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?

 

Avoiding the pitfalls that lead to zombification

zombie, zombification, startup zombies

 

Apparently Brad Pitt filmed a movie in Glasgow all about zombies.

 

Many of the streets around the city centre were renamed and given American-style street signs so it looked like a typical US city centre.

 

Zombification in the start-up scene

 

I’m not a fan of zombie movies, so I cannot say I’ve seen this particular film. But, as I speak with numerous UK start-ups and many angel investors, there would appear to be a fair bit of “zombie-ism” or “zombification” taking place in the start-up scene.
There is nothing better than a pitch from an entrepreneur that blows you away. It should be well rehearsed, but not robot like.

It should cover a few of the staple bases, but not be too technical. It should be delivered in a professional and business-like fashion to show respect to the audience and potential investors. There should, in short, be enough to hook an investor into wanting to find out more.

 

Then, if an entrepreneur communicates well with investors and completes some due diligence, a seed investment of say £150,000 can land. It seems £150,000 is a nice number as it dovetails well with the Seed Enterprise Investment Scheme, where up to 50 per cent of an investment made in a qualifying company can be offset against a private investor’s tax burden.

 

So, whether the start-up entrepreneur needs 150 grand, the magical pitch number is – yes you’ve guessed it – £150,000. So, in it goes and the entrepreneur looks at her bank account and her breath is taken away.

 

Yippee!

 

My word, after all that pitching and diligence, HMRC work and business plan formation, she now has someone else’s cash to run her start-up and shoot for the moon. Yippee!

 

But then something happens. Reality kicks in…

 

But then something happens. Reality kicks in and the entrepreneur has to do what she said she would do. She has to hire at least one or two key members of staff. She has to negotiate on contracts, terms, incentives, share options and the like. Then there is the new workplace pension and setting up everything with HMRC and her accountants on payroll, etc.

 

The business of running the business

 

Of course, there will be some form of premises needed to rally the team and stick on the website. There may be the formation of a board and the appointment of non-executive directors as specified by the investors. And still there is the business of running the business. It is here that the zombification process starts to form.

 

focus on hitting certain agreed metrics and targets

 

While the entrepreneur is running around doing admin-type functions to make the business legal and work, she also has to focus on hitting certain agreed metrics and targets. Metrics and targets that she used to convince investors to swell her bank account with coin. But, alas this is really and truly the hard bit. She is on her own and there is no turning back.

 

Dead in five months!

 

She promised a bumper payday and she has to deliver. And the next 12 weeks are torture. As she works out where and how to spend her money to hit targets, get traction, produce sales and attracts users or customers, her cash pile starts to reduce and the brutal reality kicks in… “I could be dead in five months!”

 

Like a zombie

 

So what does she do? Well, she starts to act like a zombie as the zombification process sets in. Her communication with her investors tails off. She does not share her frustrations, insecurities, fears and worries with her team. She starts to feel all alone and even lonelier as she knows that she should ask for help, but cannot work out how to.

 

Her thought processes turn to mash and while there is still some glimmer of hope that she can pull it all back on track, she cannot face the reality that in essence, she has no idea how to run a business. In effect, she is already a zombie and will not get second-stage funding.

 

My shout out to anyone who has raised investment is make sure you avoid zombification. Enlist the expertise of your investors, mentors and anyone who you think has a brain. Be honest and communicate. Brad Pitt won’t always be around to save the day.

 

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.

 

Startup life lessons from Arsenal football club

 

Ok, here’s a wee exercise for you. Close your eyes, take a deep breath and tell me the first word that comes to mind when I say “Arsenal football club”.

 

Now whilst I’ve been a Gooner from a young age, there’s no way I think many of your words are positive in light of current events. Lifeless, gutless, pathetic or embarrassing are all adjectives I’ve heard around London over the last fortnight.

 

So what has gone wrong at a club with a world class stadium, unlimited finance and a rich and vibrant history?

 

Profit-itis. The same virus infecting startups all over the country

 

Arsenal have contracted a virus. Pure and simple. Sadly for the UK, this is the same virus infecting startups all over the country. Profit-itis.

 

Being a startup is great, you have access to trendy co-working spaces, free beer on tap and all the digital content you could ever desire. You are a trail blazer, you are your own boss and you will set this market alight and write your own legacy. Investors are throwing themselves at you, money is growing on trees and you are the lord of startupland!

 

your vision begins to narrow

 

You take on your first £150k investment and something strange happens, your vision begins to narrow, you close your eyes and all you can see is £ signs. Creativity levels slowly begin to drain as voices begin whispering phrases in your ear like “payback period” and “cost reduction”.

 

You are captain of this ship

 

Investors want a return on their investment, and rightly so. Their views should be listened to and can often add invaluable advice. However, do not bend over. Do not pander to their every whim and request. It’s their money, yes, but they have invested in your vision. You are captain of this ship but unlike you, they will relentlessly drive for an increased ROI, maximum EBITDA & reduced COGS. No thanks.

