How to Pick a Winning Startup, Part II in a Series: Know Success and Failure
by Jeremy McCarthy, CEO, VentureLoop
In Part I we explored the first step to picking a winning startup: following the professional gamblers, the venture capitalists. So you’ve done some homework and tracked some of the investment trends with the top VC funds. You can see a few markets they are targeting that look to have some promise. You have tracked a few companies in those markets. Now what?
Knowing the reasons a startup succeeds or fails will help you know what to look for next. I’ve outlined some of the factors to look for below, but this is by no means a comprehensive list. Startups that exhibit characteristics of success or failure on the list are also not guaranteed to succeed or fail. Exceptions can be found to almost any rule, and this list is only meant to be a guide.
Focus
I had dinner with an old friend last night who told me a story of a product manager job he had with a startup company a few years ago. The founder of the company created and sold a software company that made him very wealthy in the past, and now he was trying to replicate that experience again. The company had a great entrepreneur with prior success, good funding, and a solid team. And they failed. My friend blamed the failure on an issue that I have seen as one of the most deadly in the startup world: lack of focus.
All companies struggle with focus, but losing focus can be most dangerous to a startup as they do not have the resources to recover. The company in this example had a CEO who never stopped adding features and functionality to a product until the market opportunity passed them by. The development team was heading in twelve different directions and never could finish the product for launch.
So how do you measure focus if you don’t work for a company? Read the website. Look for a consistent message in the content. Read the press releases and news articles from the earliest to the most recent to see if you can follow the focus of the company. Do they have a core product that they focus on? Have they released or talked about releasing several products in a short period of time? If this is a brand new company, review the products they have launched. Do they have a core competency that they do very well, or does the product have so many features that it looks like it is trying to be all things to all people?
You should also evaluate focus in interviews. Bring a notebook to track responses you get from different interviewers about the company strategy and products. Do they all say the same thing? Is the vision clear, or does everyone have a different idea about what the company is going to do? If the core message and strategy isn’t known, the company could be headed for trouble in the future.
Timing
Market timing is critical for startups, but the difficulty is that there is no set rule for measuring timing. Being first to market does not guarantee success. Being the last one to the party does not guarantee failure.
When researching a startup, know what their timing is in the market they are pursuing. If they are first or one of the first, they have the advantage of getting out their name and getting recognition. But they also have the disadvantage of not being able to learn from the mistakes of others. Evaluate how they are handling being a first mover. Do they continue to lead and innovate, or are new competitors capitalizing on their mistakes and taking market share?
If they are late to market, they have to overcome a field of competitors that is already known and entrenched. A late mover can certainly succeed, but make sure they have a competitive advantage that will clearly let them overcome the established leaders. Have they learned from the mistakes of earlier entrants to the market and developed a superior product or service based on the shortcomings of other players?
They Just Win
There are some people in this world who just know how to win. They aren’t always the smartest, they don’t have the best strategy, they don’t have to be the most athletic, but somehow they find a way to win every time. Athletes like Joe Montana, Tom Brady, Bill Russell, and Michael Jordan are easy to identify as figures who just know how to win. It is harder to identify those people in a business setting.
Evaluating the history of the executive team is an obvious place to start. You can research the founders and quickly determine if they have a winning track record. That doesn’t guarantee future success, but it does indicate a higher likelihood of future success. When looking at track record, don’t just look at the success of their past companies. Look at who funded their past startups. If 2-3 of their past startups were funded by the same people, it shows the investors have confidence that this person can do it again. They identify the entrepreneur with the past successes and don’t view the companies as succeeding in spite of that person running them.
And don’t stop at past business success. What else has this person done in their life that shows they can accomplish anything? Are they fiercely competitive in other areas? Have they held leadership roles outside of the business world? Look for those key personal attributes that make someone a winner.
A Hot Streak
The Colorado Rockies won 21 out of 22 games to reach the World Series this year. Unlikely to make the playoffs just three weeks before the end of the regular season, they went on an unprecedented streak to reach the World Series. How did they do it? Various sports analysts have opinions on that, but in the end they really just caught a hot streak where everything was clicking for the team.
This is a much tougher item to gauge, but sometimes companies just catch a hot streak too. Facebook would qualify as one of those companies right now. I don’t think I can go a day without seeing at least a dozen articles about them. There are many other social networking websites and many that started with a focus on the university community as well. How did Facebook catch fire like they did? While I’m sure many an MBA will write papers analyzing this rise to the top, part of their explosive growth was gathering momentum that just kept going. Many factors clicked at the right time, and they took off.
Other startups hit hot streaks too. They don’t have the best product. They don’t have the slickest marketing. But conditions just gel at the right time for various reasons, and the company sees significant growth. Identifying some of these prospects can help identify potential winning startups.
There is a danger here though. Sometimes hot streaks are just that. Streaks. They end and the company doesn’t succeed in the long run. Napster, Friendster, and Jib-Jab are examples of companies that went on hot streaks that eventually cooled off. These companies may well succeed in the end, but their meteoric rise did not continue as it has with Facebook. And in the end, the Colorado Rockies were swept in the World Series.
Superior Technology
The last area I’ll address involves technology. Does the company have a technology that appears so superior that others will have a difficult time competing? You have to have some knowledge of your chosen industry to effectively evaluate this one. The Google algorithm gave superior search results. Netscape had a browser that had a successful run until Microsoft could replicate it. Amgen created novel drugs critical for treatment of cancer patients.
But technology doesn’t guarantee success either. Apple arguably has a superior operating system to Windows, but they will likely never overtake Microsoft. You also want to make sure the company isn’t using a canon to kill a mouse. The technology might be superior, but is the application overkill in terms of cost and functionality for the level of problem it addresses in the market? A Segway transportation device seems really cool and innovative, but how many people are going to spend a few thousand dollars to use one instead of walking or riding a bike or motor scooter?
Closing
Remember that even venture capital firms only pick winners 10-20% of the time. If your primary motivation in working for a startup is to hit a home run, then you will likely be quite unhappy. You should have a passion for the startup community and be prepared to kiss a lot of frogs before you find a winner. You can have a lot of fun along the way and learn a great deal about what does and doesn’t work when starting a company. No strategy guarantees you will pick a winning startup, but you can take steps to mitigate your risk of picking a loser.
About Jeremy McCarthy
Jeremy conceived and co-founded VentureLoop in 2000 to create a unique
network of jobs, news and resources for the venture capital community
and their portfolio of startup companies. His vision for connecting
talent with startups is driven by passion for venture capital and its
importance to the world’s economic engine. Jeremy began his career at
PricewaterhouseCoopers, where he worked with venture capital firms,
startup companies, SEC filings, mergers and acquisitions, and IPOs.
After a brief stint as COO of Aspen Plan Services, a retirement plan
consulting firm catering to the venture-backed community, he moved on
to a Recruiting Manager position with Management Solutions (purchased
by TMP Monster). Jeremy then ran a small recruiting and consulting
firm, Jeremy McCarthy & Associates, until creating the VentureLoop
idea. He has his B.S. in Accounting from Santa Clara University, where he was named Outstanding Accounting Student of the Year.