There have been numerous reports showing the decline of entrepreneurship in the U.S., including the tech sector, and we’ve all heard the gloomy reports of startup failure rates. There are a few things to consider before you start to doubt your dream.
Two of the most recently covered studies, from the Kauffman Foundation and a report from the Brookings Institution, show the decline of business and job creation, specifically in the tech sector, in the U.S. While the data is correct, let’s not panic. There’s more to it than the net number of companies in and out of the system. The reports don’t reflect on the health or life span of those companies.
For example, there was a rise in entrepreneurship, especially in tech, in the second half of the 90’s. Venture capital (VC) money was flying at companies that had no idea how to make money. A majority of these companies failed and are now contributing to the downward statistics of the studies. Next came the post-2002 hangover from the party that, again, contributed to the downward trend. Fewer companies were being started, and less money was being invested because investors wanted traction, not just a business plan.
What does that mean for new and future entrepreneurs? Sometimes a horrible hangover is the catalyst to healthier living. Down economies and bursted bubbles, while painful, lead to changes in philosophies. Movements such as The Lean Startup ultimately lead to stronger, more sustainable companies.
The decline in the rate of new firm formations in the last few decades may be real but individuals who do choose to launch their own companies have a more efficient path to market with reduced risk. Mistakes aren’t eliminated, they just occur faster and less expensively.
By focusing on what customers want and will pay for, and building from there, changing the company’s direction is easier, cheaper and faster. Measurements with customers of product success are taken early and often. That improves outcomes.
Investors also understand and have learned from their mistakes. The reported fallout has created capital efficiency. Investors are much more cautious with their money, but it has resulted in better, and sometimes faster, returns.
Investors are now more apt to invest in proven or validated ideas and products. They want to see users, customers and real revenues. The Lean Startup movement forces a business to either grow quickly or fail fast, aided by streamlined processes with open source and cloud technology. It all translates into much more efficient capital investment.
Investors, more risk averse than ever, seek companies that have extracted some of that risk. Accelerators provide very useful validation and commercialization services that minimize risk, but joining an accelerator requires a big commitment. Entrepreneurs need to do their part. Before taking your business to the next level, consider these questions:Do you have a prototype to simulate the interaction between a user and your product?
Do you have a realistic view of how you’ll make money?
Do you know how you’ll go to market and how much that will cost?
Have you engaged with real users and customers in a meaningful way?
Have you brought the business along through your own sweat and sacrifice? Demonstrating dedication and determination is important.
It’s true, the data can sting. But don’t let the past results keep you from chasing your dream. Dig into the data, understand it, and learn from it. Talk to people who have been there, research the companies mentioned in reports. Be informed. It will bolster the arsenal in your fight to succeed, instead of acting as a roadblock.