The incredible Watsapp founder story

The incredible story of Jan Koum, co-founder of Watsapp.

Jan Koum, at the age of 41 is a billionaire and #48 in the Forbes 400 wealthiest people in America.

But did you know he arrived in the US at the age of 10 with his mother and grandmother who were basically penniless and needed state assistance to get a small apartment? He swept floors to help his mother pay the bills. His mother died of cancer when he was 24 and he also suffered the loss of his father (who never made it across from the Ukraine).

Being of Jewish descent in the Ukraine, in the 70’s and 80’s most communication was monitored by the state. When he was in the US and his father in the Ukraine, it was really expensive to contact him. These are two of the factors that played a role in wanting to develop something like Watsapp (inexpensive, secure communications). And that was the product that took him from penniless to a billionaire when he eventually sold to Facebook for $19 billion!

Want to learn more? Then listen to Vijay Peduru’s podcast (part of his excellent Amazing Founders Stories series) on Jan Koums journey (or check out Anna Vitals infographic on his life below).

Click on the link and be inspired!!!!

Amazing Founders Stories

 

This infographic from the wonderful Anna Vital traces his story

Jan Kims journey by Anna Vital's infographic
F&F infographic from Vital

At Mashauri, we provide acceleration platforms to universities to allow them to give experiential entrepreneurial education to their students where they get to build their own new ventures as they learn how. Contact simon.gifford@mashauri.org for more information


 

Mastering scale – doing things that don’t scale is the path to scaling!

Masters of Scale - doing things that don't scale

Masters of Scale Episode 1:

“In order to scale you have to do things that don’t scale.”

Brian Chesky of AirBnB

 

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The purpose of this blog is to offer a summary of the key points of each of the episodes of Masters of Scale, together with a few insights. In the first of the series, Reid Hoffman talks to Bran Chesky of AirBnB about getting early customers.

I think it is a great example because we all know AirBnB as a tech-industry giant now, but like most startups it was not easy in the beginning. The founders had maxed out on their credit cards and only had a bout ten to twenty users. Their strategy: really get to know these users and what they wanted (and did not want) and hunt down new users one by one. Was that scalable? Definitely not - but it allowed them to build a firm platform off which they could then find more automated ways of getting new users - and they could not do that until they were sure they knew what their customers really wanted and loved.

Key lessons:

1 Get personal  and detailed feedback from you early customers as early as possible - that mens talking to them.

2. Use judgement in terms of what you take on board - you should not try and implement everything you hear.

3. Understand what might be the perfect user experience - and then try and build in an appropriate level of "magic" to your product. (Click the link if you would like a free tool to help you design the experience: "the 11 star customer experience template"

4. Do not start with a product that is immediately scalable (it will probably be wrong anyway), but using Chesky's words: "Do everything by hand until it's painful". There are plenty of examples of founders using their own phones or emails as the primary customer service touchpoint.

5. Designing a customer experience and scaling that experience are two different skill sets.

6. When you finally do reach scale, do not lose the ability to innovate as you did in the pre-scale phase. Large organisations quickly kill innovations that do not look operationally efficient.

7. I really like this final point they make as it resonates with so many of our early stage entrepreneurs. If you are "pre-traction" - do not despair. This is the best opportunity you will have to really design a product that your users will love. The impact you can make at that pre-traction stage has the potential to have a massive multiplier effect on the future of your business.

Pulling these ideas into "lean startup" thinking, we offer the basic diagram below as a guide:

 

Steps to scale

For those looking for another example of gaining customers in a non-scalable way, have a look at this article (and the additional material below):
"Why I spent hours conducting research for my first clients - before I was paid a dime"


Tip for university entrepreneurs/professors:

If you are going to start a business at university (while you are studying), select your initial market in close proximation such as other university students, people in the community or local businesses. This will allow you to far more easily "do things that don't scale" with early customers than if they are difficult to get to.
For more about our programmes for universities, visit: Mashauri for Universities.


 

Look out for our next article from the Masters of Scale podcast, coming soon:

"Always raise more money than you need."


You can listen to the podcast by subscribing at Apple iTunes or the Android store; but you can also go to the website at Masters of Scale and listen to the podcasts.


 

Additional material only for those seeking more in-depth knowledge and cases on doing things that don't scale.
(This material is not part of the podcast.)

Doing things that don't scale - part II

A few years ago, Y Combinator launched an excellent video series on starting startups. In our old Mashauri site, we ran a series of blogs on the series (similar to what we are doing on Reid Hoffman's podcast). One of their videos was on "doing things that don't scale" - so we have reproduced the article (with video) below for those readers who want an even more in-depth look at the topic.

