Ron Conway and Paul Graham startup success data

I was watching Michael Arrington interviewing Ron Conway and Paul Graham and this is what I learned and also my own view after several startups of my own and those of friends.

So Ron’s very simple data from 500+ startups on success and failure was:

• Ron Conway data shows a fail rate of 40% 2002-2010.
• Bubble years much worse – failure rate 77% (i.e. a total loss)
• Serial entrepreneurs better: 66% chance of success on repeat entrepreneur i.e. 20% edge on the second company i.e. vs 60% on current success rate.
• Regardless of economic climate, success probability is still the same i.e. any time is a good time to startup.
• Great defining companies are built at a faster rate than 10 years ago…now a couple of “mega” companies being built per year vs. one every 10 years.
• Younger entrepreneurs are more exciting, they will try anything and anything is possible.
• Trust gut and move faster – be decisive is also key to success.

* Success means still in business, a sale or not a total loss with no return at all.

OK so this data is from a small “gene pool” of companies that have managed to GET funded and doesn’t apply to all companies, also they will tend to be Silicon Valley companies and one’s where the founders have done a good job of working their network to get attention from Ron Conway…that’s a massive difference to the average startup – this is a very select group of companies already.

So from this select group who must have a big idea, a good basic team and have convinced their network to open doors in order to get funded in the first place…they have a current “success” rate of around 60% – what we don’t really know is what % actually got a good exit (yet) and therefore made money for themselves and Mr. Conway!

So what have we really learned from this then?

Only that if you are funded by someone as “networked” as Ron and can convince him then your odds are improved over the average…

So the learning for me is simple – pick your backers and investors very carefully and spend the time and effort to keep looking for funding until you get some “smart money” that will support and help develop you and your business. If you can’t get smart money then your risk goes up exponentially.

Additional comments from Paul Graham data from 400+ startup since 2005:

He didn’t get to say much but he saw some basic patterns for picking better startups:

• 4 person teams do badly, most likely security in numbers but this doesn’t work out after team formation. 2-3 optimal member teams.
• Men/women no difference. Couples good if they are stable.
• He has invested in 18-43 age range but no real difference based on age.
• Tough founders are best as they can weather the ups and downs vs. the others.

So my take from this is that you need a strong leader in a startup team and not a “committee” mindset. Anyone with the passion and drive can get started regardless of age, education or gender. If you have a team with a good mix of skills that has a good idea and that functions well then you are more likely to succeed (but that could be said of any team sport!).

In my opinion, Entrepreneurship is like “Chaos Theory” and that so many factors affect a good outcome that its hard to draw too much from these indicators other than what these big investors look out for when picking who to invest in – it’s not really a true indicator of success.

Watch the video here:

Great lessons from an Angel Investor Matt Coffin

This is one of the best videos I have ever watched to help startups see what makes sense in coming up with an idea and other great lessons, how to avoid building something no one cares about, what angels want…esp. minute 4-7 if you only have a sort amount of time.

Especially useful for Internet Startups.

It’s all good…watch it!

Matt founded LowerMyBills back in 1999 (full details about his inspiration come during the first part of his interview) and later sold it to Experian for over $300M. Since then he’s become an angel investor and advisor to startups around the world (including Mahalo).

Saw this on the excellent “This week in startups” with Jason Calacanis.

Make sure your business plan gets read – build a “killer” exec summary

Like most people I hate writing business plans, I want to get on with the business at hand rather than keep writing and re-writing lots of words about what I plan to do!

This must also be true for many investors too as they don’t like reading them, they prefer a pitch or PowerPoint! However, they DO want to see a plan eventually to decide to invest or not.

Business plans do have their place – they are a very useful way to logically sort through the teams thoughts and to have one cohesive document that summarizes the intent of the business and in that regard they are very important.

In addition, once you have some interest in your business idea you do need to commit it to paper for the deeper dive people will want to give it once you have their interest. Indeed many investors still not even think about interacting with you until they have some form of “paper” document to read first.

This is where the “killer” executive summary comes in…it’s like your “elevator pitch”, you can’t get through all the apathy and lack of interest in the business plan unless you can get people to be excited about reading it.

What is an Executive Summary anyway?

