Take heed, technology startups: your fledgling company will make a lot more money if you begin focusing on your customers and refining your product to suit their needs as early as you can.
According to a lecture at the New Jersey Entrepreneurial Network poster event last week by Derek Lidow, visiting professor in entrepreneurship at Princeton University, startup teams need someone sales-oriented and “unafraid to pick up the phone and make those sales.” Early-stage companies are most successful when customer-focused rather than product-centric, Lidow said. The bottom line: actually knowing your customers is far more important than having a working prototype.
Tech startup founders should realize that intellectual property (IP) is not a critical determinant of startup success, Lidow, founder, president and CEO of iSuppli (El Segundo, Calif.), which was recently acquired by IHS said. While IP does affect a company’s valuation, many entrepreneurs start successful tech firms without it. Even if they could have gotten the IP and didn’t, they still go on to thrive, he added. “A lot of companies engage in lengthy negotiations about IP. Though IP has very little to do with a company’s long-term success,” in terms of short-term viability, the distraction of negotiating IP can delay a firm’s advancement and hurt its chance of success, he pointed out.
Looking at data compiled over 12 years, Lidow reviewed the many models of technology startup entrepreneurship and revealed some surprising results. Investments by VCs account for only 3 percent of successful startups, as do those by angel investors. Strategic partners, often touted as one way startups can succeed, account for only 1 percent of successful ventures. The most successful startups begin with money from friends and family (13 percent) or “bootstrap themselves on profits” made by successfully selling their product. “If you can figure out how to make your first product profitable,” you can grow from there, Lidow said.
Other models leverage some kind of cash flow. Lidow suggests startups begin consulting in the industry in which they have become expert. While consultants have to give away a bit of their IP, they can use the experience to determine their business model and generate cash flow.
The greatest motivation for founders’ startup success is starting a business because they can’t find another job. “They tend to have a much higher success rate because they are worried about starving if they don’t succeed,” Lidow said. Founders who want to make a lot of money are also very successful, because they tend to focus on the bottom line and ignore distractions that might divert the attention of other entrepreneurs. Founders with the lowest success rate: those starting a business because they think their technology is “cool.”