The bloody truth about the startup fairytale

Great White Shark, preditor, threat, risk,
A shark attack is rare, but not as rare as a successful startup business.

 

Sharks kill five people every year. Five out of 7.4billion (and counting). It’s hardly a significant proportion, is it?

 

In fact, it’s so unusual, every time a shark attack is reported anywhere in the world it becomes global news. It’s a big story and people are fascinated.

 

No-one cares that billions of people go swimming every year. There are billions of instances of that happening, it’s not unusual. But a shark attack… Wow.

 

That’s just how the news works. There must be some intrigue. There must be a break in the usual narrative for it to be informative and compelling. It must be uncommon to be newsworthy.

 

The misconception is that this only happens with ‘bad news’. That somehow something is only newsworthy if it is gruesome or negative – like a shark attack.

 

Wrong.

 

Introducing the fairytale of the successful startup

 

A quick search for “startups” and a scan through social media and online news channels paints a wonderful world of free stuff, unicorns and angels (fairytale anyone?).

 

We read inspirational articles in entrepreneurial magazines and quotes from those who have ‘made it’ telling us to: “dream big”, “be the difference” and “reach for the sky” … Okay, that last one might be Woody from Toy Story, but you get the idea.

 

This is news. It’s a break from the usual narrative. It’s a shark attack.

 

700,000 new startups in the UK every year

 

There are almost 700,000 new startups created in the UK every year (and that number is growing by the way). There is more than £1.5billion in seed funding invested into early stage startups by angel networks every year. The news is filled with rousing stories about how awesome it is to be an entrepreneur, how fun and exciting startupland is and how much funding is available to new businesses. The streets are lined with gold, don’t ya know?

 

Why no stories about startup failure? Why aren’t we hearing about those who go bust or don’t make it past that first year of happy-clappy startup school with the free beer and seed investment?

 

No-one cares

 

There are hundreds of thousands of them every year. It is so commonplace it’s not a news story. We don’t talk about it because it’s mundane – it’s the norm.

 

So WTF is happening to those 700,000 new startups and that £1.5billion angel investment every year? Where are the 3.5million businesses that have been created in the UK since 2011?

 

What are we doing?

 

I’m calling time on startup fairytales. We need to start learning the lessons of those serial catastrophic failures. We need to shout from the rooftops about what is going wrong. Why are 77% of seed-funded businesses not reaching Series A?

 

Sure, celebrate the successes, but understand the context in which they are successful. If the successes are the news, then there’s a shitload of work still to be done.

 

If you’re an entrepreneur on the front line of startupland right now, enjoying your new-found flexibility, cosy co-working community, the buzz of chasing seed investment and everyone telling you how brave you are: beware.

 

I used the analogy of a shark attack earlier so, keeping with the theme, if you are unfortunate enough to be one of the 90-odd people attacked by a shark each year, you still have a 90% chance of surviving.

 

Yep. Statistically speaking, you have a better chance of surviving a shark attack than you do getting your startup business from seed round to Series A.

 

Not such a fairytale after all, eh?

 

So, what’s the answer? Create fewer startups? Stem the tsunami of startup accelerators and business incubators flooding the market?

 

Nope. Of course not. We are experiencing a startup revolution. The UK is more startup friendly than it has been for a long time. Close to three-quarters of a million new businesses are being created every year and the vast majority are supported, in some shape or form, by the thousands of startup accelerators and support systems popping up all over the country.

 

That’s a good thing. No, that’s a great thing!

 

But therein lies the rub. We got so excited with all the ‘startup stuff’ that we forgot we needed to build businesses.

 

The average UK business accelerator programme now runs for just 21 weeks. Twenty-one weeks! That’s great for knocking startups into shape with a business model and securing seed funding, but 21 weeks is nowhere near long enough to build a sustainable business.

 

So what happens? More than 60% of those fresh-faced, inspired and energised startups go pop. Business survival rates are as poor (in fact, they are marginally poorer with ONS figures for 2006 recording five-year survival rates at 45%) than before our startup revolution began.

 

That’s simply not good enough.

 

We need to recognise that building a business takes time. Finding the right investor and nurturing relationships with staff and suppliers (not forgetting customers) takes time. By all means “move fast and break stuff”, but 21 weeks is even pushing it for Zuckerberg’s Facebook.

 

Not for startups who get excited by seed investment

 

We created Moonshot to partner with entrepreneurs interested in building multimillion pound ventures. Not startups who get excited by seed investment.

 

Our partnership is non-exclusive, we don’t insist our business builders only work with us and in fact many of our Moonshot businesses started out in one of the UK’s fantastic accelerator programmes. However, we are there to slingshot them from ‘accelerator graduation’ to multimillion pound exit. That’s what we do.

 

If you’re an entrepreneur on the front line of startupland right now, enjoying your new-found flexibility, cosy co-working community, the buzz of chasing seed investment and checking in with your awesome mentor: take heed.

 

You might feel comfortable in the tepid shallow water, but soon you’re going to take your seed funding and leave the kiddy pool to venture out into the cold, expansive ocean.