 

This is an interesting video lecture with 3 different speakers:

> Stanley Tang from DoorDash – a company that undertakes deliveries for small businesses. Stan discusses doing things that do not scale.

> Walker Williams from Teespring, a startup that makes T-shirts for organisations without “risk, cost or compromise” – you can see our previous blog on Teespring at Teespring Case Study. Walker also discusses doing things that do not scale

> Justin Kan, founder at Kiko and Justin.tv, talks about the tactics of getting publicity.

 

If you are short of time, I would listen to Walker Williams first, then Stanley Tang and finally Justin Kan. Although Justin has some interesting views, most are pretty straightforward and may be less relevant for early founders – but you can skim our notes below and make your own call on what you watch.

Here are my key take-aways from the video lecture:

Stanley Tang: DoorDash

> Get the most minimum “minimum value product” out there – especially if you are not sure if there is a real market (and that goes for most of us).

> Mashauri caution – we recognise that not all products can be entirely basic if that does not allow you to deliver a good customer experience; so work out what really is the minimum for you. The advice in this video though is that your product requirements are probably far more basic than you think.

> Remember that if customers do have to struggle a bit to do what you want them to do, if they still try then it is probably a stronger sign of an underlying, unmet demand.

> Do not worry about automating your product or delivering seamless service at first. Rather use the method of simply doing it yourself. Not only is this cheaper in the short-term, it also prevents you from building things that people do not want. The example is the founders taking calls and making all the deliveries themselves.

> Another big advantage in doing it yourself is you get to understand what is really required before you build the model. It plays to a previous lecture where the advice was to become a real expert in what you are doing.

> Finally, Stanley reminds us that doing it all yourself is a competitive advantage you have against more automated customers. You have the chance to deliver a really tailored service and get instant feedback.

Walker Williams: Teespring

Walker focussed on three areas - we summarise each in turn below:

Finding your first users
Turning those users into champions
Finding product/market fit

Finding your first users

It is really tough to find your first users and there is no silver bullet. It all boils down to the founders spending time and effort. It could be sending hundreds of personal emails, sitting on the phone or trawling events for people to talk to. It is simply a hard slog – but “scrappiness” is what makes good entrepreneurs.

Do not think in terms of ROI when winning these customers – you will spend huge effort for limited numbers in return. Just make sure that you have users who really value your product (if possible, DON’T give it away for free).

You are probably going to be bad at selling, you will not really understand customers pain points and do not even have testimonials or cases to help you. Tough it out. (Or as I overheard a friend saying to his daughter: “suck it up princess”)

It will get easier as you get more users; but certainly for a long time the way that you win new customers will not be a scalable strategy.

Turning your first users into champions

Delight your users with an experience they have never had before and will remember – do whatever it takes to make this happen.

Spend as much time talking to customers as possible – and really listening. Answer all mails and queries yourself. Scan social media to find out what they are saying about you – and if something goes wrong: make it right!

Proactively reach out to those customers who leave. If you cannot get them back, at least you can find out what was wrong and do something to stop others leaving for the same reason

Finding product/market fit

Realise that the product you finally ship is unlikely to look much like the one that takes you up to the point where you think about scaling – so do not get too fussed about perfection. Speed is more important than a clean product.

A rule of thumb is only to worry about the next order of magnitude of customers – so when you have ten users, think about the next 90, not the next 900!

Do things that do not scale for as long as possible – keep talking to users, keep iterating as fast as possible; only give up doing un-scalable things when it is finally “ripped from you”.

Justin Kan: Kiko and Justin.tv

> Be aware of what you are trying to achieve with public relations – that should guide everything from resource spent to the media that you target.

> Remember, outside of achieving specific goals (eg awareness in a certain town among a certain sector), the rest of publicity is just vanity. Something that makes your mother happy.

Justin is a successful entrepreneur and his advice is not bad, but unless you are specifically looking for publicity now, you can probably skip this part of the lecture.

 

 

Mastering scale – getting from startup to corporate

Masters of Scale - an introduction

Reid Hoffman - LinkedIn boss

 

A while ago we produced a series of articles around Y-Combinator's excellent series on how to start a startup. Now I am pleased to say that we are starting a new series based on Reid Hoffman's (co-founder at both PayPal and LinkedIn) new podcast "Masters of Scale.

First acknowledgement to Tim Ferris (4 hour workweek, etc) whose podcast highlighted the series for me - it is well worth listening to Tim's series too.

