For every Cinderella story about a new business that has managed to defy the odds by demonstrating strong revenue and healthy growth, there are dozens more about those who have crashed and burned.
The very nature of the business world makes startups a risky venture, but many companies have managed to prove they have what it takes to succeed.
Companies like Uber, Pandora, Apple and Amazon all began as startups with ideas that seemed crazy on the surface ultimately driving their success. Understanding just what a startup is and what measures can foster success rather than failure can help budding entrepreneurs avoid potential pitfalls.
Just What is a Startup?
There isn’t a simple answer to this question. In fact, there isn’t a single, neat definition of a startup that investors and entrepreneurs agree on.
Most agree a “startup” is loosely defined by its growth, revenue, age, profitability or stability. Others say it’s a state of mind, a willingness to make decisions quickly and turn on a dime. Still others define startups as organizations on a mission to create a repeatable and scalable business model.
TechCrunch’s Alex Wilhelm has put forth a quantifiable rule to measure startups. He proposes a startup should be defined by the 50, 100 or 500 rule. Under this rule, companies that have $50 million revenue run rates (using current revenue numbers to project future financial performance), 100 or more employees and worth $500 million or more on paper are no longer startups. Everything else would fall into the startup category.
Business Insider’s Alyson Shontell takes a different approach in defining startups, focusing on the founders behind the ventures. She calls these ventures emotional roller coasters driven by “an often very bright, somewhat crazy person.” This person drains his or her own bank account in pursuit of a way to “change the world” with a promise of emotional and financial rewards down the line.
No matter how they are defined, startups are a driving force in the U.S. economy. However, there is some decline on the startup front. The U.S. Bureau of Labor Statistics reported a steep decrease in the number of jobs created by companies less than a year old between 1994 and 2015. In 1994, the number of jobs topped out at 4.1 million, by 2015 the number dropped to 3 million.
While the BLS reported that startups took a big hit during the recent Great Recession, the 2016 Kauffman Index of Startup Activity shows a rebound is under way. That report indicated the rate of new entrepreneurs was up by more than 15% from two years prior, with an estimated 330 adults out of every 100,000 becoming entrepreneurs each month over the past year.
What can Influence Startup Success?
Aside from having a product or service idea that people will buy into, there are some factors related to startup success on a global level. Venture firm First Round Capital identified the following themes after analyzing 10 years of data from 300 companies that received investment funding:
- Gender of the Founder – First Round Capital discovered that female-founded startups tend to outperform those launched by men. Investments in companies with at least one female founder performed 63% better than investments in companies with all-male teams.
- Age of Entrepreneurs – Companies founded by younger people had a higher degree of success. The average age of entrepreneurs is 40, but the average age of founders responsible for Google, Microsoft, Facebook and Apple is 23. First Round’s analysis showed overall that companies with founding teams with an average age younger than 25 tended to perform about 30% above average.
- Education – Having a founding member who attended a top-ranked school also seems to make a difference. First Round’s analysis showed that about 38% of companies surveyed had at least one founder who went to an elite school (e.g., Harvard, Yale, MIT, Stanford); those companies performed about 220% better than others. However, education only goes so far, a study by City University London and Case Western Reserve University found. Your own talents and abilities may also account for 37% to 48% of successful entrepreneurial ventures.
- Former Employer “Halo Effect” – Capitalizing on the “halo effect” by creating teams with at least one founder from a major player, such as Twitter, Amazon, Google or Microsoft can make a difference; those teams performed 160% better than other startups.
- Repeat Founders – Investors gave people who have founded other ventures a 50% higher valuation than other companies.
- Location of the Startup – Companies founded outside major tech hubs such as New York and the San Francisco performed as well as companies based in those areas. In fact, companies outside of the tech hubs performed about 1.3% better.
- Value of Teams – Startups with more than one founder working as a team tended to perform 163% better than founders going solo.
However, the above factors don’t necessarily apply to all successful startups or their founders. Gallup’s entrepreneurship research identified other qualities of talented entrepreneurs:
- The ability to clearly articulate competitive advantage
- The ability to make decisions about product/service development and pricing that takes into account their customers
- A willingness to put aside time for planning
- A desire to align employees’ strengths with their roles to maximize engagement and performance
Business startups are risky ventures by their very nature, but the right combination of drive, expertise and planning can transform ideas into financial success.