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What Makes Startups Succeed

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Every large and successful
company was once a startup struggling to survive. Only a small percentage of
startups succeed. Thanks to a study conducted over a period of about four
years, we now have some answers to questions such as:

 

·      What factors are most responsible
for a startup’s success?

·      What differentiates a successful
startup from one that fizzles and dies?

·      How important are factors such as
boards of directors, seasoned management, cutting-edge technology, marketing
and business models?

·      How do venture investors help or
hinder startups?

·      Are there important differences
between venture-funded startups and those that bootstrap their way to success?

·      How important is leadership for
startups?

·      How important is technology?

·      In sum, what makes some startups
succeed when the odds favor failure by a wide margin?

           

While there are no hard-and-fast
rules to follow when starting a company, publishers are among those who can
employ rules of thumb to advantage. Most successful entrepreneurs we talked to
either grasped these rules of thumb intuitively or learned them from
experience. In some cases, newly minted entrepreneurs were taught them by their
investors, by their friends, and even by their employees.

 

Here are the ten rules of thumb
we’ve learned:

 

1.
Start with a group of three or four founders,
<span
style=’font-size:11.0pt’> preferably people who previously worked together at
the same company. This is important because a larger group comes with a larger
skill set and with access to capital. Since hiring the right team takes a long
time, starting with a team that’s worked together before increases the speed at
which the company can grow. In the startup world, the best leaders are those
who know how to share power rather than those who have a need to take it all.
The best people to lead startups are those who think building something is more
important than winning prestige.

 

2.
Make certain a marketing or sales person is a member of the founding team.
<span
style=’font-size:11.0pt’> Companies make big mistakes when they focus all their
resources on their products and services but not their markets. Don’t worry if
technologists and marketers disagree. When conflicts arise, argue them out or
arrange for mediation toward a creative conclusion. Don’t simply stop them.

 

3.
It’s all about teams.
Whether you
are starting with a group that’s worked together in the past or hiring a team
from scratch, remember that successful entrepreneurs get that way because they
can create teams. Some do this intuitively; others need reasoning and lots of
hard work. Either way, hiring the right team is critical. In high-performance
teams, managing each team member’s rivalries is also critical. To get the right
people on board requires painstaking due diligence and reference checking. The
best time to start interviewing people is long before you start a company.
Build a network of talented people around you to draw on when you start to
build a company. Do it at work, through networking, and with your investors.
Super success comes from building super teams.

 

4. When
building the business, don’t worry about your exit.
<span
style=’font-size:11.0pt’> Concentrate on creating value. Creating high levels
of value has a way of making even wrong things right. The best venture capital
investors look for bigger, longer-term payoffs, not just quick results.

 

5.
Manage your cash.
Startups in the
bubble years burned through money, but companies today have to be run much more
tightly. Since startups are a highly speculative investment, the people leading
the company must know how much money it will take to increase revenue and
become profitable at each stage of an investment’s life. Young companies need
high levels of financial discipline even more than older, established
companies. Why? Because their margin of safety is far more tenuous and
postbubble investors remain wary.

 

6.
Start with a market.
Occasionally
a product or service will be so innovative or revolutionary it will create a
market on its own. But for the most part, startups become successful not by
creating markets but by going into markets that already exist, with a twist.
They develop products or services that are better, easier, or cheaper. They
also succeed by automating processes that were once done by hand. The common
factor is that no startup succeeds by being too inwardly focused. New companies
must really understand the markets they are entering. That is the only way they
can create tangible results.

 

7.
Find a great first customer.
A
great first customer gives a startup big bragging rights. It also creates
confidence in the market. Of course, you won’t get a great first customer
unless you can win its trust. Great customers want to work only with companies
they are certain will stay in business. Success loves nothing more than
success.

 

8.
Build a board that is a great sounding-board, not just a good watchdog.
<span
style=’font-size:11.0pt’> Boards are there to help companies create value by
making introductions, assessing plans, and opening up their Rolodexes to
management. The best boards are those that really focus on helping management
solve its thorniest problems—and then get out of the way. Venture-capital
investors are a mixed bag when it comes to sitting on boards. Some have lots of
experience and deep insights, while others are stretched too thin. Choose your
board members wisely and make them work as partners in building your company’s
success. As you build your board, shape it into a group of problem solvers with
smarts, deep pockets, and lots of business acumen.

 

9.
Make your product or service high quality and unique,
<span
style=’font-size:11.0pt’> then brand it in a way people won’t forget. At first,
people hated the Monster name; even so, they didn’t forget it. Soon, it became
synonymous with searching for a job.

 

10.
Enjoy the ride.
Without exception,
the entrepreneurs we interviewed—and the people who funded
them—loved what they did. They had passion, vision, and an ability to
shrug off their mistakes and move on. They exuded confidence. They took pride
in building things and in seeing their teams and their companies prosper. And
while many were highly technical, they were also people who, for the most part,
really enjoyed being with other people.

 

Simply following these ten rules
of thumb will not guarantee success. You need good ideas, and you need good
timing. You need money and the ability to generate enthusiasm. You need energy
and the capacity to work long hours and stay up late. You need to believe in
what you are doing, and you need to believe in yourself.

 

Still, after years of research, we
can say that if you follow these ten rules of thumb, your chances of success
are certain to increase.

 

Joel Kurtzman, formerly the
editor of the Harvard
Business Review
and a business editor and columnist for <span
class=8StoneSans>The New York Times,
is chairman of The Kurtzman Group, a consulting firm.

 

This article is excerpted
from his new book, Startups
That Work: The Ten Critical Factors That Will Make or Break a New Company

(published by Portfolio/Penguin Group USA). Copyright © Joel Kurtzman, 2005.
Visit www.KurtzmanGroup.com for more information.

 

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