The startup lottery

Startup success is a lot like a lottery, but where certain factors can tilt the odds in your favour. This may be inflammatory to say, but even Venture Capitalists and Angel Investors tacitly admit this, with oft stated stats.

You will frequently hear variations of statistics, like 10% of VC investments are home runs, 20% do ok, 30% return the investment and 40% fail outright. Percentages may vary, but in large, the idea is that fewer than a third of VC-backed startups give investors a return. And this is among startups that actually receive VC-backing.

These statistics imply there is a large amount of uncertainty that goes into starting a startup, and any level of uncertainty leaves a large part of the outcome up to chance, or in plain language: luck. In a sense, startups are a lottery.

What is a startup?

With all this talk of startups, we should quickly define what we mean by "startup": A startup is a company undertaken to seek, develop and validate a scalable business model in a market large enough to support the return profile sought by VC funds (typically a market cap of $1bn or more). In other words, startups are not your typical predictable businesses that almost anyone can set up and at least make a decent living. Startups by definition try to do new, unproven things, or proven things, in new novel ways.

Luck, be a lady tonight

There are multiple components to whether a startup will be successful, simplified:

• Market: is the market growing or shrinking?
• Timing: why is now a good time to enter?
• Skill: why are the founders uniquely qualified to enter this market?
• Luck: just how well the dice roll for the founders.

Out of these factors, anyone factor being perfected will tilt the odds in the favour of a startup. But I'd argue that market and timing have a larger impact in most cases than skill. Whether skill or luck is more important is debatable.

Of course, founders, especially previously successful founders, will claim that skill and hard work was the primary factor in their success. They are both right, and wrong.

"Past performance is not indicative of future results"

"Past performance is not indicative of future results" is an oft touted disclaimer in investment. However, when it comes to startups, maybe past performance is indicative of future results, but perhaps not in the way people think.

Improved skills as a result of success clearly play a factor, but I'd suggest they are not the dominant factor. The dominant factor is building the infrastructure & capital of future success through past success.

What do I mean by this? Quite simply, a previously successful founder with an exit is more likely to achieve some of the following:

• They are more likely to get funding in the future, from higher quality investors.
• They are more likely to have the social connections to make their next venture successful.
• They are more likely to have the visibility & following to get free PR.

Even absent any improvement in skills from their first-time startup, the casino-table has tilted heavily in their favour.

First-time success is the worst

Having known a few first-time founders who got success, then desperately tried to replicate the success, and failing, despite having the above factors tilted in their favour, I've come to the conclusion first-time startup success is the worst.

Why? Simply because of the instinct to attribute factors of luck to personal skill instead. It's like a gambler winning the lottery, thinking it's his superior number picking skills that brought him the win: they'll frequently try to play the same numbers over and over again, only to be shocked that it isn't working, but lacking the self-awareness to understand why.

Which startup bets are the best investment?

I am not an investment professional, and this is not financial advice. But if I had a guess: the best founders to bet on are those who have failed at least once before a successful exit, but who have had at least one successful exit. This ensures both a reduced risk of hubris, and an increased chance of a tilted casino-table in their favour.

Of course, like with any game of chance, the best place to be, is being "The House", or in this case, the venture investor. It means your chances of success are not tied to any one bet (startup), but rather a portfolio of bets spread out over time.

And never forget, whether you are a founder or investor, startups are a lottery, a game of chance. Luck always plays a great role. There are just certain factors that can be tilted in your favour to improve your odds.