Why Startups Start Up

As exciting as it can be to watch the growth of a single-cell idea into a company, sometimes the cells don't divide fast enough for the organism to survive. Many times, the post-mortem of a startup reveals a basic lack of understanding about why startups start up.

Firstly, let's agree one thing: startups are not a new concept. The idea of a venture-backed company has been around for hundreds of years. The first trans-Atlantic telecommunications cable was a venture-backed startup (their target ROI was based on the potential arbitrage opportunities made possible through the transmission of real-time stock and commodity information between the US and London.)

British Telecom passed on investing venture capital into the "wireless" technology pioneered by Marconi. Tesla famously took on funding for his AC power technology from the Westinghouse patriach - who himself made his initial money from an improved railway braking system - the early equivalent of succesful entrepreneurs funding promising new entrants. You all know thousands of similar stories.

One thing all successful startups display is an understanding that the fundamental goal of a startup is to take an existing process and make it more effective or efficient (AC power, the transfer of information between London and New York) - or establish a new market for a new product (Coca Cola, King Gillette's disposable razor). In other words, your startup needs to do something:

  • Better
  • Faster
  • Cheaper
  • Entirely new

These days, it's rare to spot a technology or cleantech company doing somerthing enitrely new. Chances are, your energy, SAAS, or semiconductor startup is improving an existing process, or making a manufacturing process more efficient.

If that is the case, a really thorough understanding - and a demonstration - of the ROI associated with such an efficiency is necessary to obtain top-tier venture backing for this kind of effort. Your ability to maximize your price, your return on investment, and your initial valuation, will be highly dependent on everyone involved understanding exactly the ROI that you are targeting, and can deliver.

In the area of life sciences and some biotech firms, one of the attractions is that some startups in this space are indeed attempting something entirely new. The quid pro quo here is that they are biting of a huge speculative risk that requires large investments - but the promise of massive returns if everything goes right.

Entirely new products and processes happen less often than improvements on existing products. Predicting whether or not an entirely new product will "hit" and create a brand new category has resulted in some specutalur successes (Coke, HBO, RedBull, AdWords, Twitter to pick some at random) - but over the past two hundred years, the roadside has become littered with failures.

To achieve success for an entirely new product, you need that rare combination of a great vision backed by a working technology, backed by a one-in-a-million marketing team and patient investors, and lots and lots of luck.

Taking the first step along this path involves taking some time to think. You need to be able to tell your closest advisors why your startup is going to succeed - the better you can articulate exactly why your approach is better, faster, cheaper than the competition, and what that difference will mean in terms of cash in the hand over time, the better you will be able to protect your valuation, and create a return on investment for everyone involved.

John Sharp

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