Startups Fail… A Lot!
When examined over a period of three years or more years, 9 out 10 startups fail. In fact, the Lean Startup mantra of ‘Fail Fast, Learn Fast’ is based on the humble admission that entrepreneurs are generally terrible at predicting what other people will pay money for.
Research by Amar Bhide (2000) shows that among the entrepreneurs who do succeed, over 90% do so in a business that is different from what they originally planned (see also Jessica Livingstone’s book, Founders At Work). Most founders rarely get it right at the beginning and have to iterate their way to success. In fact the word ‘iterate’ sound more deliberate than the reality; many entrepreneurs are lucky and stumble onto their success.
And yet, the entrepreneur has become a rock star. In a world where survivorship bias is prevalent, all we ever hear and read about are the mega-successes. Not as much attention is paid to the majority of minor success stories, the so-called lifestyle businesses, zombie startups and the ones that ultimately fail. This is, in fact, not very different from rock stardom or movie stardom. We all want to be Bruce Springsteen or Brad Pitt, but those guys are outliers.
There is no denying that ‘software is eating the world’ and that the pace of change in technology, socio-economic environments and business models is increasing. It is true that Netflix changed how we consume movies and possibly killed Blockbuster. The rapid rise of Microsoft, Google, Facebook and more recently Airbnb, Uber and Dropbox is astounding. But all those companies are Bruce Springsteen. In their wake, lie a much larger number of startups that tried and failed.
The Startup Way
Steve Blank and Eric Ries’ thought leadership arises from rethinking how startups view themselves as businesses and what is considered best practice in entrepreneurship. They convincingly argue that startups are not smaller versions of large companies. This is because large companies mostly execute on known profitable business models.
In contrast, startups are temporary institutions set up to search for profitable and sustainable business models. This distinction between searching and executing is important because traditionally startups have wanted to act like large companies. The problem is that they do it too early; using business plans, five-year projections, building products in stealth mode and not engaging with customers until the launch date. Indeed, of the 90% of startups that fail, 74% do so because premature scaling. No business plan ever survives first contact with customers!
The Lean Startup movement has identified and developed a set of best practices that are critical for businesses searching for a profitable business model. These best practices include customer development, experimentation, iteration, minimum viable products, pivots, growth engines and so on. This is the startup way.
Searching While Executing
So if large companies are not startups and are executing on successful business models; does that mean that they should ignore startups? Of-course not! This assumption is equally wrong. Competitive advantages are temporary, and nowadays they have become more temporary than ever. Successful companies need to be constantly searching for new ways to sustain and grow their business.
But this is not the same as arguing that the whole organization should be acting like a startup. Large companies already have successful business models. These cash cows are an important part of the business; they keep the lights on and provide the resources that are being invested in innovation projects. Cash cows need to be looked after well through operational excellence.
There is an important principle at play here. It is not simply a choice between acting like a large company or acting like a startup. It is possible for any established organization to do both (i.e. an ambidextrous organization). The company just needs to stop thinking and acting as if it a single monolithic institution with one business models, and start to view itself as an ecosystem of products and services.
This principle is derived from distinction between searching for business models and executing on profitable ones. Just like startups struggle when they try to act like large companies too early, large companies struggle when they take the practices they use when executing on their core business and apply them directly to their innovation process.
Applying core business practices to innovation is the equivalent of startups acting like large companies. It is, in fact, premature scaling. The only difference here is that this startup happens to belong to a large company. When searching for new business models, what has been successful for the large company in their core products, may not necessarily translate to new products or business models.
In practice this means that large companies have to be good at searching and executing simultaneously. This is only possible if the organization takes an ecosystems approach to its product portfolio. Through this lens, an organization can have a view over which of its products or business units have validated business models and are mostly in execution mode; versus products or services that are still searching for profitable business models.
It is important to note here that this distinction is neither hard nor permanent. Changes in the business environment or new initiatives can move a business unit or product that was in execution mode, back into search mode. The discipline is in developing and using the right sets of management tools depending on mode. Execution can mostly be done using traditional accounting methods, optimizations and operational effectiveness. Success can be measured using traditional metrics such as profits, ROI, NPV and ARR.
In contrast, searching has to be done using the startup way; i.e. ideation, experimentation and iteration. Success is measured through innovation accounting methods that focus on how well the innovation team is doing in its search for a successful business model. This is not a choice between being in the navy or being a pirate. Large companies have to develop processes that allow their innovators to become pirates in the navy.
In my next post, I will talk about how large companies can apply the ecosystem approach to managing their product portfolio. I will use the framework proposed by Nagji and Tuff (2012), to put the notion of an innovation ecosystem on a rigorous footing. In the meantime, I would be keen to hear your comments on some of the challenges you have faced in your companies when trying to search while executing. Tristan Kromer has also written a great article about this topic that you can read here.