The democratization of entrepreneurialism continues at a rapid pace, encouraged, in part, by mainstream media sitcoms and reality shows showcasing Silicon Valley. It’s also being fueled by the staggering amounts of capital that are available to fund new companies, not just here, but in tech innovation hubs around the world.
Yet the odds of building a long-term sustainable business, and actually returning capital remains low: more than 75% fail outright and less than 5% see venture success—as defined by exits that return more than 3X capital. Not surprisingly, a lot has been written about the key factors behind successful startups. An entire industry has sprung up of accelerators and incubators that make a business of extracting significant equity stakes from newly forming start-ups, in exchange for offering to teach them best practices in product development, market positioning, fundraising and team formation.
As former entrepreneurs who built successful start-ups from ground zero, and now as investors working closely with our angel and seed stage portfolio founders across 30+ companies, we at Core Ventures Group are experiencing many obvious truisms, but also uncovering some surprising alternative success factors based on the actual performance data of these companies.
- Being a serial entrepreneur is not required for success but rather, having prior exposure to start-up success is critical.
We believe the most reliable correlation amongst successful start-up teams is having at least one senior leader on the founding team who had previously been on the executive team of a successful start-up. (S)he will have experienced the most important phases of healthy culture and company-building, and formed her own mental playbook around the proper sequencing of organizational build-out, product and market milestones, and fundraising cycles.
In contrast, founder teams who all come from big company backgrounds are accustomed to professional processes, services and infrastructure without understanding how these support pillars were formed. They often vastly over or underestimate resources required.
- The quality of the investor syndicate is second only in importance to the caliber of the founders.
In a perfect world, founders should be as choosy about who they allow to invest in their companies as investors are in backing founders. The reality is that only serial founders with high returning exits can pick and choose their term sheets from top tier venture funds. We are often alarmed by how quickly founders take capital without doing their due diligence on individual investors and their firm cultures.At a minimum, entrepreneurs considering venture capital should understand: where in the life cycle of funds their immediate and future capital commitments will sit, the track record and decision-making authority of the individual General Partner who will be their sponsor, and the return expectations of the venture fund to understand whether there is a healthy alignment with the founder plans.
They should conduct interviews with other portfolio founders to learn how engaged the investor is in the strategy and operations of their company, what specific value they have added, their posture amongst the other investors and behavior in board meetings, and what motivated their most critical investment decisions. Too often, we see venture investors influencing company decisions based on their own firms’ short-term needs such as capital distribution, rather than what’s best for a company’s long-term outcome.
Meanwhile we see negative correlation with start-up success amongst those companies who raise funds from predominantly angel syndicates (who may not add value or be unable to do follow-on investing), or corporate investors whose executive leadership changes can result in rapidly changing strategy around start-up investments.
- Forming a well balanced technical and business team out of the gate is critical.
We find that Silicon Valley culture over-indexes on the likes of CalTech, UC Berkeley, and Stanford PH.D. founders, who have incredible technical domain expertise, but are lacking their counterpart in business leadership. When this imbalance is perpetuated past the friends and family (or pre-seed ) phase of product conceiving and prototyping, the technical founder teams can face unexpected headwinds, often without realizing it.
While they may be able to deliver against product development milestones and attract engineers, they often miss the important early role of marketing leadership in methodically defining customer needs and market positioning. And they can undervalue critical strategic expertise in fundraising, specifically forming high-performance co-investor syndicates, and the not-so strategic, but necessary, experience of building professional back-office functions in accounting, legal and HR to lessen organizational hurdles as the company grows. Without strong business leadership, technical-only founder teams can sometimes get their product to market, but often without a company culture and infrastructure underneath, limiting their ability to scale. Later stage investors want to invest in companies and not just products.
- Operating plans hold teams accountable to their strategy, especially in the earliest stages when focus and related resource allocation are most precious.
Entrepreneurs are usually working against a simple task list of priorities: product definition and prototyping, customer research, incorporation documents, fundraising, founding team recruitment. Within the first year of raising a seed funds, typically $1M-$2M, we encourage them to move past task lists and into strategy-based execution mode. Specifically, to define 12-24 month strategic objectives, articulate the actions they are going to take to achieve these objectives and key assumptions on the revenue and resources required, and then build an underlying financial model to enable regular reporting on performance against forecast.
We have found that those teams that embrace this discipline as early as seed stage, are able to identify and correct against invalid market assumptions, better manage resources and anticipate financing needs, and create a culture of fact-based decision-making.
In the earliest seed stage of start-ups, we rarely see all of these attributes organically come together. When we do, they are almost always our best performing companies.
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