Research suggests that about 75% of venture-backed tech startups fail to thrive. Only slightly over half of all new businesses survive five years.
I didn’t intend to start this article with negative stats, but it’s a hard world out there for startups. How can startups effectively spend their investment capital in order to achieve success? Money usually runs out faster than expected, so having a detailed plan for every expense is important.
Be realistic about your needs, set goals, and set money aside for these three things:
- Hiring
- Product testing
- Product iterations
Hiring
Large capital raises can often lead to poor decision-making on behalf of both investors and management. The inclination to spend money simply because it’s there – before understanding your business inside and out and grasping the externalities of any industry – is a dangerous trap.
Startups feel pressure to get big quick, rapidly build up a team, and build a product. But pressure to get big fast leads to errors. When you raise money, you can feel like you have to rush to hire a team. The cost of a bad hire is substantial. For high-level positions that require advanced education, the costs of hiring and training a new employee can be twice or more of annual salary. In other words, the cost to hire an engineer earning $135,000 per year could actually be $270,000. Even being more conservative, the cost of hiring and training a new employee will likely be at least 6 to 9 months’ salary. Hiring a team before it’s needed, or simply hiring the wrong team is almost a surefire death sentence for any startup.
Leadership needs to be able to delegate
We’ve all heard the stories about famous founders that start successful companies who are fired by the board of directors. They’re usually fired over disagreements about the direction of the company; Steve Jobs and Apple is probably the most famous case. When you start a company or you’re with a company from the ground level, you want to be in control. With so much at stake, entrepreneurs can feel the need to be in control of every aspect of their business. But entrepreneurs often have so much on their plate that they lose sight of what matters most: building a great team and being able to delegate.
Entrepreneur Magazine makes the interesting point that success and failure for startups always seems “tied to leadership and the leader’s ability to build a strong team and drive a business model and business thought-process and discipline.” If it starts at the top with leadership, then the leader’s ability to choose the right team is paramount to success.
It’s all about finding the right team – be patient
Getting your startup going requires creativity. Identify the areas where you need the most support and that are strategically the most important to your business. If you’re hiring a permanent employee, make sure you spend a lot of time vetting candidates for both capabilities and culture fit. A bad fit from a cultural standpoint is not just a loss of productivity with that bad fit, but it diminishes overall productivity and impacts your whole team.
A helpful alternative to rushing to hire a full-time employee is to bring on talented and experienced contractors. For entrepreneurs with a vision who need expertise to realize it, or for companies that need expertise before building a full tech team, employing great freelance tech talent can offer significant advantages to a startup:
- Expand your hiring reach – Freelancers who work remotely enable you to hire the best person for the job as opposed to the best person located near your office.
- Hit the ground running — If a freelancer is experienced, they don’t require training or a lot of time to get acquainted with how to build your product.
- You can buy time – Bring in highly specialized freelancers to temporarily take on difficult tasks while you find great full-time employees. This allows you to find the right fit rather than the first fit.
- Reduce hiring costs – Freelancers don’t require benefits.
- Thought diversity — Freelancers can provide a fresh, outsider’s perspective and the good ones will challenge your assumptions and make sure you are thinking about potential gotchas.
- Scalable operations – Increase your workforce without increasing costs. Only pay for the hours you need and avoid all that meeting time that can kill the productivity of your devs.
To summarize the point about hiring for venture-backed companies – be patient and hire the right people.
Product testing
Testing is an important part of understanding your target audience and seeing your product work in practice. Often times, what works in theory does not work in practice and you will have to fine-tune your product. Start on a small scale building MVPs (minimum viable products) and releasing, and then, if everything seems to be working, scale up. Most importantly, do not dismiss criticism. Listen to what people have to say, even if you think it’s irrational. Small Business BC has some great ideas for market testing that you should check out.
Product iterations
Inevitably, the first version of any product is not the one that finds a market. Remember when Amazon only sold books? Amazon launched in July 1994 as the world’s biggest online bookstore. Today, Amazon has forayed into dozens of industries with no plans of slowing down. To put it lightly, Amazon has undergone and continues to undergo massive iterations.
To ensure success in the long run, you need to measure, learn, and change your product or service to fit the changing needs of your customers. VCs should design feedback loops so you can understand what your customers want. Conduct surveys, interviews, and look into ways that you can reach your customers to receive actionable data. While getting feedback and changing your product can be expensive to implement, they are necessary steps to take to maintain success. And that is why all VCs should set money aside for product iterations and/or product pivots.
Be best-to-market
With today’s fast-moving technology, being first-to-market is obviously very important. But if you’re a venture-backed startup, don’t let that pressure force you to make bad decisions. In the end, being best-to-market is still king. Focus hard on the things that matter to your business and be patient in finding the right team to take your company to the next level. Set aside funds for product testing on a small scale before going big, and pay attention to the feedback you receive. Never stop iterating.
Hiring. Testing. Iterating. Budget wisely for those 3 things and you should have a higher chance of success in the world.