There are a lot of really rubbishy articles, videos and podcasts that come out of Silicon Valley - many misleading, often overly-hyped and some frankly dangerous to a new founder who might take them to heart. But Reid is clearly different. He has been part of a number of incredibly successful businesses, part of a number of failures and has an eye for angel investing that is almost magical - some of his early investments include Facebook, AirBnB and Flickr. His insights are sharp and he is not afraid to take a contrarian view and so you will generally find his work really interesting. The excellent part of this series is that it takes place through interviews of top entrepreneurs who share their own experiences and wisdom including the likes of Mark Zuckerberg (Facebook), Eric Schmidt (Google / Alphabet) and Brian Chesky (Air BnB).

The focus of the Masters of Scale series is about scaling i.e. rapidly growing a business where the business model has been tested. However,  there is plenty (maybe 50%) of information around the startup phases as well i.e. where you are searching for and trying to find the business model that works. In Tim Ferris' podcast he briefly goes through all "ten commandments" - listening to this is a useful way of getting an overview. The commandments (and time in Tim's podcast where they appear) are: 

Commandment 1: Expect rejection. [09:14]

Commandment 2: Hire like your life depends on it. It does. [19:26]

Commandment 3: In order to scale, you have to do things that don’t scale. [25:37]

Commandment 4: Raise more money than you think you need — potentially a lot more. [36:18]

Commandment 5: Release your products early enough that they can still embarrass you. Imperfect is perfect. [44:45]

Commandment 6: Decide. Decide. Decide. [1:00:16]

Commandment 7: Be prepared to both make and break plans. [1:03:13]

Commandment 8: Don’t tell your employees how to innovate. [1:07:21]

Commandment 9: To create a winning company culture, make sure every employee owns it. [01:12:32]

Commandment 10: Have grit and stick with your hero’s journey. [1:23:22]

Bonus Commandment 11: Pay it forward. Use the momentum of your own success to move the success of others. [1:26:03]


You can listen to the podcast by subscribing at Apple iTunes or the Android store; but you can also go to the website at Masters of Scale and listen to the podcasts. Finally, for fuller immersion, I recommend the Entrepreneur.com site where they host the series and add some of their own perspectives as well - Entrepreneur Masters of Scale.

I know many of you are time-strapped and would like to get an overview of the episodes before investing your time in listening to them - and so over the next few weeks, we will produce short summaries here to give you episode highlights peppered with our own views. Look out for our next blog:

Masters of Scale Episode 1: “In order to scale you have to do things that don’t scale.”


Note to university professors and faculty heads: Mashauri work hard at ensuring our programmes for students contain the type of material that is encompassed in this series. Not only do we believe that the practical experience we give student entrepreneurs in their courses is essential, we also believe that exposure to true entrepreneurial experts is a critical part of the learning process. For more about our prgrammes for universities, visit: Mashauri for Universities.


 

Successful entrepreneurs: Iyeza Express

Mashauri is thrilled to be running a venture accelerator programme with the University of the Western Cape in South Africa. We not only guide the students in starting their own business with tools, process and other best practices, we also motivate and inspire by exposing them to successful entrepreneurs. Charleen Duncan, head of UWC’s Centre for Entrepreneurship and Innovation has encouraged us to not only use the “big names” of the startup world like the South African Elon Musk, but also to showcase people closer to home who are making a difference through their entrepreneurial ventures.

On that basis, we would like to share the inspirational story of Sizwe Nzima who founded Iyeza Health. The company delivers essential drugs to people in townships where normal deliveries are almost impossible through issues like no formal addresses and informal roads.

Take a look at the videos below


He is experimenting with the what3words app to help him as well.


So, maybe you do not need to be Elon Musk to start a business and make a difference!


If you are not lucky enough to be on the UWC programme, you can still start with our free LAUNCH programme.

Mashauri: developing tomorrow’s entrepreneurs today!


How to start a business – the no BS step-by-step guide

1. Introduction
Given my background, you would be forgiven for thinking that I was probably an ideal person for starting a business. Good university degrees in statistics, economics and an honours in marketing. An MBA with a strategy and finance focus. Real jobs in finance and accounting (6 years); in brand marketing with the multinational Kimberly Clark (3 years) and then over 25 years of consulting to major corporates around the world mostly as a partner at a top tier firm (Deloitte; Braxtons). Within that time I also launched two consulting businesses of my own and advised countless friends and family members on their own enterprises. And I even lecture at a top business school on strategy, decision making and M&A!

