Want to start a company? Then read on, because you’ll need a little bit of insight on what types of startup strategies to use!
Starting a successful company—especially if your goal is to go public eventually—usually means convincing venture capitalists that investing in you and your idea is the smartest move they could possibly make.
Unfortunately, that’s easier said then done these days, says Gary Daugenti, CEO of executive placement firm Gent & Associates. “Venture capitalists look at as many as 1000 deals every year, but usually choose to finance only one or two,” Daugenti notes—which is why using winning strategies and practicing persistence are essential.
Moreover, what motivates venture capitalists to fund a proposed startup today differs greatly from what led them to open their checkbooks 10 years ago, according to Ken Leeder, founder/CEO of ShopVibe, a technology that automatically searches the web to find the best prices on whatever consumers want to buy. Leeder should know: ShopVibe is his third successful startup.
Why the process is different today
Over the past decade, the cost of technology has decreased quite substantially, observes Leeder. “Rather than have to program everything from scratch, you can now use software programs that automatically assemble the different technologies you need, so getting a product to market now is much faster,” he says.
Though it costs less to start a company now, venture capitalists demand better proof points to convince people to invest, says Leeder. VCs today want startup founders to have actual customers and actual revenues before they will commit to invest, which is much different than when Leeder started his first company, a system of collating product information for large international companies called Full Degree slightly over 10 years ago. To get the $9 million in startup money he needed, he had only to prove there was a problem and that he had a team that could build a solution.
Four years after launching Full Degree, Leeder sold it and then funded his second company though angel investors. “Rather than go to venture capitalists, I went to wealthy individuals and got a small amount of money from each, ultimately putting about $4 million into the second company, which was called Real Travel,” Leeder says.
“The idea behind that company was, ‘Don’t trust the marketing literature from hotels, destinations or attractions but find out what these are like from people like you who have been there in order to figure out whether or not you want to go there,” he says. “The company helps about 18 million people a year plan their trips with advice from other travelers.” Leeder sold Real Travel to Uptake Networks, which was bought by Groupon.
Startup success demands a great team
Now working on his third startup, Leeder says that, in addition to enough money to get a product or service established in the marketplace, a successful startup also requires a top team, Daugenti and Leeder say.
“People are the most important thing,” Leeder says. “A good idea is important at the beginning, but I think the most important thing is having a good team of good people around you who understand the market and are willing to adjust as the market adjusts.”
Indeed, research shows that “people problems” are the number one reason new companies fail—not undercapitalization, lack of planning or failure to perform sufficient market research before diving into the deep end of the pool.
Choose people with whom you have professional connections
Leeder says that the best prospects for a successful team are people you’ve worked with before or people who have worked with people you’ve worked with who recommend them. “You are more likely to know how well those people work under pressure, which improves the trust factor,” he says.
“I also think that if you make a hiring decision that doesn’t work out, you’re better off to move on quickly as opposed to hoping the person will change,” Leeder continues. “You’ve got to be fair in assessing this person’s impact on the other people on your team and the company. If the impact is relatively small, you can afford to wait longer. If it’s huge, you can’t.”
Noam Wasserman, professor at Harvard Business School and author of “The Founder’s Dilemmas, Anticipating an Avoiding the Pitfalls That Can Sink a Startup,” fully concurs.
Wasserman notes that most new business founders tend to choose their teams from people with whom they have social rather than professional relationships: in other words, friends and relatives.
“You already trust each other in the social realm and you assume that will map to trust in the professional realm, which it does not necessarily do,” Wasserman said in a recent interview with Bloomberg Business Week. “And you’re not going to have the in-depth conversations about competence and skills that you would have with a business acquaintance or a stranger.”
“That’s because you assume you don’t need to talk and you are hesitant to raise doubts because you fear they could blow up the social relationship that is so valuable to you.”
Leeder advises would be startup founders to build the minimum product required to validate their assumptions if they need outside funding.
“If you think that a certain type of company needs a service, get something up and running,” Leeder says. “If it’s a product, build one even if you have to do the work manually. The reason is that when you validate the service or product, you are much more likely to be successful.”
Rather than putting a very large amount of money into building a system only to find out it doesn’t work, put up a very simple, low cost website for your local area, Leeder counsels.
“Even if people are going out and manually fulfilling and hand delivering those orders, you could determine market response without building an expensive infrastructure in order to find out there’s no real market,” he says. “You could learn that lesson in a very low-cost way—and if your first model doesn’t work, you can build another model without committing too much money to one approach.”
By Julie Crawshaw