In theory, it’s a very punchy overview of the business plan in condensed form. However in my view it goes beyond that, it’s like the headline in a newspaper, it’s the “pitch for the pitch” – it’s job is to sell the reader to keep reading, just like a headline.

The executive summary is often your initial face to a potential investor, so it is critically important that you create the right first impression. So you need to think of the summary as being your one and only opportunity to engage, enthuse and move the investor to action. To make them WANT to read past the first page and to talk to the team further about the business.

Often this is the ONLY part of the business plan that get’s read and it’s certainly the only part you will get to forward in the first instance to potential investors.

As a result it had better be “killer” otherwise you stand no chance at all of getting into the tiny % of startups that get to stand in front of investors and actually raise funds. Only 3 out of the 60-100 plans seen by the Band of Angels per month get to pitch, the first pass in the process of weeding out the startups is the plan!

What should I include?

OK so now we know that this is a critical document and it is also a sales document, not a dry summary. Therefore the first stage in the process is to understand the sales process it want to achieve and the outcome required.

The sales process should follow the age old A:I:D:A process. This means:

A: Attention – The very first line of your summary had better be hard hitting and get the readers attention (like the headline in a newspaper) or you will lose the impetus. So consider very carefully what’s so exciting about your startup and put that first. This could be your “elevator pitch” in writing. Make the statements direct and specific, not abstract and conceptual. Do you have some world-class advisors, big name companies as trial users, a brand name founder, investor or advisory board member…put these details up front!

Try and make it stand out and be exciting…(just like headlines!)

I: Interest – This quickly builds on the first statement developing the readers interest in your idea. Here you tell the reader in “plain English” what the idea is, what the “massive pain” that exists in the market is and how you plan to solve it with your idea. Keep this simple and easy to understand. Make it clear that the problem you are fixing is big (i.e. there is a large market opportunity, pref. of $1bn if you are pitching VC) and that there is an immediate need from the market (i.e. someone has a big headache and you have come up with the aspirin, not a vitamin) and how you plan to win against the competition.

You will also need to include the basics of the full plan like: the team (highlight what each team member brings to the idea specifically i.e. one is a technical expert, one has worked in this market on knows it intimately etc), go to market strategy, value proposition, competitors, market details (what’s your segment), your sustainable competitive advantage, your business model, financial summary, money required and for what purpose, SWOT analysis etc.

D: Desire – Now I know that you have a good idea (and understand what you do), you need to build up my desire to move forward to learn more. In the summary you can now tell me a little about how talented the team is and how successful you have been in the past, or how you have special knowledge and skills that will make you the one to “back”. You can add any customer successes, feedback from research or “proof” that this going to be a huge opportunity. Finally, you can also add any investors that have backed you to date and any money raised. I would even let the investor know that you have done such a good job that there isn’t much time to invest before all the money you need has been provided by others unless they engage now…!

A: Action – This is the desired outcome from the investor after reading the summary! See next.

When you have finished you should have a 1-2 page document max that explains in condensed form why you have a great opportunity and why the investor should act NOW.

What is the outcome required?

This depends on how the summary is being used, for example if this is designed to get the interest of the “network” and have a friend get you into a VC or investor then that should be the focus of the summary – as a way to get an intro. If it’s being sent to an investor directly then it needs a slightly different approach and if it’s for a bank or other type of institution again it needs a different approach. I used to have 3+ versions for these interactions.

1. As a way to get into an investor via a third party: In this case there is an extra and critical component and that’s the intro letter. Again, this is designed to get people to engage and move to action! In this case you need to write a compelling mini-summary with your elevator pitch that can be “forwarded on” by your network. The summary itself can be in your own format.
2. Directly to an angel group, investor or VC: In this case you will probably need to format the summary in a special way that the recipient requires. Check the website of the Angel group or VC and ensure you deliver what they need in the form they need it. DO remember however that originality and getting attention will be key to standing out from the rest. Use the content already created but format how they want it.
3. For the bank or a supplier: In this case when trying to get people to back you or support you but not necessarily invest directly you need to take a slightly different approach. perhaps you don’t want to give the same level of detail for suppliers (not giving away any secret sauce) or in the case of the banks more financial info as they prefer facts and figures.

In all these approaches you need to consider the “audience” and to write accordingly. It’s no good just sending out a generic summary to everyone, you are selling and need to focus on the needs and wants of the person reading the document if you wish to persuade them to deliver the desired outcome.