Jargon buster business modelHowever, it was only when I started researching my latest venture over 3 years ago, did I find that I really did not know the best way of launching a business in the 21st century. You see my training and experience had mainly been around growing and developing existing businesses. That really entails optimising a known business model to best serve a known market. In the majority of new businesses, especially where founders have new ideas or are harnessing new technologies – launching a business is more a process of designing or discovering a business model; and only then optimising it.

Over the last few years, I have worked hard at taking my existing 30+ years of training and experience; and integrating it with the latest best practice in startup thinking to have developed a framework that can assist founders in successfully launching a new business. I do not claim for one moment that I have all the answers or that I am some amazing startup guru – and frankly acquiring these new “startup best practices” has included learning from our (my co-founder and myself) own failures, mistakes and diversions. But now I do have a much clearer perspective of the critical success factors and many of the potential pitfalls that must be addressed in developing a new business from conception to paying customers – and beyond.

The purpose of this article (and subsequent ones) is to share my thoughts with those people who are in the early stages of developing, or considering starting, a new business venture. It will include theory, practical cases, tools and links to important blogs, books and other startup resources. My wish is that it will give you a better than average chance of being successful, provide some useful support – and perhaps put the occasional smile on your lips too – because if you do not learn to enjoy the journey (or “camino”), it may be best if you do not start at all.
Business launch

This introductory article will cover, at a high level, the overall process from conceiving an idea to scaling and growing the business. I will also touch on some of the hype (read BS) around the entrepreneurial environment and then some of the truisms that hold for established businesses and startups alike! I will finish off with some links to some useful resources.

 

I do not yet have the rest of the articles planned out in detail and to an extent I will be using your feedback to structure the themes, but they will almost certainly include:

  • Business models, value propositions and lean thinking;
  • Market segmentation, personas and the customer journey
  • Design-thinking and product development;
  • Funding and finance;
  • The entrepreneurial mind-set with a commentary on depression and optimism.

They will NOT include:

  • The 7 things that successful entrepreneurs eat for breakfast
  • The 5 character traits that guarantee startup success
  • The 10 reasons why venture capitalists have bad sex lives.

Lastly, I am not going to try and keep the articles to 500 words or whatever the behavioural psychologists believe our nano-concentration spans can handle. I am hoping that they will be valuable enough for anyone with a real interest in creating a successful business to want to read through in total – maybe even twice! On the other hand, if you do not – well, I will never know!

 

2. Stepping through idea to growing business
We can break down the development of a new business into phases. In a later article we will cover these in more detail, but for now they are:

Mashauri startup steps

Jargon buster value propositionNote several good authors have described the steps to build a business – probably the best being Steve Blank in his book “The Four Steps to the Epiphany”. The steps I describe above integrate well with his ideas, but Steve tends to use terms that may be a little cryptic unless you read his book (see recommended reading below) so I have tried to use more familiar terminology.

Google garbageGoogle Garbage alert: if you google “x steps to build a business”, you will find a lot of useless, some downright dangerous, advice.

Probably the biggest learning point a corporate business person-turned-entrepreneur will have to get to grips with is that, up until there are paying customers (red blocks in the diagram above), their business idea is basically one big experiment.

The way this experiment is run has also been covered by a number of people, but the most popular must be Eric Ries in his book “The Lean Startup” (see recommended reading list). His underlying theme is that when you start your new business, your concept is at best a set of hypotheses that describe how you think your business will work in the future. Using “lean startup, the founders should build a set of experiments around these hypotheses and test them via learn-build-measure loops that test the underlying hypotheses of the business.

As an example, one of the major assumptions (hypotheses) that the AirBnB founders had was that people would rent their homes out to strangers. The only way to really test this was by testing this idea in the real world. In the process they got to understand under what circumstances this might (and might not) happen so they were able to build this into their product offering.

We will cover more of this in the next article. It is also the underlying methodology we use in our Mashauri programmes and so if you want to start using it right away, you could sign in to our Launch Programme if you liked.

 

3. Navigating the hype.
If the previous section guided you through the right steps, this section is to help you navigate through some of the rubbish that you can find on starting a business on the web.

