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How Startups Can Avoid Failure

April 4th 2014

There’s no doubt that startups are the darling of the developed economies.  Many jurisdictions and locations have invested heavily in creating the right ecosystems that help startups succeed.  In terms of the overall health of the global economy, these fertile startup ecosystems are essential, as they have the potential to become both regional and global engines of job creation. In the U.S., for example, companies less than five years old created 44 million jobs over the last three decades and accounted for all net new jobs created in the U.S. over that period, according to the White House.

But despite the increasing economic importance of scalable startups, we still don't understand the patterns of successful creation.  However, a groundbreaking crowd sourcing project from Compass called Startup Genome is changing that.  After collecting data from over 16,000 startups they are starting to provide quantitative results. 

The key finding is that more than 90% of startups fail, more often due to self-destruction rather than competition.  For the 10% of startups that do succeed, most encounter several near-death experiences along the way. Simply put, there’s no magic formula to success.

The fact is, most startups don't know what they should be focusing on and consequently dilute their focus or strive in the wrong direction. Despite all startups being regularly bombarded with advice, the words of wisdom often seem contradictory.  So here’s the top 3 data driven insights:

1)      Founders that learn are more successful.  Startups that have helpful mentors, track performance metrics effectively, and learn from others raise 7x more money and have 3.5x better user growth.

2)      Startups that pivot once or twice raise 2.5x more money, have 3.6x better user growth, and are 52% less likely to scale prematurely than startups that pivot more than 2 times or not at all [a pivot is when a startup decides to change a major part of its business].

3)      Premature scaling is the most common reason for startups to perform badly. They tend to lose the battle early on by getting ahead of themselves.  Premature scaling is growing in anticipation of demand instead of demand driven, characterised by increased marketing costs, too much technical development or simply being unrealistic.

So despite all the investment in municipal startup ecosystems, it comes down to the people involved – and critically, how determined, flexible and in touch they are.

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