Start-up - Timing Is Critical

Entrepreneurship is on the rise. Millennials are helping to fuel startups and it looks like Gen Z will only continue the trend. According to a recent Nielsen study, 54% of Gen Z’s claim their aspiration is to create a company. The number of self-employed people in the U.S. has grown by nearly 150,000 since 2014 to 8,751,000. This number is up from 8,602,000 at the end of 2016. That data, from the Bureau of Labor Statistics, is interesting yet unfortunately many of these future entrepreneurs will fail. Over 80% of new businesses fail in the first 5 years, and 96% fail within their first 10 years according to the U.S. Department of Commerce. So, how do you hedge your bet?

According to Bill Gross, founder of Idealab, it's not the idea, plan, business model, team, or surprisingly, even the money that's the most significant factor in a startup's success. It's all in the timing. Gross studied over 200 companies and discovered that a startup's timing accounted for 42 percent of the difference between success and failure. In his TEDx talk, Gross uses one of Idealab's startups as an example. Z.com was an online entertainment company. They raised enough money, had a great business model, and even signed well-known Hollywood talent to join the company. So, what went wrong?

The problem for Z.com was that broadband penetration was too low in 1999-2000. If you are over the age of 40, do you remember trying to watch video content online back then? It was miserable. You had to figure out how to put codecs (video compression software) in your web browser. And that was just the beginning for a whole host of problems. These challenges forced the company out of business in 2003. A mere two years later, YouTube launched a similar platform that would quickly grow into the insanely popular video-sharing website it is today. The difference? The codec problem was solved by Adobe Flash and broadband penetration quickly crossed 50 percent in America.

So, Gross wanted to better understand what factors or factor accounts the most for a company’s success or failure?  He took a very quantitative approach to analyze companies he has worked with and funded, and others that he hadn't. His team reviewed over 100 Idealab companies and over 100 non Idealab companies. Companies like Flooz, YouTube, Uber, Shopify, Pets.com, Instagram, AirBNB, Kozmo, LinkedIn, Uber, Friendster and more.

He looked at a five key factors that he deemed important to get to the one factor that accounts for a startups success. Here is what his research found:

Startup Funding. Sometimes companies receive a great deal of funding - maybe this could be the factor for success? That's not the case. Well funded companies only accounted for a mere 14% success ratio.

Business Model. It's always important to know if the company has a clear path to generate revenues. But Bill has noted that you can start out without a business model, and create one later. He pointed out that YouTube didn't have a business model, neither did Yahoo!. This attribute accounted for a 24% success ratio.

Startup Idea. Everybody, even Bill loves big ideas. He even named his venture/incubator company Idealab because he loved the thrill of coming up with a great idea. But ideas only accounted for a 28% success ratio among the companies that were reviewed.

Startup Team. Most experienced venture capitalists know that the customer is the true reality of a startups potential. During Bill’s TEDx talk, he quotes the boxer Mike Tyson who once said "everyone has a plan until they get punched in the face." If a good team can adapt to the true reality of a demanding customer, perhaps the team is the truest indicator of success for a start up? But amazingly, the startup team fell short as well accounting for only a 32% success ratio.

Market Timing. Accounting for whopping 42% of the difference between success and failure, timing is the winner. Bill noted that many investors initially passed on AirBNB. Most venture capitalists were probably thinking that it was odd for a person to rent out a room in their home to a stranger. Aside from a great business model, and a great team, AirBNB had timing on its side. Launched during the recession when people needed extra cash. Uber also benefited from launching during the recession as well as people (drivers) were looking to pick up some extra money to supplement their income.

If you look at the recent rise, in the past few years, of plant based foods like Silk, Beyond Meat and others, it would not have been possible for them to be successful 10-15 years ago. What has changed? People have changed with young Millennials and Gen Z determining that plant based foods are not only healthier, they are better for the planet.

If you are looking to create a startup, before you consider anything else, ask yourself if it’s the right timing for your new product or service. If you believe it is, and you have done the customer research, then go ahead and build out a team.