What most people won’t tell you about starting a startup
Unicorns, billion dollar exits, billionaire founders, global jetsetting, exponential growth and a life of fame and fortune – it’s often how the media will portray the life of the “superstar” startup founder. Admittedly I understand why, as this is definitely the sexiest bit of the industry. However I felt that somebody also needed to also explain that these things definitely aren’t the norm. In an attempt to insert a dose of reality I wanted to share some words and advice as to what is often overlooked, and what it’s really like starting a startup.
I should explain that this isn’t supposed to put people off starting a startup. I believe doing so is one of the most challenging and rewarding things you can do. However, at Steed we encounter many aspiring startup founders, some of whom attempt this naively without anticipation of what to expect, or are doing it for the wrong reasons. I feel I owe it to share some straightforward advice that I believe everyone should read before starting a startup.
Over 90% of tech startups fail
This is a sobering one, 90% don’t make it past three years. Further compounded by the fact that 50% of those still alive in year four go under before their tenth birthday. Many data points and respected research bodies have confirmed this and whichever way you cut it, failure rate is beyond the 90% mark for tech startups. That means you’ve got a 1 in 10 shot of success. Would you put your salary, years of your life, relationships etc on a 10/1 bet?
In failing a business it’s not just a founders ego that needs to be considered, most will return no payback to founders or investors. Many founders at this point will have worked for years for little or no salary, often having used their own savings, or those from ‘family, friends and fools’ that won’t ever be repaid.
Whilst there are definitely things you can do, or avoid doing, to improve your odds, they’re widely published and still most founders don’t. But obviously you’ll be different and you’re in the 10% – everyone reading this thinks that too. And whilst discussing our ability to fail businesses is a difficult one to market, I believe our ability to put a process around failure is genuinely one of our greatest strengths. If we can fail a business in 3 months and for £5,000 instead of 3 years and £1m invested, although at the time it mightn’t feel like it, that’s a great thing for all involved.
There’s no such thing as an overnight success
If you’re anticipating that you’ll go from idea to £1m profit in 12 months, I can assure you, you won’t. Whilst each founder’s viewpoint on what ‘success’ is can be completely different, for this we’ll reference those aspiring to the Monzo, Uber, AirBnB levels of global user base, huge revenues and IPO events; as it’s what we encounter most.
If you look at time taken to IPO as a rough marker of success that usually means a financial reward for the founder; Facebook = 8 years, Google = 6 years, Microsoft = 11 years. If you look at Amazon’s share price over the last 20 years, even after IPO, it’s taken years for their shares to see the hockey stick of growth and a reported 11 years before they became profitable. More insight on this can be found in this Crunchbase article ‘How long does it take a Startup to exit?’
You may cling on to the odd exception to the rule here, and find a case study citing an 18 month path to exit or a huge profit within the first year – ok, you might. However I’d class ‘might’ here in the same way that you can put a lottery ticket on and you ‘might’ win that too.
It’s also a fair rule of thumb that whenever anyone tells you a ‘growth hack’ that you think will significantly reduce your time investment, think bullsh*t. The unfortunate truth is that to get to product market fit takes time, multiple iterations and even with great conditions (team, funding, market forces), everything takes longer than you expect.
“No growth hack, brilliant marketing idea, or sales team can save you long-term if you don’t have a sufficiently good product.”
Sam Altman, OpenAI, YCombinator
If it’s going to take three years before you’ll get a penny from the business, do you still want to do it? Are you willing to put in that time? Are you willing to commit 5 or 10 years to building this?
You’re going to have to make sacrifices
If you’re starting your startup as a side hustle, alongside your day job (which is a sensible way to begin). It’s prudent to write down what parts of your life you’re going to sacrifice to make this happen. This might be social life, weekends, gym, hobbies, but also time with family, children, loved ones.
Sadly the much lauded ‘freedom’ of being your own boss, or trying to be, can be quite different in reality. In my experience it’s much less of the freedom to work from the poolside, whatever hours you want and the perfect instagrammable life; and more juggling 100’s of responsibilities and tasks you don’t feel qualified for. The reality is that it’s going to be more difficult and challenging than your current lifestyle for the foreseeable. To begin you’re going to be wearing multiple hats, and spending significant time working on parts of the business that aren’t the bits you enjoy and are good at.