Perhaps the best way to do this is by busting some of the “myths” you might read:

  • jargon investorsMyth: Everyone should try and get a venture capitalist or business angel (see jargon buster) to fund their business.
    • The chances of getting funded are really slim. Far less than 1% of new ventures get funded (see our blog on “Holy Grails, unicorns, VC funding and other fabled creatures” for more facts). In addition, if you are one of the few that might obtain funding, not everyone likes the loss of control that goes with it – see later article on funding.
  • Myth: Social media is the answer to all your marketing prayers
    • Social media may be a useful channel for many new businesses and can certainly be an inexpensive way to reach customers. But, as in most startup spaces, it requires clear objectives and strategies. Far too many founders launch Twitter accounts, Facebook pages, LinkedIn company pages, etc and then spend mega-hours on trying to get likes and followers with no real idea why or how. One hundred people who willingly register on your website is worth thousands of FB likes or Twitter followers!
  • Myth: You have to offer things for free, especially if you are selling web-based services.
    • Someone using your services for free is a user, not a customer. Once again, there may be a sensible strategy as to why you might have a free version of your product, mainly as a way of allowing them to experience your product before buying a paid-for version. If you cannot persuade someone to part with money for your service, then you probably have not got an appropriate value proposition.
  • Myth: You should attend all the startup events you can find so as to “network” with investors and the like.
    • There are a ton of events on the go, frequently based around pitching competitions, motivational talks and startup “experts” sharing their wisdom. They can be fun, motivational and occasionally useful contacts can be made – but don’t confuse them with work. Generally, founders attending these events, even if they pay, are the “products” on offer to the vendors. (I suspect I may pick up some flak for this comment and, to be fair, there are some great events like South Summit, but you should pick your events carefully and attend with clear objectives in mind.

 

4. Some truisms
Although I started the article explaining how starting a business is not the same as running a going-concern, especially in the early stages – there are plenty of business laws that still apply. Many people holding themselves out as entrepreneurial gurus seem to want to ignore these. Frankly in this day of sky-high valuations on young businesses that are yet to turn a profit; and the rock-star status of some of the founders, it is easy to think that the business version of the laws of gravity can be defied.

jargon unicornMy list of truisms that may seem to be getting trampled to death by unicorns (jargon buster) are:

  • Cash is king – positive cash flows derived from customer revenue will always remain the lifeblood of a business (to mix my metaphors). Even if you can convince an investor to temporarily allow their cash to be that flow, they expect your business to get there – and get there quickly.
  • A startup is a temporary organisation seeking to become a permanent business through finding a workable business model. A business is an enterprise with paying customers.
  • Business strategy is still important. The teachings of gurus such as Michael Porter and Clayton Christensen are as relevant for new ventures as they are for large corporates, even if there are different interpretations.
  • Following the above point, it is essential that you are able to articulate your basis of competitive advantage if you wish to survive. By the way, being first is not a long-term competitive advantage.
  • Not all ventures must have plans to become massive, change-the-world institutions. Lifestyle businesses that simply provide a living or even bolster a salary are just as important – in fact most economies depend upon them.
  • You and/or your co-founders need to be an expert in the business sector in which you are competing and in the underlying technology or process that makes you different. For instance, if you are going to provide a highly customised tourism experience based on big data analysis of customer behaviour, your team must have deep tourism knowledge and excellent big data expertise.
  • Providing true perceived value inside an excellent customer experience in a way that is different to your competitors, will always be at the heart of any long-term business venture.

 

5. Some recommended reading
There is more new business venture reading material out there then you will ever have the time to read. Frankly for most of my readers, you just need enough knowledge of the new venture process to successfully launch and your business, not become startup specialists. I would therefore recommend the following books:

Important reading

Great to have reference books:

6. Conclusions and questions
If you find this article to have been of value, please let me know either via the comments section or direct to my email at simon.gifford@mashauri.org In addition, if you have any suggestions as to how the style may be improved (eg shorter, more examples, etc), please use the same media.

Our objective is to help you to be more successful in launching and growing your business. The Mashauri process, mentors, training and community are part of that; but should you decide not to use our programmes we hope that at least these articles will be of some value. If you do want to fast track your business to success, then I suggest the LAUNCH programme which is mentor-backed and about to commence.


Sign up to get more articles and access to our programmes and courses.

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Startup failure rate is too high – and it’s NOT OK!

News article version of startup failure article

Mashauri (Mashauri.org) is an organization with a mission to significantly increase the success rate of startups across the globe.

Infographic: startup failure rate is too high

They have written a number of articles about startup failure rates – and why Silicon Valley and others are not right in the accepted view that the majority of startups must fail and that failure is “good” because it is simply a learning experience.

Although they recognize that there will be failures and that it should be a learning experience, they believe that we can learn how to be better at launching and growing businesses – and in fact that we can learn from other founders’ success and failures and do a better job at developing viable businesses. They also claim that failure is far less of an option for many entrepreneurs than is the case in perhaps Palo Alto where funding is more plentiful and entrepreneurship is a choice, not the only option.

Mashauri have recently conducted an investigation into UK Government statistics where they have combined a number of databases to  paint a picture of what is the actual failure rate of new businesses and when are they likely to fail. There are good reasons for using these particular datasets and they believe that the learnings are translatable to other countries, although the results might need to be adjusted for local factors.

