-of-concept to market entry to market scaling.
A compelling pitch requires a good internal strategic story and an effective communication of it
The ability to develop and articulate a compelling pitch to capital providers is not always the core skill of founders, and it is easy for them to fall into the trap of trying to encourage investors to get on board and share in the passion for their startup. This can be at odds with convincing investors that the business is one worth investing in and one where they will make money.
To have a compelling pitch, it generally requires two key requirements. Firstly, you need a clear strategy internally. Secondly, you need to be able to communicate this effectively to targeted groups of outside investors and partners. The benefit of doing both well for the startup are increasing probabilities of success and reducing the cost of capital (and founder dilution) in the process. These are some of the areas that Guberno Consulting is supporting a range of startups companies as they navigate their growth journey.
A strategic spine gives shape to a startup and is the touchstone for choices and decisions
In a startup world of limited resources and endless possibility, a required capability of any startup team is the ability to make conscious choices (i.e. decisions requiring trade-offs) and then align limited resources coherently behind the choices made. Failure to make conscious choices leads to both dispersion and misalignment of resources and dilution of outcomes. In an environment of limited cash reserves, this can be terminal.
The best way to make discrete choices is to have coherence and alignment around strategy. This requires a basic understanding of a customer need, a compelling offering to meet the need, and a plan of how to get the offering to market with a pathway to a sustainable economic engine – all within the context of winning a competitive game being played by (many) others. Without this ‘strategic spine’, conscious choices and trade-offs are difficult to make and align around for a diverse team. This does not have to be a set and forget process. A clear strategic spine should not prevent flexibility to pivot if feedback around need, offering, go-to-market, and the economic engine demand it. In an iterative process, refine the strategy and execute the pivot.
Tangible goals and signposts helps provides quantitative inputs for investor analysis
The art of communication and ‘pitching’ successfully to investors and strategic partners is enhanced immeasurably by having clarity around the strategic spine of a business as a starting point. However, it is a necessary, but not sufficient precondition for fundraising success. You still must communicate it effectively. This generally requires founders learning to put themselves in the shoes of investors or target strategic partners and helping them answer questions important to them.
Unsurprisingly, this is generally all about money – i.e. money in and the prospect of multiples of money out. They are focused on forming a view on whether you have a credible proposition, what success looks like in tangible terms, and trying to identify the signposts or way markers that will provide evidence that you are making progress towards tangible success. The important word is tangible, or put another way, quantitative. This is important because investors use financials models to help them form judgements on the prospects of their invested money, and models only work on quantitative assumptions. So the closer your signposts are to the quantitative assumptions they need to build their financial models, the more likely they will value you correctly.
Coming up with hard quantitative assumptions can be hard – particularly if you are in early stages of business development. Referencing meaningful role models may help. This could be picking up other products, services, brands or companies that best represent the essence of your company vision – even if in unrelated sectors. Drawing parallels to the sort of metrics that describe your role models may be a useful reference points in guiding investors in the early-stage communication of the business.
Quantitative signposting helps keep investors loyal and raise capital in the lowest cost way
By providing regular progress updates against your identified signposts you can help to reduce risk for the investor. The lower the risk, the more loyal an investor is likely to be, and the lower the cost of capital should be to deliver on your ambition. The benefit is lower capital dilution for existing shareholders.
Quantitative signposts are as valuable internally as externally
However, identifying quantitative signposts can deliver internal as well as external benefits. Driving a credible financial model is critical for internal decision making as much as it is for external capital raising. It is the means to help forecast the consequence of decisions and actions taken today on outcomes tomorrow – most importantly cash reserves. Like the external investor, you will need quantitative assumptions to drive internal models, and unsurprisingly, this is a breeding ground for identifying relevant signposts.
The prize is increasing the probability of startup success
Effective management of external investors and strategic partners is a critical task in the ongoing juggle of startup teams in dynamically aligning the right resources at the right time for the right opportunity. The prize is increasing the probability of startup success.