If you’re reducing some of your day job time and the finance it provides i.e. dropping to 3 or 4 days per week to free up time, then this needs considering too. Maybe you won’t get to take that holiday, upgrade the car or do that house extension just yet! Something’s got to be cut back or paused, be realistic and have a plan for how you’re going to manage your finances.
It needn’t be too arduous, but have a simple financial plan that includes when you’re likely to need to bring on external investment. Whenever that is start speaking to people three months earlier than you think. Again, the fundraising process is one that always takes longer than you think. The first 12 mins of this lecture by Kirsty Nathoo on ‘Managing Startup Finances’ shares great practical advice for those just starting out.
The rest of your life isn’t going to change, and slow down to give you a chance at this, you’re still going to have friends, family, relationships, exercise, work, all vying for your time, attention and energy. Being conscious of these things, and going into it with your eyes open definitely helps with the lifestyle adjustment needed to free up space for your new venture.
There is no investible value in an idea
This is one we encounter and battle with a lot, ideas stage founders who can clearly articulate their future product, future business model and vision via a really slick pitch deck. They’ve gone to the trouble of creating an NDA for us to sign, But with no product, no customers or users and no real world validation that their idea is actually a good idea, we’re starting from the ground up.
There’s a famous quote from Scott Adams “Ideas are worthless. Execution is everything”. I’d argue that this is not quite true, good ideas are really important – but founders should understand that there’s no investable value in an idea. A fantastic idea is absolutely no indicator for success. Success, and peoples investment in it, is based on your demonstrable ability to unlock the value in your idea.
If the value in your startup is all based around the uniqueness of your idea, and in you being the only person on the planet to have thought of it, then you’re going to struggle. If your startup could be completely wiped out if someone overhears you talking about it in a bar, then there’s no defensibility and it’s completely not investable. I can assure you that there’ll already be other people on the planet thinking about and working on the same idea, you’ll win by executing on that idea better.
This rhetoric isn’t just specific to us, when you look at what investors are looking for – the idea or product solution is always low or bottom, traction is always at the top. On the flip side this means that you don’t need to be creating new markets, with a completely unique idea to win. Facebook wasn’t the first, second or third social media platform – and their product now is nothing like Zuckaberg’s first idea for it.
This is true for the majority, if not all, successful startups. It’s their ability to understand and execute on customer needs, continuous learning and improvement that’s allowed them to innovate and add value. Not the idea. If you don’t like change, you probably won’t like founding a startup.
Building tech is an expensive, ongoing cost
Whilst the question of ‘how much does it cost to build a startup’ is a poor one, and will vary significantly depending on what you’re building. As a starting point I can list some of the things that will need to be considered in your budget for most tech startups.
Design, development, servers and hosting, marketing and advertising, legal and regulatory and a whole lot of ‘other’ stuff such as third party software subscriptions and app store fees that quickly rack up and eat into your margins. Most people understand, budget for and expect these things. And to begin with you don’t need to know the exact pounds and pence of everything. But if it’s a big unknown, it should be tackled as a risky assumption early on, as it all contributes to understanding the viability of your business.
The mistake I see many early stage founders making is including a single line or item for the development costs, or posing a question such as ‘Roughly how much is it to build a community app for mortgage brokers’, and shopping for prices as if it’s a one off build cost.
It’s the wrong way to think about it. Tech development is always an ongoing investment and a recurring cost to the business that needs accounting for. Whilst the advent of Ai, Low Code / No Code development has made it much easier, and cheaper, to build and launch an MVP. For the vast majority if you’re non-technical you’ll a) still need someone to build, maintain and implement regular improvements and b) quickly outgrow standard functionality and require custom development.
For a tech team In the UK, the average hourly rate for a developer can range anywhere from £35 to £150. You might need a team of developers, including a project manager, a backend developer, a frontend developer, designer and a QA engineer, to maintain and improve your tech product.
In this case, and faced with a bigger than anticipated tech development number (£), I’ve seen founders typically default to 3 routes. All can be viable, but you should be aware of the common pitfalls of each:
“I’ll learn to code myself, then it’ll be free…” – you’ll have to be happy to put your startup on hold for a few years to do this, and consider the education cost. Also if you end up doing all of the coding…who is going to do all of the other stuff you were planning on doing!?
“I’ll get a tech co-founder so then it’ll be free…” – software developers are in high demand, consider how you’re going to make joining your startup an attractive option. Clue, it’ll likely involve a significant equity position, plus an attractive salary. Consider these 5 questions before choosing a cofounder.