Their overall findings are:

  1. About two thirds of all businesses fail within the first five years
  2. Almost one third of new businesses never gain traction (ie receive income from customers or receive funding)
  3. We are not getting better at helping new businesses become successful– in fact we are getting worse

These are shown with the relevant charts in the infographic below.

The full article can be found at: Startup failure rate is too high.

Or click the link at: http://wp.me/p7JRbh-IW

The next article in the series is going to look at the “why” of failure and try to map this onto the “when”.

To receive notification about the new article and other research, sign up here.

 

The author, Simon Gifford, is CEO at Mashauri, Director of Genesis management Consulting and an adjunct professor at IE Business School in Madrid.

Startup failure rate is too high – and it is not OK!

1. Introduction

Peter Thiel likes the aticle

This is the second article in the series: Its not OK, where we try and bust the myth that 80% of new ventures must fail and that this ratio is fine. Our claim is that this level of failure is far too high and we can learn from the mistakes of others as well as our own failures. This may be a little controversial, so hopefully it will spark debate! (If Peter Thiel likes the article, it MUST be controversial).

Note: infographic at end of article

 


The 3 main conclusions we will cover, with data-driven support, are:

  1. About two thirds of all businesses fail within the first five years
  2. Almost one third of new businesses never gain traction (ie receive income from customers or receive funding)
  3. We are not getting better at helping new businesses become successful – in fact we are getting worse

Startups RIPNaturally, we do accept that there will be some failures and we also accept that fear of failure should not be a barrier to trying to develop a business. Please read our first article where we introduce the theme.

We believe the topic of “when do new businesses typically fail” will make for interesting reading for both entrepreneurs and those involved in the entrepreneurial world (such as investors, accelerators, incubators, universities, governments and corporate innovators). The article that will follow as to the “why” of failure will likely be of higher value, but it is necessary to build some sort of fact-based platform as to “when” to develop this. Our article is based on the UK data but we feel it is of value across the globe, although the conclusions will need to be adjusted for local factors.

It is worth mentioning that “success is in the eye of the beholder”. A Venture Capitalist (VC)  idea of “success” would be their investment in a very high growth company that exits; while an investment in a company that ends up surviving and providing a good lifestyle for the owners may be a failure to the VC, but the founders may be happy with their success. For the purpose of this article, a failure is a company that legally gets dissolved as the owners/authorities do not believe it is a going concern.

In this article we take a fact-based approach to getting to grips with startup failure rate and when failure happens. We have used multiple sets of statistics published by the UK government (Companies House and Office of National Statistics). The sources and detailed calculations are available in the appendix. Admittedly the data is messy: different sources, different start/finish dates, limited cohort information and rounding errors. However, on the positive side, we are dealing with big numbers (more than 600,00 companies were incorporated in the UK last year) and a year-to-year comparison reveals reasonable consistency. Furthermore we do not have to get to decimal place accuracy and so the data and conclusions can be considered reliable.

This is UK data (including Scotland, Wales and Ireland) and when considering other geographies, you may need to adjust for local factors. For now we consider, this to be fairly representative of the entrepreneurship failure rate in most developed economies – but the failure rates are probably somewhat higher in developing economies. In a subsequent article, we will use Global Entrepreneurship Monitor (GEM) data to see how we can assess for those differences

2. The evidence

2.1 Conclusion: almost two thirds of new businesses fail in the first five years

The two charts below show the data in different formats (source: UK Companies House).

The “Number of companies remaining” shows a cohort view – that is if 100 companies are launched at the same time, the number remaining at the end of each year is shown by the column (eg in year 3 only 56 would remain).

 

New business failure rates
How many companies remain 5 years after starting

 

The “Average failure rate” shows the number of companies that fail each year. For instance in the 3rd year, 16% of companies who started year 3 will have failed by the end of the year.

Its not OK average failure rate
Average failure rate of new businesses

The number failing in the first year does appear low to those who have helped prepare this article. Our logic is that there is a sort-of “honeymoon period” where founders cannot conceive they will fail (and so continue in the face of warning signs), and more importantly there is a delay in actually getting started and facing reality.

In the next article, we will spend more time on the “how” of failure.

2.2 Conclusion 2: more than 30% of new businesses never reach “traction”

A separate set of data from the UK Office of National Statistics (ONS) captures the number of companies that have registered to pay VAT or to pay tax on behalf of employees. Both these payments offer a reasonable proxy for “traction”, which we define as having paying customers or having received funding (which would normally mean a strong indication of paying customers or paying customers in the near future).

