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.

 

Short-termism is killing startups – it’s time we grow up

 

It’s a fact… not enough businesses are making it in the startup world.  There are plenty starting in all sectors with great ideas.  There are a shed load of incubators and accelerators, support vehicles and consultants, but still only 33% of startups who get initial seed funding are making it to Series A rounds.  It should be much higher – right?

 

So, what is the problem?  Why are UK startups not cutting the mustard?  Why are we not creating more Moonshoters? It’s staring us right in face.

 

It’s called Short-Termism.

 

Only 1 in 10 startups that obtain seed funding go on to secure later stage investment

 

Having worked with thousands of startup founders who work hard to secure that golden egg of £150,000 in a first round of funding, I am amazed at the small, in fact tiny proportion, who then go on to raise the next round and grow.  I can honestly count on my two hands those who have nailed next stage finance.  It gets worse… This is backed up by recent research that shows that 1 in 10 firms that obtain seed funding in the UK go on to receive later stage fourth round investment, compared with nearly a quarter in the USA.

 

startups were formed at a record pace of 80 an hour last year

 

Entrepreneurship has become quite trendy. Having co-founded Entrepreneurial Spark in the UK, five years ago [I have now moved on from this], I see there is a huge appetite for people starting businesses.  So much so that NatWest has powered Entrepreneurial Spark to 13 hubs in the UK, each of them rammed with hopeful founders.  This, like many programmes out there is to be applauded, especially NatWest, who are putting their money where their mouth is.  Giving new start founders the opportunity to just crack on is a good thing.  Techstars, The Bakery and so many other startup outfits all create a healthy ecosystem.  StartUpBritain has completed research that shows startups were formed at a record pace of 80 an hour last year. Wow!  So, how is short-termism killing off so many of them?

 

The startup surge has created a race to the bottom

 

Imagine if you will, an architect designing a house.  She will ensure the foundations are solid and all the load bearing beams are built to cope, while plugging in all the services that the house needs to become a home (eg electricity and sewerage).  The structure will be built to a specification that is built to last.  It is built not for fun or to be sold, but to last.  In short, the architect is building for the long term with all that entails: multiple owners, weathering and wear and tear.  Unfortunately, our startup founders in the UK are not thinking like the architect.  We have too many building their ventures as quickly as they can – to sell. This is key in determining why so many are failing to make it to round two and three of investment.  Along with the surge in startup activity, there has been a race to the bottom in making investment the Holy Grail.

 

create more business builders than startups

 

It’s time to re-think and re-imagine how we build new start ventures and founders who can think more long term.  It’s time to create more business builders than startups that are not built for short term investment.  “Business Building” may sound a bit old hat and not so sexy.  But alas, it is what it is and while startup is a genre or movement, Business Building is the new black!  It’s time to focus on post investment execution, albeit the pre-investment validation was sound.

 

Once the funding is in, the real work begins

 

Execution is where the battle is won or lost.  Once the funding is in, the real work begins and you have to make it work.  The problem is we are not teaching our startup founders how to run a business, how to execute.  A startup is basically a bunch of capabilities and an idea all crashed together like mashed avocado.  But founders needs to flip out of fund raising mode and put on their big boy pants and run an operation to a point where it has some operating rhythm.  But, we have a generation of founders who cannot get to grips with this, not grasp how significant this is to them living or dying.  It’s a failure that can be avoided with some real thought and action.

 

Investors are also looking for more rounded founders

 

Short-termism is a mindset that we all need to bring to life for new founders who are in “build my startup to get investment” mode.  Investors are also looking for more rounded founders who they believe will make it, at least to the next round.  They of all people want to see their investments succeed.  So, whether you are starting, have started or are working with a startup, think about the founder and her potential to skill up to run a business and not simply get a badge for bringing in seed investment at the SEIS cap.

 

It’s time for our startups to grow up.