The Four Rules for Startup Success
Is all startup advice equal? Are there “rules” that always work? Startups come in all shapes and sizes: mom and pop, technology, bootstrap, franchise, etc. and they compete in many different industries.
Is there a set of tenants an entrepreneur can use to guide them on their journey that is always true regardless?
We set out to answer precisely this question. Our work with hundreds of startups led us to an interesting conclusion: some rules work in some situations and four of them always work.
Our methodology was simple. Learn what successful startups did, that unsuccessful ones did not. What were successful startups willing to do those unsuccessful ones did not?
To our surprise, much of the startup advice that is typically given turned out to be conditionally dependent. That is, it may be true for a particular type of startup in a specific kind of industry, but it was not true for all startups.
Further, even if a startup followed all the correct conditional rules, and did not follow the “four rules,” their probability of failure significantly increased.
So what are the four rules for startup success?
- Rules #1: Seek out the best, not the cheapest
- Rule #2: Revenue is your first priority
- Rule #3: Learn how to make effective collaborative decisions
- Rule #4: Everything else is dependent
Note that all of these rules are entirely within the startup’s control. They are choices you make. They are beliefs you hold true. Take rule one for example, which is the most often violated rules in our study.
Unsuccessful startups believed that they could not afford the best, and thus eliminated any possibility of obtaining the best. On the other hand, successful startups believed that they must obtain the best, and were willing to do what was necessary to obtain the best. It was a decision completely under the control of each startup.
This “totally under your control” observation is important as focusing on things that cannot be controlled is wasting precious mindshare. We cannot control other people.
We cannot control luck. We can only control our actions and worry about things we cannot control distracts us from focusing on the things we can control.
Our observations are that most entrepreneurs focus on the uncontrollable. Although we are not phycologist, it is not hard to understand why: it is easier to blame everyone/everything else, then to create an action for change within oneself.
This is such a powerful idea, that we consider making it the “One Rule for Startup Success”, but concluded that this idea has already been written about for eons. Although important, it is not a new idea.
Let’s look at the four rules in more detail:
Rules #1: Seek out the best, not the cheapest:
A common strategy in a startup goes something like this: I am a startup. I have no money. I need to either do the work myself or find resources as close to “free” as possible.
This logic sometimes comes from an often misunderstood belief about the value of the entrepreneurial idea and the entrepreneur’s ability to execute on an idea.
If one believes the idea brings 90% of the value and execution is just some series of task that must be done, then finding the least expensive way to do these tasks is the rational thing to do.
Our research has shown that the reality of a startup is a bit more complicated than this model of idea and execution as separate independent entities.
Often the two cannot be separated. Execution modifies the idea, or at the very least adds essential detail to the idea. Take the iPod as an example.
There were plenty of “digital music players” on the market long before Apple decided to develop their own. None were particularly successful, and it remained a niche market product for at least a decade.
Apple was able to convert this idea of a digital music player from a niche market to mass market by filling in the details of the idea: iTune, marketing, app, the infamous radius on the corners, etc.
These details came about as a result of executing on the idea over a period of months and years by a team of incredibly bright people.
These people were not the low-cost option; they were the best, and most brilliant Job’s could muster. Keep in mind this was all being done while Apple was on the verge of bankruptcy.
Physical capital (cash) is not the constraining element in a startup; intellectual capital is. That is, it is more difficult to find the best and brightest, and find a way to get them to join the team, then figure out how to find the money to support them. We live in a time of capital superabundance (see:https://www.finishlinepds.com/single-post/2017/03/21/The-Weather-is-Perfect-for-Small-Companies-and-Startups) that is likely to continue to exist for quite some time.
Capital is looking for teams that execute and the best and brightest perform well, while the “low-cost option” often cost more than the value it creates. Choosing the “low-cost option” creates a downward spiral – poor execution makes it more difficult to attract additional capital (either physical or intellectual), and this difficulty makes it less likely execution will improve.
Finding the best and brightest is a simple task, but not an easy task. It is easy and simple, to find average people – or even below average. Finding the best and the brightest and figuring out how to get them on your team will take a lot of hard work. We know the majority will opt for the easy path, and this is why many startups fail – they are not willing to do what the successful are willing to do; that is, do what is necessary to get the best and avoid the low-cost option.