The number of tax paying companies as a proportion of all companies incorporated, is shown in the chart below. Over the last 5 years the proportion of companies gaining traction is steadily decreasing. Although we are launching more new businesses (which is partly due to the ease in which this is possible), we are not doing a great job of helping them learn how to reach the point of having paying customers – 3 out of 10 never achieve that goal!

30% of new businesses never reach traction
Many new businesses never even gain traction

 2.3 Conclusion 3: we are not getting any better at improving new business success rate

Despite the increasing number of new business starts, we are not getting any better at improving business success rate. The previous point above demonstrates this. However, there are two more sets of data that also give this statement credence. Below is a chart showing new incorporations and dissolutions by year. It is clear we are starting more businesses and we know that there is greater encouragement to do so; and it is far easier to do so. Despite this, the ratio of dissolutions to incorporations is deteriorating which would indicate that the survival rate is dropping – albeit net new numbers is increasing. If you throw enough infantry at the enemy, although many of the cannon-fodder will die, but some will get through!

Ratio of new and failing businesses
Ratio of new and failing businesses

A second number of interest is the number of acquisitions of more than £1 million that are occurring (source: ONS). Although the data is very “noisy” with many factors coming into play, we would hope for an increasing number of acquisitions that might indicate successful startup exits. However, if we compare the latest 5 years history with the prior 5 years we see a substantial decrease in this number. Although this data is inconclusive, it certainly does not show an increase in exits unless they are small – and that probably equates to acqui-hiring rather than a true acquisition. (Note: we recognise the imperfection of M&A data and the large amount of factors that play a role, but the trend is not positive over this period).

 

UK acquistions

 

 3. Conclusions

After considering all the 3 points above and merging them with what we know about the development of the entrepreneurial ecosystem and the life cycle of startups in general, we have arrived at some insights:

  • Most new businesses survive the first year simply though a delay between registering a company and real work beginning, together with the passion, excitement and initial perseverance that goes with the initial stages of a new venture.
  • Probably about 25% will steadily give up through years 2 and 3, as they conclude that they are never going to reach traction or not at a rate that will develop into a going and growing concern.
  • A further 30% to 40% will fail over years 4 to 6, struggling with some level of revenue that perhaps exceeds breakeven but is not sustainable and certainly will never scale into a large company.

To avoid painting too gloomy a picture, there will be 20%+ who do make it – they will develop into flourishing enterprises, perhaps grow extremely large (the occasional fabled unicorn) or may be bought out for good value multiples by other corporates. In addition, many (or some) of those founders who do fail will learn from their errors. A few will start again and with that experience, increase their chance of success the second time around.

Our view is that this failure rate need not be so high. Although there are multiple and often combined reasons for failure, surely with the volume of dissolutions in the UK alone we should be doing a much better job of increasing new business success? There has been exceptional work done by people like Steve Blank, Eric Ries and Noam Wasserman to name a few. Organisations like the Global Entrepreneurship Monitor also do amazing research into understanding what are the factors required for new business success. Clearly however, this is not trickling down to the founders themselves who lemming-like seem to be starting and failing at increasingly higher rates.

Mashauri believes that it is possible to learn from experience and use technology to codify processes and activities into a flexible system that can guide founders along the path to success and avoid at least the major pitfalls and unnecessary risks. We do not naively believe that every new business will be successful, but we are convinced that through the right focus, efficient use of resources, shared experiences and the occasional re-direction, a significant portion of potential “failures” could be turned into successes. And lets call out the elephant in the room: failure really sucks – especially when you bring down others with you. When your families suffer, those friends who invested in you lose their money, those few employees who trusted you are without employment  …..  getting slapped on the shoulder by some wealthy VC and being told not to worry and that it is a useful learning experience just somehow does not compensate.

Peter Thiel - failure is not great

I am not always a fan of the utterances of Peter Thiel (billionaire entrepreneur and philanthropist who founded payPal and was an early investor in Facebook), but in the case of startup failure we are in agreement. As he says:

“Every time a company fails it is not a beautiful working out of the Darwinian free market and it is not a fantastic educational experience for all involved. Every death is a tragedy and that is even true of deaths of companies.

“I don’t think that we should be setting people up for failure in all sorts of ways and that is something that should be avoided.”

