The SBA agency states that 30% of new businesses fail during the first two years of being open, 50% during the first five years, and 66% during the first 10. And only 25% make it to 15 years or more.
With venture-backed tech startups situation is similar. More than 75 percent of them fail.
Why is that? (It’s a Story Time)
Let me start with four quick tech startups success stories.
Try to guess what startup I’m talking about before I reveal it at the end of each story.
These guys started a small web development agency back in 1999 and did an excellent job for their clients.
But this didn’t feel satisfying anymore, and they decided to find their way to building and selling their software products.
They made a smart move and sold a 70-pages eCommerce related report at first.
After they got an audience, experimented with marketing, they built their first product. A project management system for small businesses and teams. They did it all while still serving web design clients.
These days this project management software has over 3 million paid accounts. It’s all bootstrapped, and they never looked for VC funds.
These guys also authored a bunch of bestselling books for developers and business owners.
Do you already know whom I’m talking about?
These guys are Jason Fried and David Heinemeier Hansson and their main product – Basecamp.
These two brothers from Ireland built their first software being school kids and successfully bootstrapped it to sell in a couple of years for 5 million bucks.
In a few more years, they dropped out of college to start a new venture. They didn’t want to bootstrap it at that time even though they had money, time, and also excellent engineering skills.
Instead, they got a huge vision to disrupt the online payments industry. They set up to play big from day one.
With the previous track record, they quickly got seed funding. In couple more years, they closed series A funding.
It all started in 2010, and even this fall, they got one more 100 million funding round closed. And they keep raising more and more money.
They add a new product to their ladder every 2-3 months. They invest and acquire other startups actively.
They are now valued at $35 billion.
They’re an ideal sample of a unicorn software startup.
So who are these guys?
These brothers are John and Patrick Collison, and their company is Stripe LLC.
This guy completed his undergraduate studies in 2002 with a BSEE from Duke University and was living a great life working as a programmer in a bunch of startups.
But in 2006, his ambitions went up, and he started working on his own FinTech consumer software to disrupt banking space.
He had savings only to live off for a bit more than a year and nobody to help him.
So he closed himself in his room for 14 hours/day and 7 days/week and finished the alpha version in about nine months.
In the fall of 2006, he was lucky to get seed funding, and the rest is history.
Three years later, this SaaS got 10 million paying users and was acquired by Intuit.
This guy is Aaron Patzer, and his SaaS was Mint.com, a personal finance management app. He sold it and is now busy with other things.
During his professional career, he worked as a marketing analyst, social media manager, and product manager. But side hustles have always been a part of his life since childhood.
On November 6, 2013, as one of the last of such hustles, he began a simple email newsletter between friends sharing the latest tech products and apps they stumbled across. To his surprise, the subscribers base grew pretty fast.
And when it became evident that people like and need it, this founder brought a programmer (his friend) to build a website and moved all the community from the mailing list there.
This was the point when the side project turned into a full-time position.
In just over five years, that email list that started as a side project has become the wildly popular spot for the tech community.
This startup is ProductHunt, and the founder is Ryan Hoover.
How are these stories different?
Okay. Enough stories. How many of these stories did you guess? 🙂
Now, before getting deeper into those four success stories and try to analyze their circumstances, let’s define the rules.
These are five criteria I’ll use to describe every founder type and success story:
- Goals. What are the founder’s goals to start the software in the first place? E.g., grow and sell it, or keep it for longterm as a new income stream.
- Priorities. Based on the goals, the founder(s) will prioritize differently. E.g., focus on scale & growth, or go lean & profit faster.
- Team. Who builds the business and the software part? Possible options are: do everything on your own, hire in-house employees, find technical co-founder, or, finally, outsource it (freelancers or agency).
- Funds. Where the money come from, and what is costs structure? Money sources could be personal savings/friends/family, monthly cash flow from other businesses or salary, professional money (angels, VCs, etc.). Costs structure: fixed one-time sum to finish specific milestones (e.g., MVP version) or limited monthly cashflow.
- Involvement. How much time the founder(s) will spend on it. E.g. full-time, part-time (nights & weekends).
So what are these four types of software founders?
Now we’re ready to go over our four success stories and, based on goals, skills, experience, and circumstances, define four types of software/tech founders:
1. Biz Owner (Story #1: Basecamp)
This founder type is an entrepreneur who has at least one successful business and a steady stream of income.
This person wants to build a new income stream leveraging software and technology.
The business owner type got the necessary minimum of marketing & sales experience, and an entrepreneur mindset.
These people get into a new venture with a clearly defined audience and usually keep serving the same people with a new software product offer.
- Goals. Usually, create a new income stream and add one more successful business to the portfolio. But sometimes, it might organically grow to unicorn startup size.
- Priorities. Go lean and take it all to the profit day ASAP.
- Team. Biz Owner starts with hiring an agency to build software. Later, it might turn to in-house hires.
- Funds. Monthly cash flow from existing businesses.
- Dedication: Part-time. Other businesses also take time.
2. Startupper (Story #2: Stripe)
This is a true startupper.
This kind of founder steps into the game with a huge vision and looks for big VC money ASAP.
Startupper usually fails multiple times before turning it into success. This is how all the skills and experience are acquired.
In this case, the team is super important. Startupper prefers working with partners over outsourcing core technology. Why? – VC money like in-house teams over outsourced departments.
