What makes one start-up a success story and another a failure is frequently nebulous.
Timing, contacts, personality-type and even the weather can be factors. None of this is much help to entrepreneurs looking to set-up a business.
Many entrepreneurs have brilliant ideas and well-thought out plans for running a business, but still seem to inexplicably fail while others go on to be successful. It is clearly difficult for an entrepreneur on the brink of launching a new business to comprehend the missing magic ingredient.
Therefore, in an effort to identify the those factors or magic ingredients, Carter Backer Winter (CBW) researched 102 successful companies in the technology sector which were founded around 2005 and monitored their progress and changes over the following six years. The research also included 50 start-ups that failed.
One key finding of the research shows that ‘failure’ is often due to the actions or inactions of entrepreneurs, whereas ‘success’ is often due to luck. The difference is that you can learn to mitigate failure and as a result increase the chance that luck will play.
The findings provide a list of seven factors that reduced the risk of failure and so will increase the success rate of fledgling businesses in any sector.
Start with two or three founders:
Compared to a lone entrepreneur, a small team can better share the workload, access more contacts and wider skills. Small teams also have the focus and shared vision that larger teams may lack. The research found that while teams of two or three founders were most common among successful companies, lone entrepreneurs dominated the unsuccessful firms.
Involve investors from the outset:
Some 78 per cent of successful technology start-ups had an initial investor, as opposed to only 60 per cent of unsuccessful companies.
Dilute equity to achieve growth:
Selling equity to the right investor can kick-start growth spurts. The research shows that the founders at successful start-ups sold 50 per cent or more of their equity to investors within six years – even though this will have required a change in the mindset amongst those wishing to retain a controlling interest.
Many entrepreneurs are desperate to hold onto their equity. Sadly, this stifles growth and generally the founders are ultimately worse off.
Ensure founders hold onto equity during the early stages:
Our research indicates that founders should hold onto at least 40 per cent of equity. This minimum amount ensures founders retain significant ‘skin in the game’ to keep them motivated.
More on building a start-up:
- Seedcamp for European entrepreneurial start-ups
- The need for seed
- Recruitment and funding flagged as issues for start-ups
Introduce new directors for their additional skills and scope:
We found that 80 per cent of successful companies replaced at least one of the original founders in the first six years of operation. Successful start-ups went on to expand their boards to six or seven directors within six years, so adding key skills and contacts required to take the company to the next stage.
Don’t rely on bank loans to get started:
The research revealed that loans are not an important source of funding for successful technology start-ups. Only seven per cent of start-ups in this sector had secured bank funding in their first year (although bank loans became modestly more important over time as the companies grew).
This finding highlights the importance of business angels to start-up companies that can’t secure bank lending because they have few assets against which to borrow.
Get an FD or CFO on board:
Surprisingly, the magic ingredient was often the presence of an accountant on the board. The research shows that getting an FD or CFO involved early can make all the difference, as they can increase the final exit value of the company by increasing revenues at the expense of margin without losing site of that all important Cash balance.
They are also pivotal at helping founders sell more equity by giving confidence to the process so attracting skilled investors to join the board.
