Starting a new venture is an exciting journey. The founders have so strong belief in their idea that they devote their money, time, passions, or even entire life into it. However, the reality is that 80% of startups fail in the first 18 months and 90+% cannot survive more than 3 years. The failure rate for tech startups is even higher.
Despite all the excitements, at the end of the day, a startup is a business investment–same as investing in stock market. In equity market, the most important principle is risk control. The #1 item of Warren Buffett’s advice on investment is “Don’t lose money”. Borrowing the Wall Street advice, risk management should be one of the most important considerations in day 1 when you start the journey. Luckily, it is possible to increase your odds by following some rules.
1. Do your market research early. A survey of failed startups determined that 42% of them identified the “lack of a market need for their product” as the single biggest reason for their failure. After the exciting startup idea hit you at mid-night, the first thing you need to do is market research. There are many ways of doing market research without cost a fortune. It is different for every industry. But, you can always spend a few days to search on Google to find out if someone else has tried your idea or if there are some similar products on the market. If so, these companies have done the market research for you. You will learn a lot by find every piece of news of these companies and have some conversations with some of their employee. Another free way is to identify a few keywords for your product and find out the search volume, which is a great indicator of people’s interest to it. Google and Bing have great tools for this, for example Google Trends, Google Keyword Planner, and Bing Keyword Research Tool. Also, having some deep conversations with potential customers are a must. When everything looks very promising, you can setup a simple few pages website introducing the product, design some action items, and buy some traffic (say a few hundred visitors) to it. Tracking what visitors click or even every mouse move using tools like mouseflow.com, can give you a lot of market information.
2. Prepare yourself. As explained by “The Low Risk Startups that I have encountered in my life“, gain some competitive advantage is another key to increase your success rate. Chances are your idea has been thought of by other people. So, you should ask yourself, why you can materialize the idea and success? Qualification is not only limited to the skillset or market connections. Your financial resource, your health condition, etc., are also equally important.
3. Do as much as you can before quitting your job. One of the biggest risks to startup is that you will have no or less income for a period of time. So, do as much as you can before quitting can significantly lower your risk financially. For example, you can design or have small scale launch of your product while you still have a fulltime job. By the time you have the product designed or launched in small scale, you have eliminated the major risks in product design and production already. Have some steady income from your startup before quitting is even better.
4. Pick the right battle for you. Sometime, we have exciting big new ideas that may change the world in a significant way. However, such ideas normally have very high failure rate. For most startup, it is better to focus on a smaller but easier to success idea. For example, we all know search engine is a big business and definitely have market interest. After Google’s success, 10+ startups have tried to grab a share of it. Cuil.com is a famous example by former employees of Google with $33 million funding. It failed in ~2 years. From risk control perspective, it is better to avoid such idea.
5. Fail earlier is better than fail late. No one wants to fail. However, when failure is unavoidable, fail earlier is always better. It saves your precious capital and time. This is the key philosophy behind the popular “agile software development” movement in recent years, which promotes adaptive planning, evolutionary development, early delivery, continuous improvement, and encourages rapid and flexible response to change. The same philosophy can be used for other industry as well. For example, if you run a toy startup, you can use 3D printer to create 500 products and sell it first. Even though, every product may cost you $20 to sell for $10 only, the process can help collecting market and product design feedbacks. Then, you can create another 500 products with improved design and more appropriate market targets. When reaching the stage of mass production, you have eliminated a significant amount of risks already.
6. Do not afraid to do it again. In simple math, if startups failure rate is 90%, the chance of 2 startups fail drop to 90% X 90% = 81%. The chance of 7 startups fail is only 48%. Beside the simple math, founders gain tremendous knowledge and experience in a failed venture, which make them better equipped for the next one. Many successful founders are so called serial founder.
Running a startup is like rock climbing. It is exciting and brings your life to new level. But, first of all, be safe!