Do you want to start a start-up?
June 15, 2011
The tech start up market is hot, so for many university grads the increasing preferred route to the job market is to start a company. Start-up Weekend in Toronto, June 3-5 attracted 200 tech'ies. They formed into 17 teams with the mission of taking a concept and building it into the embryo of a company in 54 hours. Last week, "48 Hours in the Valley" hosted 20 Canadian start-ups in Silicon Valley where they pitched their stuff to Valley VC's. Incubators like Ryerson University's DMZ are hosting two floors of entrepreneurs living the start-up dream. The Ministry of Research and Innovation through the Ontario Network of Excellence is supporting 14 Regional Innovation Centres, that are building innovation communities and mentoring hundreds of start-ups every week. Included in this network is the innovationFACTORY where I am an Executive-in-Residence.
I love this energy but are we deluding ourselves and especially our young, exceptionally bright but business-naive founders of these start-ups. Building a successful tech company is very hard and the journey is littered with road kill. For every Facebook, Twitter or Groupon, there are thousands that never made it to a successful exit of any degree. To illustrate the failure rate, according to Thomson-Reuters and PwC, Canadian VC's, who target a 5 to 10 times return on their money, posted -2.8% return on invested capital over the past 10 years.
So if you want to start your own company, in my opinion, here is what it takes to make it.
It starts with Capital. I wrote in an earlier blog that like humans, a company needs air in their tank to breathe and survive. When the air runs out, you and your company are dead. Investment money is air for start-ups and it is in very short supply, especially for companies seeking their first round of institutional money from VC's. Running the fundraising gauntlet for funding from "Friends and Family" and then Angel funding is tough but it is nothing compared to competing for VC funds.
Most Angels back a mix of good ideas, big market opportunities and talented founders. Most VC's that I talk to say that they back teams. Good ideas, big addressable pull markets, unique & protected intellectual property and solid technology must be established before the VC will get into serious due diligence. Once these are demonstrated, unless you have invented something so unique and defensible, your company like most others will be viewed as an execution play and your investors will be evaluating based on your track record and ability to execute.
So consider again my beginning premise that we may be deluding young entrepreneurs who are just out of school and think they can start a company and build it into a success. Does it happen - yes. Do people win lotteries - yes but that doesn't mean that I would invest my retirement plan in lottery tickets.
Here is another approach. I know a young entrepreneur who is going a different route. His first job out of university was with a start-up that was led by an experienced CEO and management team. He used his three years there to learn everything he could from them. A few months ago he moved to a new job with greater responsibility. It is a bigger company but still early stage, with a more complex business model and more things for him to learn. Someday, I am confident that he will found his own start-up but when he does, he will have experience, a successful track record and a network of mentors and contracts.
But here is our challenge. Canada needs an ecosystem of successful start-up companies to employ and train (through the school of hard knocks) our next generation of start-up executives. We don't have enough today and many of the better ones are being sold or moved south. We also need a strong network of mentors. People who can invest their time and knowledge to bridge the gap between our young entrepreneurs and the experience that investors are seeking. The province is doing its part through sponsoring organizations like the Ontario Centres of Excellence and Ontario Network of Excellence. So are private sector organizations like BridgeScale and its Digital Puck community and Mentor Monday events. Is everything heading in the right direction? It would appear so but we have a long journey ahead.
So my advice to young entrepreneurs who have the start-up passion is start your company but be realistic about the road ahead of you. Find mentors and advisors who can help fill gaps in your experience. Don't have unrealistic expectations about obtaining investment. Learn about how an investor thinks and makes decisions. And also think about the other path of working for a couple or three start-ups or early stage companies before you start your own.