Failure takes longer than success

And two more counter-intuitive startup insights from science

I aggregated three insights around success and performance of startups. At the end of this newsletter you have answers to:

  • Should you write a business plan?

  • Do you get successful when talking to customers?

  • What takes longer, failing or becoming profitable?

Business plans: useful or waste of time?

Most MBAs won't like this, but I found a study1 that analysed 116 new ventures of which some had a business plan and others didn't. They couldn't find a difference in performance. However, one study is just one study. A meta-analysis2 that compared 46 studies found that business planning does help. However, it helps much more for established firms than for new firms. This makes sense to me, as without a business running, how much is there to plan? Furthermore, as a new business, you want to sometimes deviate from the plan, for instance for a pivot.

"Planning helps, sometimes". Jeez, what a groundbreaking insight, Jeroen. Still, for me it underpins the fuzziness of the early-stage of a startup, where changing your plan is more valuable than sticking to a plan. Your plan changes every week, sometimes every day. Some scholars note that the only value of early-stage business plans is when investors ask for them.

Sticking to the plan is actually culturally related. Cultures with high uncertainty avoidance tend to stick more to the plan. If you are unfamiliar with uncertainty avoidance, play around with Hofstede's research here, that generated the graph above, it's great fun and insightful. The meta-analysis also found that high business planning actually hinders business performance for high uncertain avoidance types of countries: they tend to stick to plans too much. Makes sense.

Key take-away: Don't worry so much about business plans if you are very early-stage. If you are getting some decent traction, it could be wise to plan more.

Open listening is crucial for success

"Talk to your customer" is one of the most heard tips for startups. It might be bad advice. Actually it seems that the way we listen to customers is much more important. A study in 2020 researched how first-time entrepreneurs hunted for customer feedback3. They found that entrepreneurs that were open to actively explore unexpected and surprising elements of their inquiries performed better.

They called this an open way of inquiring. These teams were able to do that partially because they were aware of their lack of knowledge. They knew they didn't know what it was to be a nurse, for instance, hence they inquired very deeply.

Teams that didn't progress as much tended to not explore these types of details and overlooked gaps in their knowledge. They felt they knew everything already, had a tech solution in mind and stopped exploring the problem. They would only highlight the very clear things that are unknown, ask experts about that and continue; so called focused inquiry. Read some of the quotes from the research (Table above) to see how the two modes alter. In your last customer interview, which mode was prevalent?

Key take away: Listen for things that don't match your expectations. Bring more than yourself to those meetings, two people hear more things than one.

Failure takes longer than success

This one is the most unintuitive to me. We all hear that the road to success is long, bumpy and mostly dreadful. Props for the endurance of entrepreneurs. Seriously, how bad do you want this? What hole in your life—next to your bank account—are you trying to fill?

Jokes aside, I stumbled upon research that analysed how long it takes to become profitable4. Measuring from the first activities of the entrepreneur till profit. It found in a broad database that those that succeed to become profitable do this earlier than those that abandon their entrepreneurial journey. So: time to profitable < time to failure.

The authors explain it as follows: Being profitable is a very objective fact. Chris Benson, a guest lecturer in my course, would always talk about the basic financial hypothesis for a startup: 'Money in - money out > 0'. Easy as that. The moment that point is met, the entrepreneur is likely to continue.

On the other hand, being unsuccessful is not easily measured. The fact whether the entrepreneur continues has to do with the confidence the founder has in the startup. This is much more subjective. Without any positive signals, the founder keeps looking as long as (s)he has confidence. On average, this can take 3 to 12 months extra for the founder to give up.

What can you do? Research shows that doing a lot of deliberate activities increases the chance of being profitable, especially in the first six months5. This study focused on activities such as prototyping, having a website, making sales, hiring employees, having a founding team. Startups that have lower amount of activities towards success tend to simmer on with a lower chance of profitability. I'm not saying that precisely these actions are most relevant for you. The basic premise is that action trumps non-action.

Make sure to notice this: Becoming profitable is only one milestone or major signal in a company's lifetime. There are many more. However, the absence of signals of non-success is something to think about. How do you know that you are not flogging a dead horse?

Key take-aways: The power of action of the early stage. Don't wait for time to tell you it's not worth it. The first months are crucial. Get busy!

Jeroen's note

Happy welcome to all subscribers. I'm extremely happy this is my first newsletter, I hope you were too.

Help me out: Which of these three insights resonated the most with you? Engage with me through the comments on Substack, Twitter or whatever means.

I feel I can write a paragraph or two with more personal stuff. There we go.

Currently I'm sitting on a bunch of data from the past two batches of startups from which I'm eager to share insights from. I hope to take you on a journey of developing the way we talk and think about entrepreneurship. I do this trough a design mindset. Not the stick post-its on a wall 'design thinking' mindset, but more on understanding the concepts that are created when launching a startup. This inherently is a more abstract thinking exercise, which if you know me, I enjoy.

The creation of a startup begins at the abstract (as my promotor Frido taught me), when nothing is clear and everything is chaotic. I love that place in a process. Not everyone does. Still, any entrepreneur needs to get through that phase. On top of that, I believe that abstractness does not only arise in the first weeks of your startup. It can surface out of nowhere, for you as a founder or any innovator to battle. I hope to give you (thinking) tools to fight abstract monsters. I will aim to balance abstractness with concreteness, such as with this article on customer research methods.

I hope you enjoyed the read, see you next time!

References

1

Lange, Julian E., Aleksandar Mollov, Michael Pearlmutter, Sunil Singh, and William D. Bygrave. 2007. “Pre-Start-up Formal Business Plans and Post-Start-up Performance: A Study of 116 New Ventures.” Venture Capital 9 (4): 237–56. https://doi.org/10.1080/13691060701414840.

2

Brinckmann, Jan, Dietmar Grichnik, and Diana Kapsa. 2010. “Should Entrepreneurs Plan or Just Storm the Castle? A Meta-Analysis on Contextual Factors Impacting the Business Planning–Performance Relationship in Small Firms.” Journal of Business Venturing 25 (1): 24–40. https://doi.org/10.1016/j.jbusvent.2008.10.007.

3

Shepherd, Dean A., Rose Sattari, and Holger Patzelt. 2020. “A Social Model of Opportunity Development: Building and Engaging Communities of Inquiry.” Journal of Business Venturing, June, 106033. https://doi.org/10.1016/j.jbusvent.2020.106033.

4

Shim, Jaehu, and Per Davidsson. 2018. “Shorter than We Thought: The Duration of Venture Creation Processes.” Journal of Business Venturing Insights 9 (June): 10–16. https://doi.org/10.1016/j.jbvi.2017.12.003.

5

Reynolds, Paul D. 2016. “Start-up Actions and Outcomes: What Entrepreneurs Do to Reach Profitability.” Foundations and Trends® in Entrepreneurship 12 (6): 443–559. https://doi.org/10.1561/0300000071.