 

they strove to be extraordinary and blow the competition away

 

The Arsenal team of invincibles had no such problem. They were not content with merely aiming to win the league, they strove to be extraordinary and blow the competition away. They did not want to just win and increase the bottom line, they wanted to win in style. A class above the rest. It’s this relentless drive to always be extraordinary that set them and Wenger apart, to inspire those around them to raise their game and become better.

 

As soon as you begin to settle for mediocrity, disaster is never far behind

 

Profititis has the opposite effect. Money becomes an all-consuming driver like a spell cast upon you, leaving you devoid of your lateral thinking and creativity. Turing you into a zombie football club or worse yet, a zombie startup. As soon as you begin to settle for mediocrity, disaster is never far behind.

 

To avoid Profititis and maintain your long term health, keep the faith in your vision and never shoot for anything less than being truly extraordinary. Growing your vision, mission and team come above all else as long as you are delighting your paying fans along the way. And to those needy investors who demand you sit up and pay them attention, simply ask them to take a look at the dejected figure of a once great Arsene Wenger and his beloved Arsenal football club.

 

Stop being a startup, become a business builder

 

Moonshot business building

 

Business is the beating heart of a country.  Whether it’s selling mangos at the roadside, building an Internet of Things startup or operating in a large corporate.  Business, as all politicians from all persuasions will tell you, is vital to the success of economies.

 

You’ve heard it all before – right?  Business creates jobs for people.  It gives people purpose and gets them out of bed.  It pays HMRC taxes and in some cases contributed towards pensions.  Business is essential and it is everywhere.  Train franchises to farmers to airlines to grocers to ecommerce to newspapers.  Every country has programmes in place to support business and encourage people to enter – startupland.

 

The UK has many such programmes.  But, something is missing…. And if we don’t take action, it will kill off the next generation of business builders.

 

much of what we have out there supporting these “startups” in startupland is not hitting the spot

 

I’m being pedantic here in my language and proactively referring to people starting businesses as business builders.  It’s time to re-frame the lexicon that has creeped in over the past decade where firstly startup and then scale up became the sexy words that encompassed business and indeed entrepreneurship.  Startups are everywhere and we have shed loads in the UK from Edinburgh to Manchester, Birmingham and London.  But, much of what we have out there supporting these “startups” in startupland is not hitting the spot.  Too many of them are still failing and still not making it.  There are multiple reasons for this.

 

Short termism permeates startupland

 

First off the bat is the short termism that permeates startupland.  I see it all over the UK.  Startups who are jumping onto the investment travelator and whose stole purpose in life is to get investment.  It’s all about the funding and that’s why they then dive bomb once they have brought it in.  Ostensibly, they are building a model that is attractive to investors, whether they be family and friends or high net worths or angel syndicates.

 

it may be more prudent to ask them, how they are going to run the bloody business

 

But, all the questions are wrong, it could be argued.  Instead of asking these newbie startups who have just come into startupland, what their exit strategy is, it may be more prudent to ask them, how they are going to run the bloody business.  It’s everywhere, startups creating three minutes pitches, business plans and investment decks showing potential investors the big pay days they may get.  But, these newbies in startupland don’t have a scooby doo on how to actually run a business.  Therein lays the first problem.

 

Secondly, our startups don’t understand what “timing” means.  Timing is crucial when starting a new venture, seeking investment and building a business.  Let me give you and example here.  Internet of things [IOT] businesses are trendy just now.  I spoke to a young startup recently who is developing an umbrella that uses photovoltaic energy to power your iPhone while it’s up. It can also Bluetooth stuff from your smartphone while interacting with beacons etc as you walk.  Pretty impressive stuff.  But, if this idea had been put out 5 years ago, it would have been too early.  The flip side of this is coming to market too late and trying to create the next Facebook.  Timing is key to understanding when investors invest and where they will be and where your service or product fits.

 

We have too many solopreneurs

 

Thirdly, despite all the signs and signalling from the USA, VCs and all the support out there, we just do not have enough teams.  We have too many solopreneurs, who cannot or do not have the capacity or nous to co-create a business with others.  Trust me when I tell you this is really tough and it requires you to think and act differently.  Team formation at the leadership level is crucial to potential success.

 

Having a co-founder is also a big plus point.  Whether it’s serendipity and you stumble across each other and hit it off with the same vision for the idea or whether you have to actively go looking, a great co-founder speaks volumes to investors.  It is the team that will execute.  It is the team that will think things through and overcome.  It is the team that will pull through when time are really tough.  It is the team that co-creates and has that emotional buy into progress and success.  But alas, we do not have enough startups in startupland who can pull this off.  And it is having an affect right now on how startupland is functioning.

 

think about you, your co-founder and team as business builders

 

Finally, and I could go on a bit on this rant, we do not have the mindset of business building.  As I said earlier in this piece, startups are looking too much like short term bets.  Forget labelling your self as a startup or scale up and think about you, your co-founder and team as business builders.  It’s a mindset change and one that is overdue in Scotland and beyond.  So, I would encourage all those involved in supporting businesses to re-purpose support and thinking into a longer term approach that puts Business Building at the forefront of a startup’s mind.

 

It’s perhaps time to take a step back and re-examine how we as a nation as helping to create our new business builders, after all….. business is the beating heart of a country.