The #Entrenovation Blog - 4

Start-ups: Definitions, Success Rates

A mantra I strive to live by is never stop learning, experientially and intellectually. Of course, learning curves are part of that process – nobody knows everything about anything. #Start-up success rates is a subject I think about. Upon re-visiting the subject, I was surprised to learn that reported success or failure rates are more widely distributed than I had believed to be the case. This led me to explore definitions of start-ups and I learned definitions of a start-up are as widely distributed as the success rates. 

Definitions; there are many

The question, “What is a Startup?” was addressed in an article published by Forbes a few years ago. The concluding paragraph in the article pretty well sums up the answer to the question:

If you are generating revenues below $20 million, have less than 80 employees, and remain resolutely in control of the company you started, you’re likely running a startup. Likewise, if you’ve just set up a tiny for-profit enterprise and are intent on it becoming big enough to take over the world – even if you’re still working from your bedroom – you’re probably a startup founder.

It seems that almost anything can be called a start-up. One description raised the upper revenue limit to $400 million, beyond which it is no longer a start-up. And, what about unicorns? Another definition suggested a start-up graduated to the next level following three years of realizing sales revenue. Why three years? There is no evident consensus.

Absent a description, the use of a label to describe a situation, or a person, is a particularly poor form of communication. A beautifully crafted label on a bottle of wine tells you zip about the wine you are about to consume. Personally, when thinking about start-ups, my definition of a start-up spans the period from the recognition of an idea to the commencement of marketing and selling the product or service. That start-up period is the stage during which the practice of entrenovation is useful. Further, when a company realizes sales revenue, it has become a business and must compete as a business, a small company with great prospects possibly; the period of entrepreneurship.

No fixed rule is set to describe a start-up. It behooves people to describe the current activity of their entity to afford the audience an understanding of the entity’s state. The term start-up, in and of itself, is meaningless without a further description.

Success rates

Obviously, the wide range in the use of success rates results from the particular definition of a start-up as applied in each case. Let’s look at a couple of examples.

In an interview a well thought of venture capitalist suggested the following: his VC firm would review 2,000 situations and select 300 for more investigation. Of the noted 300, thirty would be selected for investment and fifteen would provide a return to investors; but only one or two would be expected to be a “home-run”. You don’t need a calculator.

The success rate of another cohort examined is calculated from when sales revenue is realized. The calculus indicates 50% will fail in the first year and each year thereafter additional “start-ups” will fail. It seems to me a large number of start-ups have been left out of that equation.

As with the definition of a start-up, the parameters of the cohort are required to provide perspective to the stated success rate.

I am undecided regarding the significance of success rates. Possibly the most important purpose of noting success rates is to inform entrenoveurs (innovators) and other idea generators of the importance of thorough investigation of the idea before launching a development program. If you don’t get it right at the beginning, success is unlikely in the future. However, all ideas are worth pursuing. Each of us, I feel certain, have at some time dismissed ideas that turned into successes. What has the success or failure of someone else got to do with it anyway?

Concluding…

My preferred method to identify the status of a “start-up” is to break the process into segments. Stage one, the start-up process, would commence with the recognition of the idea and conclude when the developed product or service enters the marketing and sales stage. At that point the new venture would be a small or new business and in turn become a medium sized business and so on. Within each of those stages are definable sub-stages.

So, I ask, what is the most important stage? A well-known professional golfer was asked the question, what is the most important golf shot? Without hesitation, he stated, the one you are about to hit. The same applies to each stage of growth, or advancement, in a business venture. Achieving excellence must be the goal at each step. Mediocrity begets mediocrity. 

That being said the goal is to be successful at each stage. The pressure is on founders to prove, or not, the viability of the idea. Their initial focus should be to obtain an objective conclusion. The pressure to continue in that mind-set never goes away. The culture of the company will determine how much fun it may be to work there; and it better be fun because it requires a lot of hard work.

So, what is a start-up? Whatever you want it to be. A continuously updated description of the current activity of the entity will assist the understanding of what your venture is actually doing, as a start-up. The two major stages require, first, the practice of entrenovation followed by the practice of entrepreneurship; or you could say, the start-up stage followed by the business stage.

Mind your way,

Jon

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