 

Are you prepared for what’s coming?

 

Altitude sickness: are you prepared to scale?

challenge, scale, altitude, grow

 

Clint Eastwood starred in the Eiger Sanction many years ago.  It’s a pretty good movie and although not recent, it is worth tracking down.  In the movie, Eastwood is gearing up for a big climb.  One of the biggest – The Eiger. A great deal of the movie focuses on him getting prepared for the climb.  He has to get physically fit.  This involves exercise and lots of running.  He has to re-skill himself in the art of knots and buckles and all things mountaineering.  And finally he has to acclimatise himself as the air at that high altitude is thin and he needs to be able to operate there with his mind and body under stress.  It’s a bit like growing or scaling a business…

 

doomed from the get go

 

If UK startup founders don’t prepare to climb the Eiger, then they are doomed from the get go.  If you follow my blog posts you will know I have been banging on about why startups founders are not growing from Corbett to Munro to the Eigers of this world.  It’s short-termism and a lack of understanding what it takes to be fully prepared for what is ahead. The evidence is there to see.  Only a handful of founders are actually making it to next round investments, breakevens or big milestones. There are a number of reasons for this, but let’s focus on a couple.

 

seasoned investors actually wish startup founders would ask for more cash

 

A big number, in fact a huge number of startup founders do not understand what burn rate means.  Clint Eastwood did.  That’s why he trained hard to skill up.  It’s so easy to get carried away spending cash, trying new things and hiring in new people, without truly understanding the full monthly costs of these and how they impact the bottom line.  I have witnessed many startup founders who raise a wad of cash – say £150,000 – then have no clear path up the hill.  The have perhaps mugged off a few investors telling them that the cash will last for 18 months. But the reality is that to scale from Corbett to Munro, takes a lot more than they bargained for.  I’ve heard so many times from seasoned investors that they actually wish startup founders would ask for more cash and be more realistic.

 

founders are actually terrified of what is next and hide in their own areas of strength

 

Secondly, and perhaps one that many of you may find a little perplexing, is that many founders are actually the reason the startup fails to grow and make it to the Eiger.  Who would have thought it, eh?  The founder is the baddie who actually kills off the trek up the hill half way there.  Why does this happen?  Much of the time it not the business idea or the product that is validated and created.  It’s the founder who cannot keep up.  Keep up with the pace of carnage that is and will take place within the startup as it begins to scale.  Added complexity, new personalities in the team, dealing with investors and lacking that flexible ambidextrous mindset that can move between science, data and analytics to gut feel, instinct and intuition, causes meltdown and an imploding of what could be pretty special.  Many founders are actually terrified of what is next and hide in their own areas of strength to avoid facing the facts that they are not coping or do not want to prepare for the big changes taking place and ahead.

 

It’s a big old hill

 

It’s easy to work with a single spreadsheet that the founder is comfortable with.  It’s easy to micro-manage a small team of two or three as a founder gets started.  But the rules of the game and the toughness of the climb kick in when new altitudes need to be reached as the startup becomes more scale ready.  This is when our UK founders require to take a leaf out of Clint Eastwood’s Eiger sanction preparation.  It’s a big old hill and it takes mindset preparation, teamwork and a willingness to get uncomfortable.

 

I think we need to be a bit more honest and dare I say it – forthright – in how we mentor and prepare new and existing founders for the Eiger.  Otherwise, we do them no favours when they get altitude sickness.

 

It’s time female founders received a level playing field

We laugh at how ridiculous ads like this seem nowadays, but have things really changed?

 

 

I recently interviewed a woman who was running a new startup and asked her about her capacity to be “all in” as running a new business is all-encompassing.

 

To illustrate the point, I rather smugly pointed out that I had been up since 6am and hadn’t left my laptop since then, as I was so busy.  I further added that I would be here until 7pm, still tapping away on the keys.

 

How silly did I feel?

 

The female startup owner then stated with some conviction, I’ve also been up since 6am, I am still here working in a serviced office space and I have dealt with two children under five in the meantime.  How silly did I feel?  But, I was delighted with her answer as with that attitude she has an improved chance of making in startupland. But, why is there bias or perceived bias in startupland and is it harder for female founders or female entrepreneurs to get ahead?

 

I started to look around and to be frank the evidence is all plain to see and paints a picture.  Babson College, consistently ranked number one for entrepreneurship in the USA , conducted a long term study on venture funding and whether or not females were getting an equal slice of the cake.   Well, how about this for a statistic!

 

“For the 10-year period from 1988 to 1998, women-led businesses received only 3.5% of the total venture capital invested in private companies (290 women-led ventures received investment compared to 4016 men-led ventures in the same period).”

 

It would appear that historically startupland favours the boys and while the situation is improving, there is still a bias that prevents female founders or teams with females in them from getting ahead.  And with all the news coming out of Silicon Valley around sexual harassment, we begin to see what has been happening.

