Super startups: What are the signs of success?
Analysing startups and predicting success is both an art and a science. So, what does the science say?
Whether you are an investor, an entrepreneur building up a company, a candidate considering a new job with a startup or just someone wanting to gain a better understanding of why innovation has moved away from established companies, being able to pinpoint success is a distinct advantage. Knowing what characterises the best is very useful.
About two years and a few hundred startup meetings ago, I wrote (this article) about what to look for when analysing startups. Since then, new figures have been published that show that two ideas favoured by entrepreneur Peter Thiel have turned out to be myths: that competition is for losers and that the pitch itself or the story about the company are vital to startup success.
Ever more authoritative examinations of startups keep appearing, and the experienced venture investor and analyst Ali Tamaseb has just published his Super Founders – what data reveals about million-dollar startups. This book is a 320-page survey based on more than 30,000 data points from thousands of startups, including 200 unicorns (startups valued at more than a billion US dollars) and experience provided by their approx. 500 entrepreneurs.
The method is simple. Tamaseb compares the 200 super-successes to the control group – every other startup. Based on this, correlations are extracted and, where causal relationships are unclear, entrepreneurs are interviewed in depth. Everyone from Peter Thiel to Jack Dorsey and Eric Yuan have contributed. The book clears up a slew of misunderstandings and myths – as well as tall tales – about who typically succeeds.
Below are many myths about successful companies and entrepreneurs. Until now, access to data has been limited and anecdotal evidence and tall tales abound. Everyone, for example, has heard about the entrepreneur who had an idea in college that no one else believed in, but who turned out to be right in the end? Or about the Harvard dropout who became the founder of Facebook? Or that without co-founders, startups get nowhere and all the best companies have at least two founders? This particular myth is such a strong and accepted truth that founders are hardly ever taken up by Y-combinator unless there are at least two.
What kind of background does the super-entrepreneur have?
Is it best to be young and have little to lose by risking everything or is it better to be older with long-standing professional experience? Are those with a low level of education and few learned and outdated thought patterns the ones who most often succeed – or do those with a high level of education and a wealth of professional expertise? What about top universities? Is that where the best teams come from? Stanford, Harvard, MIT and other top universities are often regarded as success machines. Are they overrepresented in the figures?
The figures show that none of these variables can be used to predict success. The age of entrepreneurs is very evenly distributed from 25 to 60, with most somewhere in the middle. A higher level of education is slightly better than a lower one, but where you studied is of very little importance. It does not even matter whether your university is among the top 100 in the world. It is, however, slightly surprising that super-entrepreneurs are on either end of the educational spectrum: they more often have a PhD and are also far more likely to have dropped out of higher education altogether.
Does a CEO of a tech startup need a technical background to succeed
No. This also appears to be a common myth. Managers of the best companies just as often come from a completely different background, and tech CEOs are not overrepresented, even in deep-tech companies. Managers of technology companies obviously have to understand technology, but it is more important that they are smart, resourceful generalists who are able to understand the entire spectrum of the challenges that a company faces. So smart people are good in general, but a tech specific background is not a requirement.
On average, successful entrepreneurs have 11 years of professional experience – but not from just anywhere.
Someone succeeding straight out of college is a rare occurrence and only happens in a very small number of cases. The vast majority of entrepreneurs have started up companies before, managed major projects or associations and taken part in starting-up everything from NGOs to political organisations. They have lived a life with an above-average creative drive and entrepreneurial spirit. They also rarely come from large established corporations or from major consultancy firms. Extremely few have climbed the less risky corporate ladder before. But they nearly always have experience.
Industry experience is a good thing, right?
This is not necessarily the case either. The most successful companies do not have founders with domain or industry expertise. It seems like it may even be an advantage not to have been set in too many established ways when going out to challenge established industries, as long as you have general experience of building and managing companies. Having a network, business understanding, managerial experience and as a rule solid ‘soft skills’ is more important.
The ability to learn quickly is far more crucial to success. Especially being able to fail fast. In short, general intelligence scores highly, while long-standing industry knowledge scores much lower.
Is it an advantage to have experienced the problem you’re trying to solve first-hand?
Not as a rule. A common story about the motivation of super-entrepreneurs is that superpowers come from personal experience. This is true sometimes, but the driver is much more often to be found elsewhere.
Hardly any of the billion-dollar companies in the survey have come about without many, frequent and radical changes happening along the way. These are numerous so-called ‘pivots’: the business model often ended up being something completely different compared to where it started. This point shows that the best entrepreneurs often cannot be too emotionally in love with their starting idea, the business model or the product. On the contrary: they need to learn quickly, let the data guide them and listen to the market, right until the market extracts the idea from the company – and pays well for it.
Going into major existing markets more often results in success than trying to create new ones.
