Rethinking The Way We Frame Entrepreneurial Success Stories
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Another email, another headline hits my inbox: company XYZ has raised funds to the tune of a million dollars or more. Notable investors are on board, the great and the goodhave also invested. Sounds super. The media picks it up, and blasts the story out. Investors follow suit, and jump on the bandwagon. Conference organizers reach out to founders to give keynotes, and their faces are plastered over magazines as the shiny new toy everyone’s talking about. The buzz even attracts people to apply for jobs at these enterprises. Some of these companies go on to greatness. Others peter out, never to be heard of again. A few hit the headlines as their lights go out. The ones that fail are marked off as part of the 70% of early-stage companies that don’t make it. All lament on how risky early-stage investing is.
But is this really true? Are 70% of startups doomed to fail- or are there certain things we can do to improve the odds of success? Let’s start with a rule of thumb: the amount of money a company raises is not a measure of success. Neither is its supposed valuation, or the list of investors who backed it.
All these factors do is create an assumption that someone somewhere has done their due diligence, and found the idea worthy enough to invest in. The greater the profile of the investor, the stronger the assumption that someone knows what they’re doing. Even if a potential investor had doubts, they second-guess themselves, assuming they’ve missed something. Not wanting to miss out, they defer their thinking to the afore-mentioned great and good, and then follow suit as well. However, when you ask investors how they do due diligence, they often say that they look at the team first. In people’s minds, a checkbox is ticked if “the team is good.” But how exactly are they validating the team? Some say they trust their gut. We have found typically that if one’s gut says “no,” it is probably wise to step away (or at least proceed with caution). If the gut says “yes,” many conduct diligence reviews to prove their gut right. This however is a poor practice that creates confirmation bias.
A better approach, if somewhat counterintuitive, and requiring one to keep one’s ego in check is this: if your gut says “yes,” park it, and do due diligence to prove your gut wrong. If the due diligence comes back clear, you are in a stronger position to proceed. With that said, the next question thus becomes: well, what then should investors be looking for? Anyone doing due diligence needs to come away with an answer to: “Do the founder(s) and the team have what it takes to deliver?” For that, they need to break down the skills and temperament required, then map the founder(s) and the team against these criteria. Where we trip up is being taken in by data points with no correlation to success in the role.
For instance, just because a founder worked with a blue-chip firm or went to (or dropped out from) an Ivy League school, that doesn’t mean they have what it takes to build this business. It may make a good story- but it doesn’t necessarily translate to capabilities. It’s also worth remembering that just because a founder started the business, that doesn’t mean s/he is the best equipped to be the CEO. This is especially the case for companies that reach a certain size and complexity. If the founder lacks this awareness, and is attached to being the CEO regardless of what the business needs, the company is likely to fail. There is, after all, a fine line between confidence and arrogance. Once we understand the skills required, we need to determine the weighting and focus of activities. It’s common to hear the predominant reason startups fail is they run out of money- either because they left their raise too late, or failed to focus on cashflow management. Raises need to be led by the CEO. They need to be supported by the CFO. But focusing on a raise cannot distract from their core responsibilities in running the business. This is where a good board is essential.
At my enterprise, AmaniCircle, we strongly recommend the separation of CEO and Chairman roles. If a CEO is too busy to run the business, s/he is also unlikely to devote the required time to organize a board meeting. Moreover, the CEO reports into the board, so if s/he is the CEO and Chairman, then s/he, in effect, reports to themselves. This is poor governance. In terms of board composition, the board is not meant to be littered with individuals who merely lend their name to beef up credibility. Board members need to have the right skills and experience to provide the required oversight and guidance to the CEO, and his or her team. As the company grows, how the team scales, and the associated culture (or spirit) provide tell-tale signs on how well the company is run, and its likelihood of success.
For instance, a company that has negativity, disengagement, and a poor perception of the CEO and/or management is going to struggle to build, and retain high-quality people. Symptoms such as high turnover or negative reviews on platforms such as Glassdoor should be taken into consideration, and not be brushed under the carpet of “it’s hard to find the right people.” That said, these reviews should be taken with a pinch -and sometimes, a bucket- of salt, since some reviews can reflect personal grudges, or even manipulated reviews to skew perception. Of course, vetting a company and its likelihood of success is part art, part science, and is a process full of nuances.
The points above touch upon some elements, but they are by no means the only criteria. Having said that, one must remember that the ultimate objective of a startup is to build a company that adds value. Raising money is not the benchmark we should be using, but how effectively those funds are deployed in executing the strategy. A business is not sustainable if it is not profitable. The obsession with valuations and the hunt for unicorns is encouraging behaviors that inflate the valuation, but are not necessarily honest reflections of value creation.
Let’s invest wisely, and ensure we are not lulling people –investors and employees– into a false sense of security on where they are investing their money and time.