I’ve worked for two start up companies in my career. Both followed a fairly standard model and both made a relatively rapid transition for a handful of employees to a more substantial workforce. I feel both had good products, although I wouldn’t say they were world changers. Both having been running for several years as of the time of writing. Unfortunately they both have something else in common too, they are both dying.
I spent several years working at both of these companies but this was in the past. Despite this I still had the occasional inkling to check in on them and see how they were doing. I’d honestly liked to have seen both do well. The reality of the start up market, irrespective of the current economic conditions, is that more will fail than succeed and this is certainly borne out in my experience of start ups.
There is another aspect that both these companies shared that I feel has had an impact on their impending failure. They were both oriented around the “big sell”. Both were looking for deals in the tens of thousands, hundreds of thousands or millions of pounds/dollars region. Both were promoting big ticket items and the only market for these were big companies.
Unfortunately, as Joel Spolsky points out in his Camels And Rubber Duckies essay this is a hard market to sell into. To successfully sell into this market requires substantial marketing and sales resources and takes months of schmoozing with executives at various levels in the customers company. If it all works out this can be a very lucrative sale with one or two of these big deals often being enough to determine the success of a company. Unfortunately most of the time these efforts are delayed to the point of frustration or simply never come to fruition.
The effort involved in assembling a company to chase these kinds of targets is very substantial. I’d already mentioned that both of the start ups I’d worked for had scaled up their staff relatively quickly to meet a preceived demand that simply never materialized for them. Such an influx of resources has a cost associated with it and I know that both these companies burned through millions during their lifetimes. The kind of time and money required to pull a company like this together means that it’s dependent on a number of things, not least of which are…
- Having access to levels of financing required.
- Confidence that the product has a reasonable chance of success.
There’s a number of things about these two points that mean the majority of people will never be in a position to be a founder in a big ticket item company. Firstly, I don’t personally know anyone that has the kind of money required to back one of these companies. Sure, there are banks and venture capitalists out there that can provide this kind of cash but this then connects to the second point. As the person with the idea you may have a great deal of confidence in it but that isn’t necessarily going to be shared by the people with the money. In fact, to get access to the cash, you’re going to have to divert substantial effort and resources into putting together a pitch to convince the finance people that you’re worth the gamble. The more money you need up front, the more difficult this becomes.
So, given the statistics on start up failure rates and the high cost of running such a business in terms of financing and resources, why would you want to start a business like this? Well, if you’re in the position I’m in (which I suspect most people are), you wouldn’t. That is to say, if you don’t have a very large sum of disposable cash ready to hand and nothing better to do with your time then this kind of company doesn’t represent a good investment for you.
Luckily, with regards to the software world, there is an alternative available. Although the term Web 2.0 seems to have fallen from grace the concepts and practices remain valid. Bootstrapping a new software company for a small amount of money is a viable alternative in the current times. The need to commit a large amount of time is still part of the deal but it’s possible to bring an idea to fruition without hiring the number of staff that were previously thrown at these kinds of efforts. Also, with overheads kept to an absolute minimum it’s possible to move away from the big ticket item approach and offer the software for a much lower cost. Rather than relying on getting one or two huge sales to survive and prosper you can work towards many smaller ones. If this article has even a fraction of truth in it, then this approach could also be a very lucrative business opportunity indeed.
Even with this approach we’d still all be subject to the start up failure rates referred to above. Yet there are numerous stories of the early failures of people who’ve eventually navigated one or more businesses to success. The one element common to all of these is that they say you have to pick yourself up, learn the lessons from the failure and try again. This is a difficult thing to do where the failed venture has just consumed all of your resources and future ventures are also front loaded on their resource requirements. With low overhead start ups this “try, try and try again” model becomes one that’s viable for a wider range of potential founders.