An important indicator of success for a Company is whether it survives 5 years. In the USA only 35% do. According to the Nobel laureate Daniel Kahneman, Entrepreneurs get involved into their business plans, they think their great plan is an exception. Unfortunately, this is builder bias. 35% is a global statistic, meaning regardless of quality and sector, your startup has 2 chances in 3 to fail. Accept and live with it.
Where to open a startup?
The USA is a great Country for entrepreneurship and 35%, though discouraging, is a great success rate, so we can consider opening a startup in Countries like Italy, where this rate is inferior and not even available, as a complete suicide. You were warned. If you want to dare, feel free do so, but I know stories about Entrepreneurs who literally migrated Italian companies to the USA with minimum change (like Giovanni Bazzoni), who turned from grasping at straws to millionaires just because of the environment. Don’t choose a bad environment. Entrepreneurship must be a core value of the Country of residence for your startup. I went through this struggle and had to make sacrifices, myself. If you are not ready to do so, maybe for “valid” reasons like your family, relatives, etc, then you can consider a career as an intrapreneur or individual contributor, just don’t gamble your capital or lifetime efforts if it’s your first time.
There are Countries even better than the USA. like Switzerland where, in the Zurich and Lausanne areas, within certain criteria and programs, this statistic is greater than 90%, according to Daniel Kahneman! Other good places include Sweden, Norway, Dubai, Singapore: make sure to inform yourself on the house rules as they are completely different and will affect your business Operations.
What kind of startup?
Now that we sorted out the environment, there are essentially 2 kinds of Companies.
- Professional services. That is, essentially, consultancy.
- Product category designers or harvesters.
If you have no knowledge on the sector, don’t open a startup. Period. First work as an employee in that sector and learn, or get business partners or hire people who have such experience and share rewards and penalties with them. If you are thinking: – But this sector is easy! – or – There are people who did it with no experience! – then halt. Those who were successful with no experience probably dodged a bullet without even knowing.
It’s important to plan the growth of your startup. In the beginning, you can’t likely afford to be picky, but later on, your Company will have to say No to all activities that stray from its core strategy. These two principles are completely opposite. A consultancy company must acquire customers, negotiate rates and projects and is constantly driven by requirements by customers. It has a linear growth: twice the jobs, twice the revenue. Product category designers have an internal vision and sell it to a market. It is a 1-off effort and sales may explode.
So my advice:
- Try to minimize or avoid professional services – but it’s a necessary evil for newcomers
- Be different, not “better” than an existing product or service
To make an example, Bill Gates was a category designer. He invented the concept of Software programmer – before him, people built hardware and also software for it. And then he invented the concept of Operating System. Steve Ballmer was a category harvester, maximizing sales volumes, trying to run against other products, etc. Jeff Bezos invented “eCommerce”, the Kindle, and the Cloud.
The timing of a startup
You must define if you want your Company to go public. In that case the Initial Public Offer (IPO) will determine the peak value of your Company. I know, this is completely unrelated! But the IPO will act as an anchor and carry long terms effects. Try to aim as high as possible, sell your Company well.
To do so, you must design a strong category within 6 years. Statistics show that after that, the chances of your Company to take off drop. If you are an investor and a Company hasn’t designed a category within 6 years, don’t invest in that Company. The sweet spot for growth is between year 5 and 11, where the Company may go public if you intend so. Also there is nothing wrong in getting acquired and selling the company. You can use the new capital to open new startups and design new categories. Alternatively, you can run it, if you have a path to scaling up. Just plan ahead.
Based on the above, startups are bets. You are now educated on the criteria to make a good key bet. Invest in startups aligned to these criteria, or in established Companies that have a growth history of decades. These have little chance to innovate, but they acquire startups to do that. Amazon is an exception, it still manages to innovate despite its size and has specific core values and processes to do it. It’s not the only one, but you can do your research and find out.
Pick a Country where Entrepreneurship is a core value, design a category as quickly as possible, build a prototype and go public or sell within 6 years, or run and scale up. Then open more startups. Or be an intrapreneur and invest in healthy startups or in established Companies that have a growth history of decades. In that case keep buying, offset net operating losses with profits, and collect dividends.