A Survey of Startups

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Nearly all startups fail to scale up.

There — we got the bad news out of the way. The good news: it’s possible to greatly shorten the odds by following a few simple rules.

A report on recent MIT research lays out some pointers:

“Compared to average startups, which have a one in 3,500 chance of experiencing growth, the top one percent of firms with these characteristics have a much better chance (one in 100) of taking off. New startups are four times more likely than the average startup to grow if they are a corporation, two and a half times more likely if they have a short name, and five times more likely if they have trademarks. Furthermore, firms that apply for patents are 35 times more likely to grow. And, curiously, eponymously named firms are a whopping 70 percent less likely to grow.”

There’s more, but in a nutshell:

  • Incorporate
  • Use a short name (not the founder’s name!)
  • Nail down your trademarks
  • Apply for patents
  • Locate in a high-tech region:
    • Silicon Valley
    • Southern California
    • Washington state
    • New York / Boston
    • Texas

Oh, and let’s add the standard principles for business success:

  • Provide a product or service people need and love
  • Make what you sell vastly better in some important way
  • Hire excellent people you can get along with
  • Stay focused on results (instead of signs of your own importance)
  • Work your butt off for 4 years or more

What could be simpler? Now get to it.

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Equity as Pay

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One way to improve your income is to increase the ways clients can pay you — hourly, salary, full-time, part-time, contractor, percentage of revenues, percentage of profits, barter. (To name a few.) One method that can make you a fortune — or, more likely, pay you nothing — involves taking a piece of the client’s company as compensation.

You get involved in a project — a start-up, perhaps — where they need your help but don’t have much cash to pay you. If you’re going to be their sales rep, the answer is easy: a percentage of revenue from your sales. But if you’re a techie or administrator or accountant, it’s harder to determine how a cash-strapped operation can pay you. So you offer to take part of your remittance as equity: a small-percentage ownership in the business.

You might be tempted to ask for, say, one percent. It seems reasonable — not too greedy. And, in a going concern, it could easily amount to a nice little income stream for you. 

The problem is that any ownership stake you receive early in the game is likely to become diluted as more people get involved in the project. To begin with, the founder is handing you a part of his or her ownership, and by the time new partners and banks and angels and venture capitalists have muscled their way in, the founder’s piece of the action has been reduced greatly. And your one percent shrivels to a few basis points. 

Knowing this, you may wish to ask for five- or ten-percent ownership. Then you call up your favorite contract lawyer and get an iron-clad agreement that guarantees you a payout in the event of a major change, such as when the business gets sold. 

Still, this method is fraught with dangers. An acquaintance got such a contract, with an elaborate payout clause in the event of a sale — but the company merged with another by buying it, which thereby canceled the clause. He received diddly.

You could ask, as the sales reps do, for a percentage of revenues. One problem here is that businesses often need bridge loans to keep going, and banks don’t take kindly to watching repayment revenues get tied up in employment contracts.

Another problem is exemplified by the way Hollywood does business. Moviemaking is inherently speculative, and talent sometimes negotiates pay based on “net profits”. But accounting standards permit studios to play fast and loose with the rules — and they pile every imaginable item into “costs” to reduce the net — to the point where major film successes often end up showing no gain. For this reason, movie “net profits” are sneeringly referred to as “monkey points”. 

In showbiz (and everywhere else, for that matter) it’s probably better to ask instead for a percentage of “first-dollar gross” revenues. If the owner balks, try to arrange your pay in some other manner entirely. Avoid monkey points.

Once the contract is signed, don’t hold your breath, because most fledgling operations go nowhere. For example, of 30,000 Internet start-ups each year, a mere ten will soak up more than two-thirds of all the resulting value — and one will be worth more than all the others combined. So it’s a steep hill to climb.

Why not make this kind of offer to an established company? Well, nobody wants to give up ownership — or issue a long stream of payouts over months and years — unless they have to. Major businesses usually have plenty of cash to pay contractors, so they’ll likely turn you down. Worse, now and then a big corporation will sign the contract, then simply renege and dare you to sue them. After all, they have great lawyers and lots of time, and you don’t. I know of two instances of this happening among my immediate network, and neither ended well for the victims.

