by Matthew Sawyer, Managing Partner of Rocket Market Development LLC
Many of the most talented and brightest students are convinced that a startup is their best business option. Over half of the college students in my management course at Parsons New School for Design plan to join startups or form their own companies. It’s not just about the dream of big money and fame; students tell me that they want to make a positive contribution to the world, and they believe startups are the best places to work toward that goal.
Investors keep pouring money into startups and early stage companies. According to the National Venture Capital Association, the amount of money that VC’s invested rose 8% to nearly $30 billion in 2013. You can double that number if you add the amount of money put up by Angel Investors. Angel Investors, VCs and entrepreneurs agree that the success rate for startup companies is dismal. Business Insider recently reported that only .4% of startups that applied to the Y Combinator Accelerator are successful. Research conducted at The Harvard Business School found that only 25% of VC-backed startups return investors’ capital.
Obviously job hunters and investors should be careful about where to place their bets. They need to look beyond a startup’s initial success to the crucial factors (or requirements) that will enable the company to continue to grow.
Here are five questions to ask startups to determine if they will be successful:
1. Do they have standardized processes and standards?
To manage growing workloads, startups need formal processes and standards. “Just get it done” is fine when entrepreneurs are starting out, but not when the work is distributed to a bigger team. To be successful, the company needs to grow beyond the founders without losing its competitive edge. Do you think Vistaprint, Edible Arrangement or Gilt could have grown as fast and as profitably if they hadn’t established processes? Even smaller startups need workflow processes and standards as entrepreneurs bring on new employees, which is important to establish consistency and higher profit margins.
2. Do they have the right talent for growth?
The most critical requirement for success is having people with talent, experience, and the desire to win. Many investors will tell you that the quality of management is the most important reason they choose to back a new venture. David Rose, Founder of NY Angels and CEO of Gust, says that the entrepreneur’s integrity is the first thing he looks for when considering a startup.
To help build new product development and venture teams, my colleague Rob Goldberg, of Stages of Innovation, created an assessment tool called Talent for Growth. Through work with hundreds of teams, he found that talent requirements change as companies move through the growth curve, particularly when they move from early adopter to mainstream customer sales.
3. Do they have a scalable technology advantage?
Startups need technology to help them efficiently produce more work. This enables startups to grow without having to dramatically increase staff and costly resources. Scalable technology is often the only way that startups will be able to reach profitability and grow revenue. EachScape created a platform for non-programmers to assemble blocks of pre-built native code into high-end mobile apps. Recently, EachScape’s scalable technology took on creating apps for Google Glass.
4. Are they addressing market needs?
Too often startups develop a product or technology before having a clear idea of their prospective customers. What are customers’ needs and desires or, as Clay Christensen of the Harvard Business School puts it, what are the jobs that they want the product to do? Complicating matters even more, startups find that the needs and desires of early adopters are vastly different from more mainstream customers. Citia developed an innovative non-linear publishing platform based on the insight that people want to control how they read and explore non-fiction books and other content.
5. Do they have consistent cash flow?
Warren Buffett said that if you really want to understand how a company is performing, talk to their bank credit analysts, because they talk cash flow. Even if a startup is flush with investor money, they need to prudently manage their expenditures. They need to prioritize and fund the activities that will have the biggest impact. If not, investors will hesitate to kick in more money. Yes, consistent inflow of cash is a sure sign that an early stage company is offering consumers a valuable product or service.
Of course, there is no guarantee that a startup will be successful. Unforeseen external factors, such as new competitors or better technologies, will no doubt disrupt a promising startup’s prospects. Nonetheless, getting answers to these five questions could improve the odds when betting on a startup.
Matthew Sawyer is the Managing Partner of Rocket Market Development LLC. He is also an Adjunct Professor teaching business strategy at Parsons New School for Design. Sawyer is a strategic market development professional who has rejuvenated historic brands and built profitable new technology-driven businesses. For the past ten years, he has applied his business skills and experience to several startup and early stage companies in the mobile, online video, and advertising technology arenas.