60% of the successful companies entered and competed in major existing markets, 30% went into slightly smaller markets and only 10% created new or started in small markets. These new or small markets, are markets that had not existed yet and where there was no competition. PayPal is an example of a startup entering a nonexistent market, and under the management of Peter Thiel, they came up with the slogan: competition is for losers.
This means that the disruption of existing business models is more often a recipe for success than ‘blue ocean’ models. Creating new markets and solutions the world has not seen before is expensive, but there are important exceptions to this rule: 10% of the companies were in this category and naturally enough, these exceptions receive the most attention.
Is making ‘painkillers’ or ‘vitamins’ best?
Pain relief more often results in success than vitamin supplements do. This has long been a truism, and it still applies that painkillers are what you need to look for. 70% of the companies became successful by solving a major existing problem for a large target group –like launching a really efficient video conferencing system (Zoom)– and 30% became successful by creating ‘convenience’ or more joy and entertainment (Netflix). Especially those companies that manage to produce clearly differentiated products (Spotify), strong brands and, in doing so, change habits are successful.
Launching a startup requires an ecosystem
Although the trend is on the wane, approximately half of all successful American startups come from Silicon Valley. This is a solid overrepresentation and it is evidence of what anyone who has worked with startups knows: the more solid the ecosystem of investors, incubators, co-working, accelerators, entrepreneurial education systems, tools, soft funding and media representation is, the more people will attempt entrepreneurship and be successful. Those who are successful have a very strong tendency to share expertise and contribute to new attempts, causing things to eventually snowball exponentially. A bit like Oslo over the past decade; at first, things went very slowly, but now only a few months pass between unicorns such as Oda and Kahoot.
Competition is good and…
The vast majority of successes happen in large existing markets. Very few startups manage to set up completely new categories, and those that do gain traction from a great deal of attention (Tesla). Established competition is helpful, and 85% of successful startups have many competitors when they first launch. 50% of successful companies started up in a tough competitive environment compared to large established companies (such as Zoom).
Being a first mover is rarely important, it is often expensive and means that all of the investors, partners and customers sit on the fence for longer. Timing is important: it is not about being first, but about being nearest the tipping point. It is more important to be present when the market turns, or suddenly accelerates because the technology is mature enough; once demand is established, exponential growth takes off.
However, there is an important exception to the rule that competition is good: if your competitor is another startup that has already received solid funding, has well-known investors behind it and is further down the road, there is little to suggest that competition is good. Hardly any of the successful companies became so in competition with other startups that had already been solidly financed.
… networking effects are even better
Networking effects, taking the lead and pulling up the ladder behind you, making it expensive for the next person, is a winning recipe. The best scenario is when everyone wants to use a product precisely because everyone else is using it. This results in success much more often than when you have to compete on branding or technology alone. There are exceptions, however, e.g. hardware companies whose production processes and distribution channels are expensive to copy. High capex also means a high barrier for competitors – and although ‘hardware is hard’ for startups, it also has clear advantages. Many of the companies from StartupLab have been examples of this (Huddly, NoIsolation, Remarkable). ‘Software as a Service’ (SaaS) companies have become very popular with investors and have achieved high valuations. This is only true if growth is based on clear networking effects and is not based solely on high budgets for sales and marketing.
Venture capital arrives – and that is the key to success.
Most startup success stories in the past decades have received extensive investment from venture capital. Historically, as well as currently, venture capital in Norway has not been the standard tool used to build companies. Developments in the United States have been approx. 10-15 years ahead of Norway where – with some honest exceptions and despite access to a great deal of capital – hardly any solid venture capital environments are found. Because startups have become innovation drivers, venture capital is also coming to Norway, both through an increasing number of foreign investors (Softbank) and more Norwegian and Nordic investors (in 2019 I wrote this article –Venture is coming).
Even in the United States, the total venture capital industry of approx. USD 450 billion, which makes up less than just one of the big private equity funds. But almost without exception, venture capital is still what is generating success. Of the companies that have succeeded in the past ten years, 90% were financed by venture capital. They have had a great deal of money from the start, in many rounds, have gone from seed to Series A funding within four years and have been boosted by capital from well-known venture capital funds.
10% are so-called ‘boot-strapped’ and have built a product at hardly any cost. Among these 10% are also some self-financed companies created by entrepreneurs who have succeeded before and are reinvesting their own money.
Venture capital investors and angels base their calculations on big upsides and big risk, and the slightly counterintuitive approach where only a few companies in the portfolio are the ones that will make the big difference. That kind of approach is not something Norwegian capital environments are used to and neither are Norwegian business media (with Shifter being the exception).