Unlike Biz Owner, startupper often starts with an idea and then tries to find Product-Market fit… from scratch.
- Goals. Grow it big, grow it fast, and then sell it.
- Priorities. Funds, Growth, and Exit.
- Team. Usually, 2 or 3 co-founders. E.g., the hacker (CTO), hustler (CEO and Sales), and hipster (UI/UX). These guys prefer doing it all by themselves and hire in-house after VC money came in.
- Funds. Before traction: own savings, help from family & friends. If got lucky, seed money from startup accelerators. After traction: VC money.
- Involvement. Full-time only
3. Programmer (Story #3: Mint)
The programmer builds tons of software as part of his daily job.
Also, every passionate programmer creates a few dozens of so-called “pet” projects. It’s a joyful experience.
Eventually, every programmer dreams of turning one of these pet projects into profitable software to quit the job and enjoy some passive income.
But there is a massive gap between building software and selling it. This kind of founder starts with an idea, develops software, and then tries to sell it.
There are a lot of successful software businesses started by Programmers. These are people who stepped into CEO positions and learned sales and marketing.
Also, launching your own software being a programmer is relatively cheap as you build it yourself.
- Goals. Both ways: small SaaS to pay the bills and quit the job. Or it can be about building a unicorn startup and changing the world.
- Priorities. Go lean in the pre-revenue phase and then grow it after raising money (or making revenue).
- Team. The founder does everything. Builds the product and sells it.
- Funds. Personal savings, family/friends, a fraction of monthly salary.
- Involvement. Part-time. Evenings and weekends
4. Employee (Story #4: ProductHunt)
The last founder category is very similar to the Programmer, with the only difference – lack of programming skills.
This is the person with a dream to start her own business. She’s doing this for the first time w/o much prior business or tech-related experience, and this founder got no technical skills to build software.
This person burns night oil and also spends all weekends working on a new idea.
Employee doesn’t have the luxury to do multiple tries with different software ideas as Programmer does. Employee type needs to pay for the development hours.
Costs of starting a tech product are much higher for Employee than for Programmer. The initial investment for the MVP version is crucial in this scenario.
This kind of founder needs to acquire both: high-level technical skills and business skills.
- Goals. It could be both: big huge startup or just a small bootstrapped venture to pay the bills and get rid of the boss.
- Priorities. Go lean and on a budget.
- Team. Usually hires agency (or freelancer) or partners with a technical co-founder.
- Funds. Own savings, friends/family borrows, part of monthly salary.
- Involvement. Part-time. Evenings and weekends.
Who got more luck?
I’m pretty sure there are more tech founder types, but these four are the most common that we met among our agency clients since 2011.
We worked with all four types of founders, and there are success stories with founders coming from all four categories.
My first three software products I started when I was in the Programmer category. But then, few fresh ideas I started being an agency owner (Biz Owner type).
Trying new startup ideas from the Biz Owner perspective was way more relaxed. I had a bit more time as my team was serving clients, and I had a bit more cash to invest in building and marketing new ideas.
My partner Ethan also came from Real Estate space being part of the Biz Owner category.
And you know what?
Our preferred category of clients are people coming from the Biz Owner category.
The Biz Owner category success ratio is the highest.
These people are okay with playing small at first and know what it takes to build a new income stream. Be it technology or just a local store.
They got the mindset, the money, a bit of time and usually start building anything only after they understand the audience and their pains.
They usually start on the market side.
They have enough monthly cash flow to fund a new idea for the long run until they figure out how to sell it. They got the mindset and can sustain hard times.
On the other side, Programmer and Employee type of founders…
They need to learn and figure out a lot of customer and marketing stuff. And, of course, the hardest part is a mindset shift.
It’s much harder to turn 9-6 employee into an entrepreneur than help serial entrepreneur step into software business for the first time and create one more income stream 😉
What about Startuppers?
Less than 25% of VC funded startups fail.
And you know what? – Most of the popular software products are actually bootstrapped (or got professional money at later stages).
Startuppers need to satisfy both investors and customers. Evidently, investors are put first.
In startup mode, priorities change often, pressure builds up, the environment changes instantly, and stress is growing.
Of course, there’s no right way to start up
Some start lean. Some don’t.
You might start with a huge goal and look for VC funds to scale your business but end up pushing it all on your own.
Or you might never think about disrupting your industry and just wanted to build a small tech business, but it naturally grew to something bigger.
In our agency, we love a productive economy. If that’s possible to start a software product with $30-50k, why would we spend $300-500k on it? Just to burn funds and show costs on account sheets?
We love working on building profitable software from day one where we get paid from revenue and not from founders’ pockets or investors.
We prefer building businesses over startups.
It’s up to you to pick your GOALs with new software and tech ventures. But make sure you align your actions and processes with these GOALs.
And I hope after figuring out what type of founder you are, you’ll speed up your journey and enjoy the whole process a lot more.
As usual, I have a quick home assignment for you if you want to act now:
- Download free infographic in the form below
- Review all four founder types criteria and find out what type of founder do you belong to
- If you come from Programmer or Employee category: check this article and learn what it takes to build and launch profitable software
- If you come from Biz Owner category: get an honest opinion on your software idea from me
- If you come from Startupper category, as the next step, make sure you have proper co-founders in place
So what kind of founder are you? Are you coming from the 5th category that I missed to include?