 

Only last month, it became clear that even those running programmes in startupland were not averse to using their positions of power – as men – in, well, not a nice way.  The accelerator, 500 startups, is big in the USA and gets lots of media attention.  It appears to have been very successful and I have used video footage from it in talks I have done while at Entrepreneurial Spark.  Many founders and startups worked hard to get on to this programme led by Dave McClure.  McClure has been idolised by many for the work he does at 500 startups.  But, McClure has fallen from grace as he has been outed as not being a very nice chap when it came to females around him on his programmes.  In his own words:

“I made advances towards multiple women in work related situations, where it was clearly inappropriate….I put people in compromising and inappropriate situations.”

 

He has since been removed from running the 500 startups.  Quite right too.

 

So, what is to be done to change this and indeed make sure it doesn’t continue to manifest itself in startupland? Especially, as more and more female led businesses and those with females in the leadership teams emerge.

 

it should not need more females as investors to have more females making it in startupland

 

Well the answer is that it will not happen overnight.  As the complexion of angel syndicates and VC funds changes to include more females, then this will help.  But, it should not need more females as investors to have more females making it in startupland.  What it needs, is us blokes to stop thinking like blokes and stereotyping females as less capable than men. Couples have families – not women.  I hear it all the time – she’s about to start a family or she’s having a baby. Really?  What we mean to say is they are starting a family and they are having a baby – him and her or indeed her and her.

 

Don’t let the old boys networks and golf club anachronistic thinking colour your judgements

 

As I interview many new founders over the next few months, I will be even more aware of any gender bias that goes through my head. I consider myself  fair minded and to be honest gender does not really figure in my conscious thoughts when making decisions on female founders.  But it may be in the sub-conscious that all us blokes need to watch out .  Don’t let the old boys networks and golf club anachronistic thinking colour your judgements.

 

Its 2017 and it’s time to encourage more female founders into startupland and make sure they get a level playing field.

Listen to your customers – don’t get trapped on Fantasy Island

Corkscrew roller coaster

 

Boss, the plane, the plane!!  Yes it was these immortal words from Herve Villechaize aka Tattoo to Mr Roark on the programme – Fantasy Island – that I always knew would lead to a good story.

 

At a luxurious, but remote tropical island, the enigmatic Mr Roarke would make the dreams and fantasies of well heeled guests come true.  Money was no barrier and what the guests thought would be a terrific fantasy on many occasion turned out to be anything but.  Usually, as with all fantasies they had not thought it all through, so different circumstances and outcomes would pop up and surprise them.  This then got me thinking about people who start businesses from a laptop and a spreadsheet and create their own fantasies.

 

this is where the conversation became a little strained

 

I once had a guy  – who we will call an ‘entrepreneur’ as he told me he was one so I had to believe him – tell me his business was valued at £20 million.  Great news I thought as I studied him.  Can you tell me all about it and how many staff you have.  Tell me about the profit you make and your plans for growth.  And this is where the conversation became a little strained.

 

He pulled out his MacBook Pro and opened it up, where I was presented with a spreadsheet.  Now, I’m not a big spreadsheet fan, but I sat and had a good look at it all the same.  The spreadsheet outlined a £4M profit in year three.  It showed explosive growth in customers using his mobile App.  I must say it all looked good and most plausible on a laptop screen.  But, when I asked him some questions about the £4M profit, I ended up with more and more questions.

 

With not one customer at that time, this ‘entrepreneur’ had created his very own fantasy that would have fitted well into an episode of Fantasy Island.  He was convinced beyond reason that his early adopter customers would jump at the chance to use the App and that the money would tumble in thereafter.  I could see Mr Roarke and Tattoo shaking their heads behind the scenes as this fantasist in front of me was living in a world of make believe.  I suggested that he go out to a friend of mine who would be a model customer for his App.

 

the grim reality of facing a customer asking hard questions

 

A few days later I got two rather interesting phone calls.  One from my colleague who told me that the ‘entrepreneur’ was deluding himself and one from the ‘entrepreneur’ telling me that my colleague had been rude and did not understand how the App worked, so dismissed it.  Oh dear, I thought, the grim reality of facing a customer asking hard questions of your wonderful spreadsheet that is in fact, a fairy story or fable.  Suffice to say, the ‘entrepreneur’ with the £4M profit business in year three is no longer and in fact had disappeared into a black hole, despite me suggesting that he keep talking to customers to get more feedback and insight.

 

the best way is to co-create the business with customers and be prepared to pivot

 

This approach is typical of many who startup and get seduced by spreadsheet madness.  A zero here and there is easy to add into the spreadsheet and this is where it moves from reality to fantasy.  I’m not going to stifle anyone who wants to start a new business – far from it.  But, I would suggest from experience that the best way to do this is to co-create the business with customers and be prepared to pivot and swap out staff.  As I tell people who apply for the Moonshot Academy, there is no point in starting out with the wrong people taking up precious seats in the spaceship.  It only adds to the load.

 

Co-Creation with real people who you believe will buy your products really helps with product/market fit.  It is very different from the Fantasy Island approach on a spreadsheet, where Mr Roarke and Tattoo will allow you to live out your fantasy of being an entrepreneur for the day.  There is nothing wrong with talking to people about your idea.  Trust me it is where you gather your best insight…