Joydip Gupta shares an evergreen article that explains what differentiates successful startups from mediocre ones.
Most of you know the usual must-have’s in a startup business plan. Market must be big, product should solve a real pain point, scalable idea, strong leadership team, solid execution, and so on. No, these are not the capabilities I am referring to. These are hygiene factors. Don’t start a business unless you have these in place.
But 95 out of 100 startups still fail (another 4 do ok-ish). More alarming are the VC statistics: Early stage VCs are arguably the best at reading between the lines in a startup business plan – right? Ironically, early stage VC financial models assume 6 out of 10 of their investee companies will fail, 1-2 will do so-so, and they hope 1-2 will fly. TWO out of TEN!! That’s like saying: I know 6 of my 10 clients won’t pay me, and I hope 1-2 of them pay me repeatedly 🙂 . You get my point. There is such a high risk of failure in an early-stage startup, that if you can get marginally better at predicting winners, you can get really rich.
So what does it really take to win? This is something that has intrigued me ever since I jumped into the Indian startup scene. The Internet is abound with theories and articles, most of them regurgitating the same. Over the past several months I carefully studied companies that are hugely successful to detect patterns. By the way, my definition of success is long-term success of returning value to investors. So if a startup had a string of great funding rounds with accelerating valuations but is still concerned about how they will survive the next 12 months, they are not successful yet. Most of the Indian unicorns unfortunately fall in this bucket, and the jury is still out on whether they will be successful long-term.
So, the #1 factor that differentiates successful startups from mediocre ones is sustainable Barriers to Entry. This is the only capability that guarantees success to a new venture. This is also the #1 weakest link in most startup strategies. Michael Porter had immortalized this several decades ago, but in the current startup rat race, this often gets neglected. Simply put, a sustainable Barrier-to-Entry is a capability that will ensure that competitors can’t copy you quickly and get ahead of you. It must be differentiator first…..either increases product value or reduces cost. But all differentiators are not barriers to entry.
Being a first-mover may have gotten you a good valuation, but if you haven’t built barriers to entry, you are headed for down rounds and will eventually succumb to competition. If you build sustainable barriers you don’t need to compete indefinitely on price, you will retain your customers longer, and your industry getting crowded doesn’t impact you much. And yes, the barriers need to be sustainable. If a large competitor can copy your barrier completely in say, 12 months, it isn’t sustainable.
Key points include:
- Building barriers to entry
- Product value
- Time constraints
Read the full article, The 1 Thing that consistently separates Winners from Losers in Consumer Startups, on LinkedIn.