“I’ll get it built overseas, it’s way cheaper…” – This means you’re widening your choice of possible suppliers across multiple countries. Consider how you’ll find the right fit for you. Don’t choose solely on price, consider time zones, language barriers, experience, team size, skill sets and familiarity working with startups. If possible, start on a small project. You’ll learn a ton about compatibility in the first few weeks working together.
Whilst this can be a great option, I still encounter countless tales of outsourcing overseas and being burnt. Remember it’s a partnership – and that the trade off for lower price can often be an increase in your time needed to communicate and project manage.
The upshot is, if you’re not technical, you’re going to need to find someone who is. And they’re going to be an integral part of your business (so choose your tech partner wisely). It’s going to cost, and you’re likely going to need external investment to support this.
Your plans will (and should) change
There’s a saying “A smooth sea never made a skilled sailor” and that’s absolutely true here too. No amount of planning or reading can prepare you for the unexpected you’ll encounter most days as a founder. It’s great to be prepared but you need to be comfortable with the fact that things are going to hit you that you hadn’t anticipated and your path will, and should, change.
Gathering feedback, data and user behaviours on the product and making changes and adjustments accordingly should be your primary goal when starting out. Your first product is always going to be wrong, so you need to get that into the hands of users, and out of the way, as quickly as possible.
Add to that things like slow, or negative growth, members of your team leaving, investors stalling, tech bugs, failed marketing and missed goals are all par for the course and will cause changes, or iterations, to your plan.
“You know that old saw about a plane flying from California to Hawaii being off course 99% of the time—but constantly correcting? The same is true of successful startups—except they may start out heading toward Alaska.” —-Evan Williams
When describing the typical founder journey, Paul Graham coined the term the ‘trough of sorrow’, shown in the diagram below. This is where you’ll be spending most of your time. It’s supposed to be difficult, but if you can understand that changing course is as an expectation rather than a cause for frustration, stress and despair. It’ll help you escape the trough as quickly as possible!
There’s a couple of pieces of advice I can share that can help manage change in an early stage startup:
Have a financial buffer – enough to weather a storm and buy you time. This’ll mean those unexpected costs, of which there’s always some, don’t wipe you out and you’ll be able ot change course and make decisions based on what’s best for the business rather than the immediate need for cash.
Don’t quit or pivot too early – Knowing when to completely change tact, or even continue is really difficult, though some useful advice is shared here. Commonly I see early stage founders bouncing between ideas too quickly, as soon as it gets difficult, or when there’s a skills gap issue (i.e. people aren’t buying because you’re poor at sales and marketing). Oftentimes success is about getting your team firing, and allowing the business to stay alive long enough for the market timing to line up with your product.
Focus on the problem being solved – without being tied to a solution, and instead focusing on the customer pain points you’re solving you open up a host of potential solutions which require experimenting through to uncover the one that delivers the most value to users.
Use a mentor – A trusted impartial mentor is often more able to advise on and facilitate change, with the ability to look at situations without bias and the internal stresses that you will have. Try and find a mentor who is a couple of years further down the line than you, and will have navigated similar challenges in their own business.
Have a success marker – Before you start, really think about what you want to call ‘success’ for your startup – is it 10bn turnover, 2mn users and 50,000 staff, or is your goal a £50K salary and employing only yourself? both are completely different operations. Both are great. But both will have – massively determine the path you follow and the decisions you make.
Whilst our programme goes some way to negating these, and reducing some of the risks involved for founders – the points above all completely still apply for those working with us. We don’t want to sugar coat it, startups are really difficult. But they can be absolutely great too. I believe a fair comparison to consider before starting out would be the famous 1920’s Sir Shackelton ad below:
“Men wanted for hazardous journey, small wages, bitter cold, long months of complete darkness, constant danger, safe return doubtful. Honour and recognition in case of success.”
Whilst the above was looking for recruits for a research trip to the South Pole, I believe in today’s world this could be a recruitment drive for a startup founder.
So before starting your own startup journey please consider the above, and ask yourself if you’d be one of the 5000 who applied to the original Shackelton ad. If you are, and the above hasn’t put you off, that’s probably a good sign. And we wholeheartedly wish you every success with it.
Enjoy the journey, and if there’s anything we can help with don’t hesitate to ask.