I was having a conversation with an angel investor turned venture capitalist over breakfast earlier and we were reflecting on the differences between successful founding teams and less successful ones. I drew from my own personal experience as an ex-startup founder and recent experience consulting and mentoring startups while he drew from his experience investing in over 20 startups as an angel investor is close to the founders.
What is a startup?
A potentially profitable business with several unproven hypotheses that can grow and scale fast.
Startups don’t necessarily need to be profitable on Day 1 but their true north is always growth. Can they fuel growth without external investment? Sure, but the founder(s) will need to weigh in on the opportunity costs and risks of not growing as fast as they could to be a market leader. An attractive and growing market will attract competitors and that’s part of capitalism. Fast is as relative as to how quickly the competition catches up to displace the business.
A startup is more like a science experiment with multiple unknowns rather than a predictable process (e.g. a replicated science experiment back in school). Predictable growth and revenue give the startup leeway to take more risks, essentially allowing more opportunities for growth.
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Why do smart startup founders fail?
There are many reasons why a startup could fail but I’ll focus on things that can be controlled by the founders. These listed reasons are equally applicable to innovation leaders in the corporate context.
The adjective ‘smart’ can be replaced with ‘passionate’, ‘talented’ or ‘well-meaning’ and still ring true.
1. They fail to take action sustain momentum
There is no traction without action. The action is necessary to overcome inertia and the increasing number of challenges grow as the startup grows. Many startup founders struggle with analysis paralysis and often become the bottleneck of their startup’s growth.
A common example is when founders encounter operational problems, they take their eyes off the other levers of the business e.g. distribution. Rightfully, the entire business needs to be moving together like a well-oiled engine. A startup must keep moving if it stops, it dies. Starting and stopping can also create unnecessary inertia.
2. They fail to manage their variance
Founders fail to appreciate moments where they need to increase variance and moments where they need to reduce variance. If all parts of the business are operating unpredictably, it means the team is scattered and processes are incoherent.
When innovating and ideating, more variance leads to a variety of ideas, an optimal outcome. When turning parts of the business operational e.g. hiring process, more variance leads to more unpredictability, a sub-optimal outcome.
A huge amount of variance is risky for a startup because the internal variance is easier to control than an external variance e.g. competition. Alignment of people and processes, part of the vectors of a business, is part of reaching minimum variance internally. Minimum variance leads to predictable revenue and growth.
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3. They fail to take ownership and responsibility
There are founders I’ve met that don’t take responsibility for their actions and some that act so without integrity. They will lay blame on others first and believe that they aren’t the source of the problems within their startup. It’s no different from living in a lie in which I would quote Ayn Rand’s Atlas Shrugged.
People think that a liar gains a victory over his victim. What I’ve learned is that a lie is an act of self-abdication, because one surrenders one’s reality to the person to whom one lies, making that person one’s master, condemning oneself from then on to faking the sort of reality that person’s view requires to be faked…The man who lies to the world, is the world’s slave from then on.
If a founder surrenders control to take responsibility for the root of their problems, they would not be able to take action and course correct. Faking reality also expends unnecessary energy and resources which can be better allocated for growth.
4. They fail to root themselves in reality
The most ignorant founders I’ve met let their egos and ideas come first instead of putting the needs of their customers and the market first. Operating in a free market economy means customers will have the choice of whatever solution that fits their needs and addresses their problems. Founders should have a clear vision but also need to understand the realities of the market and allow their vision to take form over time. Reality checks do not mean sacrificing a big vision, reality checks (or results that validate assumptions) are a means to know the business is on the right track. In a world operating under capitalism, the market is the final arbiter of reality.
5. They fail to segment their risks
There are two types of risks: necessary risks and unnecessary risks. Necessary risks have expected outcomes while unnecessary risks don’t.
- Necessary risks: If we do X, Y is expected to happen and triple our returns.
- Unnecessary risks: Our team and other companies have done A to get B result. We conveniently forget that and will do C this time around.
Some of these decisions are reversible and some are irreversible or much harder to reverse.
6. They fail to systematically reduce risk
The best founders I’ve met and worked with are risk averse and always seek to systematically reduce risk and maintain control over areas they and their team can as much as possible. The rationale is simple, a startup’s journey is full of unpredictability so why introduce more unnecessary risk?
7. They fail to think big enough
Not all markets are equal. A big market can allow more room for errors while a small and hyper-competitive market leaves little room to make mistakes.
I’ve met founders that restricted themselves geographically or by revenue or by industry niche. It takes a different mindset to think big, but when you do, the next question is “How do we get there?” but at least the goal will excite everyone. A majority of the people in this world have lost the ability to dream big. Antoine de Saint-Exupéry said it best below.
If you want to build a ship, don’t drum up the men to gather wood, divide the work and give orders. Instead, teach them to yearn for the vast and endless sea.
8. They fail to think long-term
The horizon in which a founder thinks tends to reflect in the operations of the business. Founders who think long term often build to scale as compared to founders who are in to make a quick exit.
- Short-term Thinking: For a B2B business owner, “Let’s charge this new client as much as possible.”
- Long-term Thinking: For a B2B business owner, “Let’s work with this new client to add as much value as possible even if we have to do this project at cost.”
9. They fail to apply reason
Humans can be irrational even though they may possess the faculty of reason. Founders need to be self-aware when they make irrational decisions or draw irrational conclusions. An irrational being (including animals) cannot be reasoned with and they will use force to coerce submission. Reason is a bastion of what makes us uniquely human and being susceptible to logical fallacies decreases the quality of decisions and affects the velocity of decisions a founder makes.
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10. They fail to hold themselves and their team accountable to results
A founder is a leader first and a creator second. Thinking like a leader first means the decision a founder makes is accountable to other people including customers, the team, and its investors. With that in perspective, good communication and decision-making skills are a necessity. Founders should always be mindfully aware of the risks created by poor communication and decision-making skills.
Good leadership and management skills are necessary skills to manage risks in a startup. This includes managing money and holding people accountable for results. I’ve met and worked with founders who fail to break down their vision into actionable objectives and key results. A lack of accountability represents a lack of control.
If you’re an investor or early employee try to ask questions and observe if their actions. I also find Amazon’s leadership principles as incredibly helpful as a guide.
If you’re a founder and can’t relate to all of the above, you’re likely putting your startup and the people you manage at risk. These are skills that can be acquired and mindset that can be nurtured before you start a startup but they can also be nurtured and practiced if you’re now aware of the blind spots.
Contributed by Daylon Soh.
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About Daylon Soh
Digital Ventures & Innovation: eCommerce Product, Growth & Design @ Razer
Daylon works in the intersection between digital marketing, digital product design and digital product management helping startups and corporations build new digital products and ventures. He uses a mix of research methods, Agile practices and communication strategies to facilitate the innovation process with teams. He used to work for Unilever as a Digital Marketing Strategist and was most recently part of the Digital Product Design team of Aviva Digital Garage working as a SCRUM Product Owner. Daylon is also an Agile Certified Practitioner (PMI-ACP)® & PRINCE2® Certified Practitioner in Project Management and instructs adult learners at General Assembly.
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