Image credit: Brenda Clarke | Flickr
In the world of startups, there are three ultimate outcomes — failure, modest success and, very rarely, spectacular success.
How rare? The typical venture capitalist meets with 1,000 new companies a year and funds two of them. For every 10,000 startups that get funding, only one becomes a unicorn — the venture capital slang for a startup valued at $1 billion or more. In short, the chances of achieving startup success at the unicorn level are about one in five million. Most of the other companies just run out of cash, while a handful are bought for substantial, but not spectacular, sums.
One thing that makes the difference between success and failure is whether an entrepreneur can find enough growth opportunities and direct the startup’s resources to capture enough market share to reach $100 million in revenue. That magic number seems to be the hurdle over which startups must leap in order to go public.
How can entrepreneurs find the right growth opportunities? Here are five steps.
1. Solve a problem familiar to you.
Why did you start your company? To boost your odds of success, aim your startup at a problem that you deeply want to solve. Your startup should be based on a problem that you know well and that matters to you.
Perhaps you have spent years grappling with the frustrations and challenges of caring for your elderly parents. You have lots of ideas about how to make elderly care better for children. Brainstorm and come up with dozens of ideas, then focus on the two best based on your experience, your knowledge of where your startup can offer a better solution and the size of the opportunity if your solution works.
2. Test your guesses quickly.
Entrepreneurs are often surprised by what resonates with customers and what does not.
If it were up to PayPal co-founder Max Levchin, he would have kept working on the details of an operating system for a digital wallet instead of responding to persistent customer demands to build an electronic currency for eBay.
You can find out the right path for your startup more efficiently by doing so-called A/B testing. Figure out which customer segments you think will want your product and find two groups of say 10 or 20 potential customers from within that segment. For your two best ideas, develop a clear description of your product with lots of pictures and show the first idea to one of those groups and the second idea to the other. Ask each group whether they would buy the product, how much they would pay, and how frequently they would buy.
Repeat this process until you have figured out which product features generate the most resoundingly positive response.
3. Build and test a prototype.
The next step is to build a prototype of your product or service incorporating the features that your customers told you were the most needed.
As Israeli venture capitalist Motti Vaknin told me, if a potential customer tells you that your product is interesting, you will never get a sale. In order to get people to pay for your product, they must convey a sense of urgency: “I need this product now. How soon can you deliver it?”
Keep working on your prototype and testing it with potential customers until you get that kind of feedback.
4. Sell to your initial market.
If you can get to this point, you have a product that the market wants. But you will need to build a sales and marketing organization to break the $25 million threshold and saturate your initial market.
A winning sales and marketing organization must be tailored to the needs of the customer. If you are selling to individual consumers directly, you need effective advertising. These days that means mobile and social media marketing. At the other end of the spectrum, if you are selling to large companies you will need to hire a sales force experienced at closing corporate sales in your industry.
5. Expand globally.
You are unlikely to reach $100 million in sales in your initial market. To get there you will need to go after the right global markets.
To warrant an investment, such markets should be at least $1 billion in revenues. Conduct sufficient customer research to know that you can gain a sizeable share of that opportunity. Many companies founded in Israel or Europe decide to relocate their headquarters to the U.S. to get access to that much larger market.
If you are already in the U.S., you may seek to expand into Europe and Asia. Accomplishing that goal often depends on finding local partners who share your vision and have the right skills and incentives to help you achieve your goals.
Do these five things and you have a shot at beating the odds and becoming one of those rare startup success stories.