Unicorns are startups valued at more than $1bn and the subprime breed is supposed to get killed like the CDO securities from the housing crash in the US in 2008. As an entrepreneur, one takes the time to understand a problem and numerous years to build a solution and gain marketshare. It takes tremendous energy to build a company and to have all those years result in a subprime unicorn is like being the Lance Armstrong of startups. The amount of practice and determination Lance had for cycling was no less than any other athlete in the Tour de France but he justified PEDs (Performance Enhancing Drug) to the environment he was in.
Are the subprime unicorns also lured into using drugs like easy money to inject a business for enhanced performance on Excel graphs?
15 deals out of 4000 per year are responsible for 97% of VC returns. That’s a 3.75% chance of being meaningful even after successfully raising venture funding so in this scenario an entrepreneur would do anything to be a winner in a power law distribution.
Looking at these odds, there is no rational reason to be an entrepreneur. However this is not the first domain where human energy is applied to beat the odds. Entrepreneurs understand their problem and solution well enough to build a business passionately, however the real game is being one of the 15 successful startups from the 4000 funded every year. A framework to answer this question is as important as building the product.
The odds to land a man on the moon were similar to building a successful unicorn. The Apollo mission took a tremendous amount of preparation and suffered many setbacks before Apollo 11 was successful in getting man to walk on the moon.
All crew members of Apollo 1 perished in a fire on the launch pad. Neil Armstrong would have died while testing the Lunar Landing Training Vehicle on earth if it took him even half a second longer to eject during practice. While landing on the moon, the Lunar module had overshot it’s planned landing site and Armstrong was able to land just before the Lunar Module ran out of fuel. Moon Machines is a mini documentary series which shows how several of these key Apollo machines were built.
The Apollo mission was successful because of the tremendous amount of preparation to understand the environment and test that understanding to successfully move forward in a staged fashion. Each step of the process reduced uncertainty and risk. For an entrepreneur to focus entirely on the product and not the process of building a business is like trying to make the Apollo mission successful in one shot.
Initial conditions are incredibly important to have a unicorn that can gallop 5 to 10 years later. Paying attention to a few things initially is like the preparation for the Apollo mission. Different things become a priority as a startup goes through it’s lifecycle and getting the kernel of the product and company right in the early years gets a strong dynamo to build later.
The early 5-10 people who contribute in building the startup are really critical. These people are co-founders, early employees, people working on contract or advisors. They all contribute meaningfully to strengthen the product and company. You know the right people are onboard when these individuals are adding non-linear amount of value to move the company forward. They invariably are extremely talented at their skill and deliver their best by taking ownership.
Look at the value that will be added by building this company. Focus more on picking the right problem to solve. You have a solution for the problem that you at present believe is right but this solution will transform rapidly and become a better solution in the next 12-24 months. The problem is much harder to change. Take the time to pick the problem you would like to devote the next 10 years of your life solving.
The cognitive ability required in building a startup is like going on an Everest expedition in 1950 or going to South Pole in 1910. Entrepreneurs are far less prepared to make the journey successfully and listening to tales of past expeditions from other entrepreneurs helps keep the focus on the important things. The mentors don’t solve your problems but instead shine a light on the dark areas that are not in your vision or pat you on the right things or stretch you and show the pitfalls.
10,000 hour rule
The myth that some entrepreneurs know the right things and perfectly execute does not hold up when you actually go look at the details. Elon Musk expected to be successful in launching a rocket in 3 attempts at SpaceX and they all blew up. Steve Jobs did not get a unicorn outcome from Apple 1, Macintosh or Next. Jorge Paulo Lemann was unsuccessful in building his first entrepreneurial venture Libra because of the ownership setup and had to sell out his stake in the business. Most entrepreneurs are successful because of perseverance and independent thinking. Then there is time needed to become good at the details and it is similar to Gladwell’s 10,000 hours of practice to become good at a cognitively challenging task.
If these are the conditions and skills needed to have better odds of success then that’s the way to build a startup. Keep these in mind when starting your journey and all the work would not end up in building a subprime unicorn.
[Guest article by Ishdeep Sawhney, Founder of Banihal.]