What is a start-up company?
A start-up company is a young company founded by one or more entrepreneurs to develop a product or service, unique or not, and bring it to market. By its nature, the typical start-up tends to be a shoestring operation, with initial funding from the founders or their friends and families.
One of the start-up’s first tasks is ensuring it has enough resources to develop the product or service until it starts to have enough income to be financially independent. To guarantee that, the start-up needs to have a concept with a proven and tested product or service and a scalable business model. It’s a long and very challenging journey.
The vast majority of start-up companies fails, however, some of history’s most successful entrepreneurs, which in the process became some of the richest men on the planet, created resilient and profitable companies like Apple (founded by Steve Jobs), Facebook (founded by Mark Zuckerberg), Tesla (founded by Elon Musk), McDonald’s (founded by Ray Kroc) and many others.
What makes companies succeed the most? What are the most important factors for start-up success?
Start-up organizations are one of the greatest forms to make the world a better place. If you take a group of people with the right equity incentives and organize them in a start-up, you can unlock human potential in a way, never before possible. You get them to achieve unbelievable things.
But if many start-up organizations are so great, why do so many fail?
Much research has been done about this topic, both scientific and empiric, and the general consensus is that timing and the management team are the two critical factors for success.
Very often, the idea and funding come up as the main causes for success or failure, however, the road is paved with thousands of failed companies with great ideas and huge amounts of funding.
Consider companies such as pets.com, Friendster, Airbnb and Uber. All had great ideas and huge amounts of funding; however, timing and execution made a failure of the first two and a wild success of the latter two.
Latest studies show that the most important factors for a start-up company to become a wild success are, in this order, as follows:
- Execution (management team)
- Business model
The idea, the differentiability that is needed comes in third place. This is not to say that the idea isn’t important, it definitely is, but it’s not the most important thing. Usually, it matters more when it is actually well timed.
The business model makes sense to come fourth because many companies start out without a business model and then add one later, if your customers are demanding what you’re creating, just think of YouTube, for instance.
The funding is the least important of these five factors. If a company is underfunded at first, that will stimulate more creativity and that in turn will lead to more traction. With traction, funding is a relatively easy process.
Let’s take the above successful companies as an example.
- Airbnb, everybody knows about them, today! That company was famously passed on by many smart investors. People thought “no one’s going to rent out a space in their home to a stranger”. Of course, people have proved that wrong, but the one reason it succeeded, aside from a good business model, a good idea and great execution, was the timing that company came to market, right during the height of the recession when people really needed extra money and, frankly, probably that helped people overcome their objection to renting out their own home to a stranger.
- Uber, same as Airbnb. Uber came out in March 2009, during the financial crisis, as an incredible company, incredible business model, great execution too, but again the timing was so perfect for they needed to get drivers into the system… and drivers were desperately looking for alternative ways to make very much needed extra money. It was very, very important.
- YouTube, in 1999-2000, it was too hard to watch video content online. Broadband penetration was too low, you had to put codecs in your browser and do all this stuff and many companies, with great ideas, management teams, funding etc went out of business because they were too early to market. In 2003, just a couple years later when the codecs problem was solved by Adobe flash and when broadband penetration crossed 50% in America, YouTube was perfectly timed. Great idea, but above all unbelievable timing. As a matter of fact, YouTube didn’t even have a business model when it first started. It wasn’t even certain that that would work out, but, again, the timing was perfect.
In summary, execution definitely matters a lot and so does the idea, but timing matters even more. And the best way to assess timing is to really look whether consumers are ready for what you have to offer them.
Start-ups can change the world and make it a better place. Let’s contribute to help them get their timing right.