Rule #2: Revenue is your first priority
In this context, revenue is any form of income on the cash flow statement: investment, sales, loans, in-kind services, etc. However, revenue is more than just money in the bank.
It is validation that you are going in the right direction. In order to receive revenue, you must convince someone (investor, bank, customer, strategic partner) to write you a check. They are voting for your team with their dollars.
This idea of voting with dollars is in contrast with the idea that the team will first develop the perfect product, and then everyone will buy it because it is the perfect product.
Free markets work because they harness the power of crowds – I would argue capitalism was the first version of crowdfunding and remains the most powerful.
Every time you ask someone to “vote” for your team is an opportunity to learn and modify the idea based on this learning. Even a “no” can lead to learning – often “no” is more instructive than a “yes.”
For example, Apple first learned why the existing digital music player did not sell well – why they said “no.” Learning what the market values are a vital function of most startups.
The best method for determining if your value proposition “works” is to ask the market to pay for it.
There is nothing wrong with generating theories about what the market values; in fact, it is a necessary task, but not a sufficient task.
However, without testing the theory, it is just a theory, and theories need to be tested before they are developed into a perfect product or service.
The most valuable learning from the Lean Startup movement has been the idea that we move from an entrepreneur that knows what the market value, to an entrepreneur that knows how to determine what the market values.
Startups should focus externally on the market, not internally. A startup’s first priority should be to test their theories (external focus), not perfect their theories (internal focus).
Your first priority should be to prove a repeatable business model, and only then perfect this model, or scale the business.
Revenue is the first priority because it is the best way to prove your theory about your value proposition – so-called “market validation.”
Trying to scale before market validation is relying on luck and intuition, and as has already been stated, relying on luck is not something we can is a poor strategy.
Rule #3: Learn how to make effective collaborative decisions
Research has shown that most people believe they make effective decisions and they are wrong. Humans tend to make decisions based on emotions and then rationalize them with logic.
We fall into all kinds of decision fallacy that may “feel” right but are flawed nonetheless. See https://www.finishlinepds.com/single-post/2016/04/08/What-it-Takes-to-Succeed-at-a-Startup for more on this topic.
Further, research has shown that functional collaborative decision making is more efficient than unilateral decision making. Teams that understand how to work together share ideas and come to a decision that everyone on the team can support, even if it was not their idea, almost always out-execute teams with a single team member who decides for the group.
The key to these functional collaborative decisions is in the “functional” part. No doubt, many teams are dysfunctional in their decision making. Just because the meeting is being held does not make a functional collaborative team. To be functional teams need to know and respect each other.
They need to understand the point of view of each team member. They need to have clear roles and responsibilities. They need to put the success of the team above their egos and aspirations.
Anyone who has ever participated in sports, or followed sports, will understand this difference. Many organizations that had great players failed to produce excellent results because of team dysfunction.
To continue the sports analogy, the difference is the coach. All great teams had a great coach. They had a great leader who understood how to get the best out of each player.
She had the ability keep egos in check. She recognized the importance of culture and values. She knew what functional collaboration looked like, and she knew how to get everyone to row the boat in this direction.
Don’t underestimate this ability. Every successful startup had at least one great coach. To repeat a theme, it is not easy to be a functional team, but it is one the things successful teams do that unsuccessful teams are not willing to do.
Rule #4: Everything else is dependent
Why have rules that there are no other rules? Because it is critical to understand that everything else depends. Raise money or bootstrap – depends. Outsource or hire employees – depends. SEO or PPC – depends.
Much of the advice that startups get are specific strategies that worked for some other startup – usually a different kind of startup in a different industry – investor are notorious at providing this type of advice, but they are not the only ones.
It is not that this advice is wrong necessarily, it just that it is dependent on each startups situation.
Different strategies work for different startups, but all strategy, accepting these four rules, do not work for all startups; and assurance that your startup follows these four rules will increase the probability that the right strategic choices are being made.
Conversely, the best strategy in the world is likely to fail if these four rules are not followed.