(It’s not that all business leaders are pirates. Okay, some of them are. But all of them do run into problems now and then, and they start tossing things overboard, including vendors. On the other hand, when a business — especially a B-to-B — gets into fatal trouble and crashes and burns, its customers tend to stop paying their bills. After all, why throw money at a dead thing? So, deep in the cold heart of the corporate world, there beat little fluttery pulses of moral compensation for the rest of us.) 

Let’s review:

1. Ask for more equity than you’re comfortable with — say, ten percent — because that will get whittled down to almost nothing by the time you see dime one.

2. Get a really good lawyer. Make sure the attorney has found every nook and cranny where the business can bury a contract bomb that blows up your takeaway, and seal off those dangers. Then cross your fingers.

3. Hope for the best but prepare for disappointment. Take what you get, forgive them their trespasses, and walk away. 

Then: Onward! To the next job.

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Failure? Mistake? Lesson?

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An expert is a person who has made all the mistakes which can be made in a very narrow field. — Niels Bohr

In recent years it’s become a business truism that failure is a path to success. The idea is that if you’re having failures you’re trying lots of things — tossing stuff against the wall to see what sticks — which should lead eventually to something that pays off big time. (In Silicon Valley this attitude is quite popular, as high-tech startups are especially iffy.)

There’s a problem with this notion: it isn’t exactly true. Owners whose first businesses fail are unlikely to try again. The collapse of a cherished enterprise can crush the first-timer. These failures destroy capital, upend job security and ruin reputations.

Just thinking about such scenarios can make a business owner’s heart rate go into overdrive.

But maybe we’re suffering from a bit of confusion about what people mean by failure. Much of what is called “failure” is simply “mistakes”. When we confuse the two, we hesitate to try things, even small things, for fear we’ll “fail” when often the worst that happens is we learn something useful. If we don’t make this distinction — between mistakes and failures — we’ll freeze up at the little challenges, and eventually our frozen selves shatter against a wall of defeat.

When scientists run an experiment and get a result they weren’t expecting, they don’t consider this “failure”; they think of it as “data”. To them, it’s all interesting. Artists experiment over and over, discarding most of their attempts, as they perfect new paintings or songs or comedy sketches.

Interesting outcomes are just awful outcomes with the volume of drama turned way down. — Elizabeth Gilbert

Nearly everything a business does is made of small steps. Most of these steps are developed through trial and error. Mistakes get made and corrected, and the business moves forward. It’s these little mistakes, not the huge terrible failures, that help us grow stronger and smarter at work. 

• “Take care of the ounces, and the pounds will take care of themselves.” Failures and mistakes are outcomes of risk. Failure comes from big risks; mistakes come from small ones. If we’re undaunted by small risks and we try to learn from them, the odds of long-term success get enhanced. How, then, should we approach risk in general, so as to take advantage of mistakes and avoid failures?

Don’t regard any one project as everything: even your business startup is just a chapter in the history of your career. It’s the career that matters, not its expression today. In fact, entrepreneurs who manage more than one business at a time have higher success rates than “serial” entrepreneurs who only work on one. Of course you’ll put your best effort into every portion of your work. But knowing that no one project can make or break you takes the pressure off, so you’ll make fewer panicky mistakes and suffer fewer failures. 

Don’t take it personally: This one’s hard, especially when we’ve just been brought down by a mistake at work or, worse, a startup failure. At that moment we’re tempted to consider ourselves as failures. But the project failed, not us; just because we made a mistake doesn’t mean we are a mistake.

Do a pre-mortem: Good sales reps anticipate every possible objection from a prospect and prepare strong answers for each. This technique works for any aspect of business. Begin by making a list of all the ways your startup — or just this month’s work project — can go wrong. Then think of several ways to fix each situation. 

Do a post-mortem: This is, of course, a highly useful exercise with projects that implode, but it’s also worthwhile to follow up on any problems you encountered during the roll-out of a winner. Don’t let all the back-slapping and glass-clinking distract you from itemizing the small problems that cropped up, and devising repairs … so they don’t become big problems later.

Keep your eye on the racetrack, not the wall: Professional race car drivers know that if you go into a skid, you mustn’t stare at the oncoming wall but instead focus on where you want to go. This reorients you toward driving instead of crashing, which increases the chances you’ll get out of the jam and continue the race.

Remember that half of all businesses are still in play after five years: It’s a myth that 80 percent of new firms wash out in 12 months. The odds favor you.

…Finally: As a wise man said, do not brace yourself for failure, but ready yourself for fulfillment.

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