The purpose of Mashauri is to make a difference to the success rate of new businesses across the globe. Our initial work has been to research entrepreneur failure (and success) and early stage founder requirements. We have run a beta site (Mashauri.com) for a number of years and helped various founders both online and offline. We are beginning to figure out how we can make a difference. It is likely that those startups selected by VC’s and the top accelerators have a higher than average chance of success (by nature of the competitive process if nothing more), but the vast majority of new businesses (probably in excess of 90%) do not fall into this elite category – and it is here that we believe we can make a difference. Learning from each other, understanding patterns of success (and failure), providing the right focus, encouragement and pace, using the tools that are available, providing critical training …. none of these will guarantee non-failure, but they will certainly increase the chances of success.

We are just launching this new site Mashauri.org, with a few acceleration programmes and soon-to-be training programmes. We admit that as it stands, the site is going to be creaky for a while and the programmes may not be overly sexy – but this is just the beginning and an extension of our earlier learning process. Future moves include using Mashauri information linked to other sources, to use big data to gain better understanding patterns of success and failure. Then supporting the process with AI-enabled mentors to help scale the system at a truly global level.

If you care about this as we do, it would be great if you could spread this article wider and help us to engage with other people who are also concerned about startup success – and can join us in our quest to make an impact in the world of new business.

Watch out for our next article where we will build on this one and start to discuss why and how failure happens. This is even a more complex subject with even less reliable data. However, we will tap into the excellent work of organisations like the Kauffman Foundation, the Global Entrepreneurship Monitor and we will rope in some real gurus on the topic to work with us on these hypotheses . Peter Thiel: are you available?


Thanks to contributors to this article, especially Apoorv Bamba, Guy Harris, Peter Quinlan and Peter Bryant.


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Infographic: startup failure rate is too high


 

#Sucessful startups case studies: Teespring

Teespring announcement

The story from the founder ……

“Just over nine months ago, armed with a few beta users and a short wait list, we launched Teespring to the world. The concept was simple: Kickstarter for custom t-shirts. Instead of dropping thousands of dollars to get your tees screen printed and trying to figure out how to get them to your buyers, all you had to do was come to Teespring, design your tee, set a goal (the higher the goal, the cheaper the price per tee), and launch the campaign.Teespring T shirts
Buyers could come to your campaign and pre-order your tee, and once you reached your goal we’d handle the production and fulfilment and send you a check for the profit.

We had big dreams of Techcrunch articles and explosive growth. We’d poured ourselves into this, people were sure to be blown away and it wouldn’t be long before they’d be sharing it with their friends. It was only a matter of time.

The reality was far less exciting. No one was interested in covering our launch, only a small percentage of the waiting list opened their invite email, and traffic was the same as it had been the day before. It was time to face the truth: There would be no overnight success for us, we’d have to grind it out.”

Teespring now has multi-million dollar revenues and although success has come quite quickly, it has not been without hard work and the normal “entrepreneurial roller-coaster”. What are the lessons to be learned:

On a positive note:

  • They really understood the problem they were solving – as it was a problem they faced.It is always critical to have a clear idea of the need your venture is fulfilling (in fact it may be THE most critical aspect); but it is often best if you have first-hand experience of the problem. If you do not – it is always a good idea to go and get that experience.
  • They got a product up and operational in a short time. They proved it worked and then developed from there. This is also classical start-up thinking -do not try and develop a solution with all the bells and whistles at first cut – you will only have to redo it all later when you have more user experience to guide you.
  • Although they had a good start, they recognised the need for help and signed up to an accelerator (Y Combinator) as they recognised they were missing skills and networks. This is a great lesson for entrepreneurs in general who have a tendency to try and do everything themselves. It may be possible, but it will slow you down.

On a more challenging note:

  • Although the product was good and met a real need – it still had to be actively sold. The founders did an excellent job at speaking to a wide range of prospective buyers to understand what was required to make it something that was easier to buy. They finally realised it was the in-web design tool that was the critical issue (and the most difficult to develop)
  • It was a long haul. They pushed and hustled and generated leads but nothing seemed to allow the site to get its own momentum, until suddenly there was a magic moment when it started getting easier. Campaigns began to commence organically and new users arrived who had not been cajoled to join. The owners put it down to a critical mass  of effort that eventually started paying off.

The Teespring tipping point

 

So – in summary, what are the lessons:

  • Really understand the problem or need – and keep increasing your knowledge of it.
  • Get a product out there quickly and then refine based on user needs
  • Recognise where and when you need help- and go and ask for it
  • Push hard and keep persevering – even when things look dark, you may be inces from the tipping point.

Mashauri has been designed as a web-based accelerator and training resource that is focussed on assisting entrepreneurs moving along the start-up path. Although the effort is going to be yours, we can support you in reaching the stars through our tool-set, process and real live mentors. Have a look around the site for more information.