Four Golden Rules of Startup Success

Introduction

There is a lot of advice out there on how to be successful at a startup. Most of it is wrong; or at least may not work for your startup. Most startup advice is anecdotal; that is, it is a result of someone’s experience on what they believe worked for them.

Are there even “rules” that always work? Startups come in all shapes and sizes: mom and pop, technology, bootstrap, franchise, etc. and they compete in many different industries. Is there a set of tenants an entrepreneur can use to guide them on their journey. Are there rules that are always right regardless of industry or type?

We set out to answer precisely this question. Our work with hundreds of startups leads us to an interesting conclusion: some rules work in some situations and four of them always work.
Our methodology was simple. Learn what successful startups did, that unsuccessful ones did not. What were successful startups willing to do those unsuccessful ones were not?

To our surprise, much of the startup advice that is typically given turned out to be conditionally dependent. That is, it may be true for a specific type of startup in a particular kind of industry, but it was not right for all startups. Further, even if a startup followed all the correct conditional rules, and did not follow the “four rules”, their probability of failure significantly increased.

So what are the four rules for startup success?

  • Rule #1: Seek out the best, not the cheapest
  • Rule #2: Revenue is your first priority
  • Rule #3: Learn how to make effective collaborative decisions
  • Rule #4: Everything else is dependent

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Rule #1: Seek out the best, not the cheapest.

Unsuccessful startups often underestimate the difficulty of execution. Some believe the “idea” is the real value, and anyone can accomplish the “tasks” that need to be performed to execute this idea. Our work has shown that the reality is much more complicated. Separating the idea from execution is difficult. It’s not unusual for the execution to modify the idea in significant ways. Startups that focus on finding those who execute tasks for the lowest cost, instead of seeking out the best, are much more likely to fall victim to poor execution, and poor execution is THE reason a startup fails – or at least the only reason that is within the control of a startup.

One key attribute of great entrepreneurs is to surround themselves with the best. They find ways to attract the best despite a lack of capital. They understand that without the best, their chances of success fall rapidly. They find ways to attract the best employees, vendors, investor, and customers.

Rule # 2: Revenue is your first priority:

In this context, revenue is any form of income on the cash flow statement: investment, sales, loans, in-kind services, etc. However, revenue is more than just money in the bank, it is validation that you are going in the right direction. To receive revenue, you must convince someone (investor, bank, customer, strategic partner) to write you a check. They are voting for your team with their dollars. This idea of voting with dollars is in contrast with the notion that the team will first develop the perfect product, and then everyone will buy it because it is the perfect product.

Free markets work because they harness the power of crowds – we argue capitalism was the first version of crowdfunding and remains the most powerful. Every time you ask someone to “vote” for your team is an opportunity to learn and modify the idea based on this learning. Even a “no” can lead to learning – often “no” is more instructive than a “yes”. For example, Apple first learned why the existing digital music players on the market did not sell well – why they said “no”. Learning what the market values are a vital function of most startups. The best method for determining if your value proposition “works” is to ask the market to pay for it.

There is nothing wrong with generating theories about what the market values; in fact, it is necessary but not sufficient. Without testing the hypothesis, it is just a theory, and theories need to be tested before they are developed into a perfect product or service. The most valuable learning from the Lean Startup movement has been the idea that we move from an entrepreneur that knows what the market values, to an entrepreneur that knows how to determine what the market values.

Startups should focus externally on the market, not internally. A startup’s first priority should be to test their theories (external focus), not perfect their theories (internal focus). Your first priority should be to prove a repeatable business model, and only then perfect this model, or scale the business.

Revenue is the first priority because it is the best way to prove your theory about your value proposition – so-called “market validation”. Trying to scale before market validation is relying on luck and intuition, not skill.

Rule #3: Learn how to make effective collaborative decisions:

Research has shown that although most people believe they make effective decisions, they do not. We people tend to make decisions based on emotions and then rationalize them with logic. We fall into all kinds of decision fallacy that may “feel” right but are flawed nonetheless. See HERE for more on this topic.

Research has shown that functional collaborative decision making is more effective than unilateral decision making. Teams that understand how to work together, share ideas and come to a decision that everyone on the team can support, even if it was not their idea, almost always out-execute teams with a single team member who decides for the group.

The key to these functional collaborative decisions is in the “functional” part. No doubt, many teams are dysfunctional in their decision making. Just because meetings are being held does not make a functional collaborative team. To be functional teams need to know and respect each other. They need to understand the point of view of each team member. They need to have clear roles and responsibilities. They need to put the success of the team above their egos and aspirations. Anyone who has ever participated in sports, or followed sports, will understand this difference. Many teams that had great players failed to produce significant results because of team dysfunction.

To continue the sports analogy, the difference is the coach. All great teams had a great coach. They had a great leader who understood how to get the best out of each player. She had the ability to keep egos in check. She recognized the importance of culture and values. She knew what functional collaboration looked like, and she knew how to get everyone to row the boat in this direction.

Don’t underestimate this ability. Every successful startup had at least one great coach. To repeat a theme, it is not easy to be a functional team, but it is one of the things successful teams do that unsuccessful teams are not willing to do.

Teams are more than just employees. Teams are your entire ecosystem: employees, investors, vendors, customers, advisors and the community. Engage the whole team. Find great advisors and get them engaged. Don’t settle for just “task execution from vendors – ask them what they would do. Get feedback from customers.

Rule #4: Everything else is dependent:

There is a lot of advice out there for startups. Our experience is that most of it come from individual sources, usually former entrepreneurs, investors or executives from existing business, who have only experienced a handful of startups. Often this advice is based on a few strategies that worked in these former companies. Typically they are unaware that this same approach did not work for a different company. Most people do not study failure and thus can attribute success to things that also correlate with failure.

In our work with hundreds of startups, both failures and success, we are unable to find any other attribute that always correlates with success. This finding does not mean that there are no rules that work some of the time or that always work for a specific type of startup or industry – there likely are. What it does mean is that these rules are conditional, not universal.

About the author: Steve Owens, Founder, and CTO of Finish Line Product Development Services has over 30 years of successful product development experience in many different industries and is a sought-after adviser and speaker on the subject. Steve has founded four successful start-ups and holds over twenty-five patents. Steve has worked for companies such as Halliburton and Baker Hughes. He has experience in the Internet of Things, M2M, Oil and Gas, and Industrial Controls. Steve’s insight into the product development process has generated millions of dollars in revenue for start-ups and small businesses.