What not to include

NEVER come across as arrogant and overconfident – I know this is a sales document but it needs to be based on FACTS and not B.S. Make sure you don’t fall into the traps outlined in my other posts about what not to include in your plan.

Never, ever, ever make any claim you cannot backup! If you say the market is $X big then have details to how you came up with the number. If you have a customer then you had better be prepared for a reference call to them, the same goes for connections and contacts. If you say a big named person is a backer you can bet the investor will contact them….NEVER be afraid of being open and honest. Do not use complex jargon, too many adjectives, long sentences, “waffle” and things that don’t concisely convey your message.

Try and focus your efforts on building credibility by showing a balanced approach to the risks and rewards of the idea and any problems/issues you see going forward.  This is the best approach to gain trust and then eventually $$ investment.

You may want to write the full plan first and then come back to the summary in the end so that you can get all the core facts ready in advance. If you want some further details on business plans and how to craft some of the “parts” I suggest you read some of my other posts here:

http://www.tobeanentrepreneur.com/blog/category/entrepreneurship/business-plans/

How To Create A Unique Selling Proposition

How to write a winning elevator pitch

Watch this: http://ecorner.stanford.edu/authorMaterialInfo.html?mid=1920 (superb video from Ron Conway)

Want to “burn” your Company to the ground…Fire the founder.

This topic is always a hot one for founders when they are considering VC money!

Or indeed when they are talking with private equity companies.

I wanted to write about it as a very talented friend of mine was just “fired” after navigating the recession and raising a $30M round in this climate!

They fired him after he had worked his butt off for years and got his startup setup in a good position and then they replaced him with someone with less expertise and experience. All because of what sounds like VC politics…

I should say he has a great deal of experience, is mature and has worked in senior positions for the likes of fortune 100 companies– so this isn’t the situation where the founder is too young, dumb or lacking core expertise at all.

 So what’s so dumb about this other than the obvious then?

Well in my personal experience (where I fired myself and brought in the “grey hairs” to replace me as CEO) is that the “heart and sole” of a startup is the founder(s) and their energy, determination and culture.

If you rip that out at the wrong time, as I did with myself, then you cause chaos, people leave, you “get execution lag” where the new person has to come on stream and you also lose credibility with customers…in many cases!

Most importantly, many of the core people in a startup are there because they are following the founder and they believe in that “person”, if the founder is killed then all those folks will get very nervous and will consider leaving. That’s the case in my friends startup, core technical expertise essential to the Company joined because of him and now they are seriously considering their options.

In my case, I convinced staff to stay but the new guy went on a bunch of ego trips from overspending, to not reacting to market conditions and reducing costs (i.e. their salary) for example – why not? – it’s not their baby and not their money!! The founders will do anything and everything to keep the baby alive: if it means 6 months no pay then so be it, ramen soup 3 meals a day, then OK…anything to win. You will never get that with outside talent as they will not have “founder fever”.

When I ran the startup we had a great company culture but we had holes in the carpet as I didn’t waste the money on replacing it. I preferred to run “lean” and only spent where the funds were most need like technology in this case.

Now, as with any example, there can be good reasons to replace the CEO/founder at the right time. Often if the founder is very technical and needs the expertise of a CEO and they can work that out and accept it then great. But in that case you have positive agreement and you keep the goodwill in the company as it grows, all very sensible.

So to finish my rant, one: be careful when you take VC money they can and will fire you if they feel like it; two: try and make yourself replaceable over time anyway then you will be able to scale and move on if you so wish; three: be very careful both legally and in the culture to make sure you don’t get killed if you value your Company’s future!

In my opinion you are taking the very lifeblood of a startup out of it when you mess with the founders unless you are very, very careful and make the whole process positive. Startups are already fragile “babies” early in their lives and it doesn’t take much to kill one, firing the founding CEO is like dropping the baby (startup) on it’s head…not a great idea.

I don’t know the stats on what happened to companies where the founder was forced out but I am guessing they don’t look very good at all…(a bit like most VCs returns that do this sort of thing!)

Here’s a great video that covers some of this topic and explains why Facebook CEO Mark Zuckerberg does not step down even though he is young and inexperienced!