Why Would You Ever Create a Startup? (The Odds Are Horrible …)

What causes a founder to start their business? What do supporters or wider members of the ecosystem say to these founders when they are starting?

The mind is such a powerful thing... whether you think you can, or think you can't... you're right.

Is this true? I love this statement, especially when I think about enabling potential or unlocking potential and having confidence or lack of confidence. I think about this a lot with business owners and also with my children when they lack the belief system to go out and succeed in whatever they choose. Those that know exactly what they want to achieve don’t need to change their thinking. Most of us however have doubts, don’t back ourselves and listen to our inner voice to create doubt.

Is this true in all cases? What about with start-ups? Is it true if you just believe in yourself you can do it? What systems and expectations do we put up around the people who want to or have started a company?

Recently, I was challenged by a past customer of The Icehouse. His experience of our service, support and results for his startup were not what he expected. He was pissed off and he felt he had wasted time and money with us. He also felt that we should have been more open about the odds of starting a business of success vis-à-vis failure. I had many conversations with him, and despite the frustration that his point was not getting through, it does make me think a lot and reflect.

Don’t you find that we learn more from our challenges and our failures than we do when we succeed? I could not placate the customer, I tried and I failed. I also felt that it was not 100% our fault – there were other factors, the market, his approach, the timing and the odds! End result, he did not get what he wanted (while on the other hand, neither did we) and went away to do it himself. I say all the best to him and good luck. I am sorry that for our part we could not improve his odds. We tried and it just did not work.

So on the topic of odds, let's dive into some stats on creating a startup that I have developed through observation and talking to others in the market:

• 1500 is the number of high-tech/high value start-ups we see in the NZ market each year, looking for money, looking to secure resources to take their startup forward.
  
  
• 150 is the number of start-ups we see successfully raising investment in the NZ market each year, and on average they raise $500,000 NZD of investment.
  
  
• 10 is the number of start-ups we also see successfully raising investment in NZ except they are raising a bunch more money, around $10m but probably a range starting at $5m.

The points from these statistics: you don’t have to raise money to be successful – but many need the funds to drive their start-up forward. 150 have a chance, but they really are in the context of world domination having ‘one quiver’ in their bag that is 500k - they have to get it right the first time otherwise they will struggle to raise more money, and then they are dead or just treading water.

When you have a tiny market and a small amount of capital, your likely conversion rate to get the next round of big money or resources from customer acquisition is near zero. Tough, tough, tough. For those that have raised money, they feel like they have won compared to the 1350 who did not successfully raise! Yes, there are 10 who have the resources, chance and time to really make an impact. Lucky them.

Your odds are not great if you are a startup, are they? Do the founders realise this? Do we as a system tell them about these odds? We could do better on this. I am going to try and be better with more visibility of the odds.

Now, not to drag us into the real world even more - here is another stat that is pretty challenging that I have come up with from observation…

Only ¹⁄4of 1% of start-ups achieve product market fit

Yes, one quarter of one percent achieve product market fit in NZ inside the first 3 years of their life. To me, product market fit means: (1) you've developed the product/service (2) it meets a real need and (3) you can’t keep up with demand. The last part is quite important.

This number is tiny in NZ, it probably means that in the context of taking a startup ‘global’, we have only 5-10 start-ups a year in NZ achieving product market fit.

The odds are stacked against you if you are starting up! Hard to raise money, hard to find your market! Why is this?

Well – we live a long way away from the markets that most of our start-ups focus on. That is a reality, but also because people seem to forget to focus on customers in their validation and initial phases – they focus in on the wrong areas, they make the wrong choices and maybe they are unlucky.

So why are start-ups so popular? Why are so many of our governments and our people chasing the space? Is it because of a rational argument? Or is it irrational?

From a community and government perspective, I get it – new technologies, new innovations and high growth companies create lots of new jobs in our economies. They create vibrancy, they are new and shiny and they give people options. They give people a way out of their seemingly boring job, there is ambiguity, there is the chance to make it big, to get freedom and to have choice!

From a start-up founder perspective, I get it as well – albeit I think it is true that people don’t really understand the odds or they choose to ignore it. They are making a conscious decision when they start a business that they want something different, they want to do something new and they are moving towards it. I also think that we don’t go out of way to say to these founders – you have a 0.25% chance of getting to first base, let alone a home run!!

We could be more open about the chances, I know when I talk to founders I try to understand what is causing them to start their business. I am pretty clear about the odds, but I don’t talk openly enough about these odds, so I am going to try to do more about that. Maybe that will help others think hard before they jump in, and maybe it will not change people’s actions. Over the years in New Zealand, I also think the system has got remarkably better – both founders and wider members who are equipped to help focus on ‘finding that product market fit’ – following the process to achieve that. We will find out.

Creating and working on a startup is fun, it is exhilarating and your chance of succeeding is bloody horrible, so think hard before you take 10 years of your life focused on finding the needle in the hay-stack. Being successful might happen, and that is great, but also think about all of the other skills and experiences you will have as result (i.e. maybe the journey is just as important as the outcome). Maybe if you focus on the journey, the outcome might look after itself? What I know is that when I look at the founders I know, they are different, they are alive, they are living the dream, they are my heroes and I just want to see more of them achieve success and improve the odds.

This blog is written by Andy Hamilton, CEO of The Icehouse.