If you’re thinking of creating a startup, you’re probably going to look for promising external factors like astrological signs to determine whether a gamble into entrepreneurialism is worth the trouble. And right now, the signs look good. VCs are startup friendly, hardware costs are low, and Google is buying companies for 1.65 billion dollars. The problem, however, is that first time entrepreneurs don’t necessarily succeed or fail because of outside socio-economic forces.
“Our empirical model indicates that entrepreneurs who succeeded in a prior venture (i.e., started a company that went public) have a 30% chance of succeeding in their next venture. By contrast, first-time entrepreneurs have only an 18% chance of succeeding and entrepreneurs who previously failed have a 20% chance of succeeding.”
Now, don’t become too disheartened. Even though the odds say you’ll mess up on your first go (and even your second), just like walking, talking, or even snowboarding, business success comes through persistence and basically knowing more than you know now. This is why failures do better than newbies and also the reason why you (especially if you’re young and without attachments) need to get your feet wet as soon as you can. To help convince you of the values of getting one under your belt, we’ve gathered the following five reasons why your first startup, regardless of whether it’s a success or not, is more valuable than you think because of the lessons you’ll learn.
1) It Prepares You for How Much Work Is Involved
Many startups fail because the founders were not mentally prepared to work the ridiculous hours necessary to make a business succeed. Basically, founders who are unprepared for the rigors of a startup are less likely to make it. At the Startup Success 2006 panel discussion, one of the audience members asked if the founders were able to work from 8-5. Reid Hoffman, founder of LinkedIn, sort of sighed and had this to say:
“Before you get profitable and establish yourself, you’re basically walking dead and you have to realize it’s more of a marathon than a sprint.”
He then went on to say that you can expect to work over 70 hour work weeks to get the product out the door. If you’ve run any type of long distance race, then you’ll understand the importance of mental focus. For example, if you’re mentally ready to run five miles, and at the fifth mile you’re told to run five more, that’s much harder than mentally preparing for ten miles at the start. The only way to train for a marathon is by running, and the only way to train for a startup is by starting.
2) It’ll Teach You What to Look for in a Cofounder
In Paul Graham’s essay on why startups fail, he states that,
“Fights between founders are surprisingly common. About 20% of the startups we’ve funded have had a founder leave. It happens so often that we’ve reversed our attitude to vesting.”
If you and a potential cofounder are really serious about creating a business together, get started now. Even if you’re not working on your master idea, start doing something that is high stress, requires long hours, and tests your dedication. It’s not uncommon to hear of two friends who spend a lot of time on planning out the perfect idea, but break up soon after they actually start.
Particletree was the perfect testing ground for us because it was originally a low risk project that tested how well we worked with one another. Don’t get me wrong, we’ve always taken Particletree seriously, but the servers could have easily been turned off without affecting too many people if our personalities clashed. The three of us were all good friends before going into business, but friends don’t always make the best of business partners.
3) It’ll Show You How Flexible Your Ideas Need to Be
In Dharmesh Shah’s recent essay on How To Kill Your Startup, he believes that startups often fail due to “death by determination”, or stubbornness. To quote Dharmesh,
“Dogged determinedness will likely keep you from building the business that you could have built.”
Along similar lines, a venture capitalist once told us that a startup’s final product usually contains very little of the original idea. Considering that we first tried to create an ASP content management system instead of a form builder, Flickr started off as a game for girls and Craig Newmark just wanted to help people find cool events, he might be on to something. Not only is it important to start now because your idea needs time to mature, but because oftentimes one idea will lead to other non-related ideas. Who knows if we would have del.icio.us or Microsoft if Joshua Schachter and Bill Gates hadn’t first bombed on Loaf and Traf-O-Data.
4) It’ll Teach You the Importance of Passion
Founders often call it quits when they just aren’t passionate about an idea anymore. For example, Kiko, an online calendar application recently sold their business for a number of reasons including lack of passion. Richard White, cofounder of Kiko stated,
“I won’t get into all of the dynamics of the situation, but, in a nutshell, we had lost our spark and were letting our users down by not improving the product the way we should have.
He later also said,
“The team was burned out and we decided that it was time to find someone else to carry the torch.”
Starting a business and quickly realizing that it isn’t your passion is definitely better than waiting for the perfect moment to start a business that you may not be interested in anyways.
5) It’ll Show You How Little You Know About Money
To launch our web development magazine, Treehouse, we gave out the first issue for free in order to generate a little buzz. Even though thirty thousand people downloaded the free issue in its first week, only about 300 of them felt it was worth paying for. According to Ryan Carson, cofounder of Dropsend, that’s a lot closer to the norm than we previously believed.
“If you’re offering a free plan to your customers then expect to get around 98% or 99% of your customers on that plan. That means that you can only really bank on 1% or 2% of your total customers on the paying plan. In our experience this is true and other major players in the web app industry have agreed. This is about the industry average.”
Getting customers to pay for your product is hard work, and it’s no surprise that startups often fail due to poor budgeting and cash flow. According to SCORE’s, Top Reasons Why Businesses Fail, misguided financial expectations often explain why companies call it quits.
- 82% Poor cash flow management skills/poor understanding of cash flow
- 79% Starting out with too little money.
- 77% Not pricing properly - failure to include all necessary items when setting prices
- 73% Being overly optimistic about achievable sales, money required and about what needs to be done to be successful.
While Treehouse didn’t necessarily fail, the experience taught us an important lesson on estimating cash flows. That knowledge was pretty important in determining how much angel investment we decided take in order to ensure we could make it to break-even with Wufoo.
The moral of the story is that now is a great time to begin your first startup because there is usually a lot to learn before your first real success. The act of starting a business will help to solidify your ideas, weed out bad co-founders and give you a feel for the time commitment required. Marc Cuban, owner of the Dallas Mavericks, had this to say about his early business experiences,
“With every effort, I learned a lot. With every mistake and failure, not only mine, but of those around me, I learned what not to do. I also got to study the success of those I did business with as well. I had more than a healthy dose of fear, and an unlimited amount of hope, and more importantly, no limit on time and effort.
Even successful people often fail at first, so right now now is the perfect time to get those hiccups out of the way.