The Patterns of a Successful Startup

May 30, 2011   //   by Eran Savir   //   Blog, SaaS, Tips for Entrepreneurs  // 

Paul Graham describes determination, flexibility, imagination, naughtiness and friendship as the core selection criteria for YCombinator and probably also the key to success.

A project called The Startup Genome interviewed and analyzed over 650 early-stage Internet startups and released the first Startup Genome Report— a 67 page in-depth analysis on what makes early-stage Internet startups successful.

This is a fascinating report. If you’re an entrepreneur, an internet startup founder or an investor I warmly recommend reading it.

They did not analyze and compare startups based on the traditional differentiation that is based on startups’ type of user and payer, which was essentially B2C vs. B2B. One reason is that the problem with that approach is that it doesn’t take into account that with the evolution of software as a service and cloud computing, many B2B startups can behave like B2C startups if their product is simple and cheap enough, given that employees have the autonomy to make purchase decisions without needing approval from decision makers or the IT department.

Instead The Startup Genome defines different types of internet startups:

Type 1

• The Automizer

Common characteristics: self-service customer acquisition, consumer focused,product centric, fast execution, often automize a manual process.

Examples: Google, Dropbox, Eventbrite, Slideshare, Mint, Groupon, Pandora,Kickstarter,Zynga, Playdom, Modcloth, Chegg, Powerset, Box.net, Basecamp,Hipmunk, OpenTable etc.

• Type 1N – The Social Transformer

Common characteristics: self service customer acquisition, critical mass,runaway user growth, winner take all markets, complex ux, network effects,typically create new ways for people to interact.

Examples: Ebay, OkCupid, Skype, Airbnb, Craigslist, Etsy, IMVU, Flickr, LinkedIn, Yelp, Aardvark, Facebook, Twitter, Foursquare, Youtube, Dailybooth, Mechanical Turk, MyYearbook, Prosper, Paypal, Quora, Hunch, etc.

Type 2

• The Integrator

Common characteristics: lead generation with inside sales reps, high certainty,product centric, early monetization, SME focused, smaller markets, often takeinnovations from consumer Internet and rebuild it for smaller enterprises.

Examples: PBworks, Uservoice, Kissmetrics, Mixpanel, Dimdim, HubSpot, Marketo Xignite, Zendesk, GetSatisfaction, Flowtown, etc.

• Type 3 – The Challenger

Common characteristics: enterprise sales, high customer dependency, complex& rigid markets, repeatable sales process.

Examples: Oracle, Salesforce, MySQL, Redhat, Jive, Ariba, Rapleaf, Involver,BazaarVoice, Atlassian, BuddyMedia, Palantir, Netsuite, Passkey, WorkDay, Apptio,Zuora, Cloudera, Splunk, SuccessFactor, Yammer, Postini, etc.

Following are some of their key findings:

  1. Founders that learn are more successful: Startups that have helpful mentors, track metrics effectively, and learn from startup thought leaders raise 7x more money and have 3.5x better user growth.
  2. Startups that pivot once or twice times 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.
  3. Many investors invest 2-3x more capital than necessary in startups that haven’t reached problem solution fit yet. They also over-invest in solo founders and founding teams without technical cofounders despite indicators that show that these teams have a much lower probability of success.
  4. Investors who provide hands-on help have little or no effect on the company’s operational performance. But the right mentors significantly influence a company’s performance and ability to raise money. (However, this does not mean that investors don’t have a significant effect on valuations and M&A)
  5. Solo founders take 3.6x longer to reach scale stage compared to a founding team of 2 and they are 2.3x less likely to pivot.
  6. Business-heavy founding teams are 6.2x more likely to successfully scale with sales driven startups than with product centric startups.
  7. Technical-heavy founding teams are 3.3x more likely to successfully scale with product-centric startups with no network effects than with product-centric startups that have network effects.
  8. Balanced teams with one technical founder and one business founder raise 30% more money, have 2.9x more user growth and are 19% less likely to scale prematurely than technical or business-heavy founding teams.
  9. Most successful founders are driven by impact rather than experience or money.
  10. Founders overestimate the value of IP before product market fit by 255%.
  11. Startups need 2-3 times longer to validate their market than most founders expect. This underestimation creates the pressure to scale prematurely.
  12. Startups that haven’t raised money over-estimate their market size by 100x and often misinterpret their market as new.
  13. Premature scaling is the most common reason for startups to perform worse. They tend to lose the battle early on by getting ahead of themselves.
  14. B2C vs. B2B is not a meaningful segmentation of Internet startups anymore because the Internet has changed the rules of business. We found 4 different major groups of startups that all have very different behavior regarding customer acquisition, time, product, market and team.

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Download the full Startup Genome report here.

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