With increasing success comes even more accessible venture financing, and more and more large capital environments are getting the point and moving in on earlier phases. In order to be able to participate on the way up, gain a place at the cap table and benefit from the best deals in later phases, you have to come in early. For entrepreneurs, the rule of thumb for success is first to obtain the angel investment required. After that, your chance of success increases with your ability to attract the bigger and more well-known funds. In addition to the skills, capital and networks they offer, funds also create their own gravity.
Another interesting insight provided by the figures is that entrepreneurs who have themselves been angels or venture capital investors are more often successful. The opposite is also true. Investors who have previously had entrepreneurs on their team do better. They have experience of assessing, recognising and understanding success.
Pandemics, economic decline and social insecurity generate more successes
True. It has been relatively well documented – although it seems counterintuitive – throughout industrial history that declines and crises, relatively speaking, generate more new successes. Economic downturns, stock market crashes, dot-com bubbles and most recently a global pandemic have laid the foundations for many of the biggest new technology companies. Those who invest during a crisis, and often run fast when the rest have stopped, have historically had a greater chance of success.
The company pitch is important, but not that important
The survey of the 200 companies, and interviews with their founders, show that the pitch itself is less important than many believe. A surprisingly large proportion of successful entrepreneurs had never even made a pitch. They created ‘traction’ by making a superior product, and, in partnership with solid teams, letting it speak for itself. Possessing the general expertise to solve the wide range of problems that arise in the early stages, documented experience from leading companies and excellent abilities to understand the problem and the target group proved to be far more important than fine-tuning the pitch. Communicating what you do is obviously important, but spending time making the product work is far more vital than convincing others with a story about the product. This also applies when recruiting talent, partners and experienced investors. success.
Being on the right side of the future
Areas experiencing a rapid pace of change and the areas in which that change is accelerating, provide a good indication of where the world is heading. Sustainability goals have long been in place as a backdrop, and right now it seems that many events are converging. More and more capital is getting a new mandate, new up-coming regulations, and even the oil industry’s global interest organisation is arguing for investments in projects other than oil exploration. Some of the world’s fastest growing markets are currently being created. Whether they are in climate, energy, oceans, food, health, education or mobility they are all technologically driven by social innovation.
The figures show that companies that solve big problems, and hit the mark, succeed more often. With a global awakening that has gained additional momentum during the pandemic, it is safe to say that having a strategy for sustainability is no longer enough. The big winners in the future will be companies that have sustainability at the very core of their business model. And impact investments, investments where profit comes from the ability to solve big problems, are becoming more mainstream. This is why these areas will also be seeing new success stories in the next ten years. In Norway, climate, energy and ocean-related enterprises are positioned well.
Man or machine
At Katapult, we analyse a couple thousand impact tech companies a year and have looked at a little more than 12,000 since we first started. Much of that work is about analysing large volumes of data on companies that require investment. Access to more and more data, from more and more companies, from more and more sources, also makes it possible for machines to develop large segments of the analysis. With the availability of data, we are able to apply machine learning to develop and improve the way in which we identify those who will succeed. Right now we are developing a major analytical tool with the AI superheroes at Bakken & Bekk, and Seedstars, that will allow us to drill down into our insights and make even more accurate investments.
With solid support from European research funds, the goal is to learn even more rapidly, identify change faster and invest even better. This means that we will be able to contribute to solving even more of the world’s challenges. So far, we have about 130 investments in our portfolio, a number that will multiply over the next decade. This will not be possible without the help of machines, combined with highly skilled people with analytical expertise and an understanding of who succeeds.
The time where you could invest based on a “gut feeling,” belief in the product or a vague perception that the team was good, is over. The investors who succeed in the future must also be able to perform large and complicated analyses of companies quickly. The big venture capital companies have built up programs in recent years (such as EQT’s Motherbrain), which will now also be available to smaller players like Raized.ai. With the best Norwegian AI environments behind us, we believe that Norway can lead the way in this area too and build an even better eco-system for new companies.
Understanding entrepreneurship is understanding social trends
In summary, if you are investing in the future, considering a new job, founding a new company or just want to achieve a better understanding of why innovation has moved from large companies to startups, you need to know what characterises the best. Understanding developments in entrepreneurship and the role of technology has become increasingly important in understanding developments in society – as well as rapid change – a skill almost everyone needs.
In this article, I have reviewed what we know characterises those who have succeeded and what the figures say – and the material showcases a variable that goes beyond all the others:
The figures show very clearly that the best preparation for starting a successful company is to start a company.
Practice is the best preparation for success. Those who have done so before have used their ‘entrepreneurship gene’ to take the initiative, solve problems, build products, create associations, run campaigns, participate in politics and actively move the world forward. They succeed more often than the rest. Even when previous projects have not succeeded. Among those who succeed, there are almost no first-time entrepreneurs, and even the first-time entrepreneurs have a long list of entrepreneurial activities and projects behind them.