What is “success”?

This Sunday Scaries centers around a few concepts. It also ties back to some best practices for founders that I have written about like the power of reflection. While I don’t intentionally tie my posts together, I would say it’s fairly natural that they would tie together.

Building and growing a startup is hard. I have seen an interesting pattern amongst successful startups and their founders. Let’s start with the previous sentence. If you read my work, one thing to be very cognizant of is my word choice and sentence structure. Do NOT browse my work. Pay attention or you will miss the point. I wish I was more of a plain writer. That would make me a better writer, however this is where i am and hopefully I will get better.
The difference is that I stated “a successful startup and their founder”. The difference between a successful startup and a successful founder can be quite different. I successful startup is pretty easy. Regardless of ownership structure, success is defined as business success. On a risk adjusted basis (ZIRP was easy, but say a 5%MM or the S&P) that the business returns more than the invested capital on a risk adjusted basis. This can be done through cash-flow or through a liquidity event. This applied to all businesses, bootstrapped, VC backed etc. The variable is the “risk adjusting”. As a founder, if you plan on taking on outside capital, you need to know and understand this really well. Every investor including yourself (say you are bootstrapping) will run through this analysis. If you need help understanding this, message me in Catalyst Network. This is the definition of startup success. Conventional wisdom would say that this should be the same definition as Founder success. This is not the same. A Founder can run a startup for 5 years and lose all their investors money. That would be a startup failure. However, the founder may have learned through this journey many things that de-risks their next venture. The learned on their investors and customers dime, something very insightful that they will apply to their next venture. That’s hardly a failure.
The importance here is that this journey is an experience. For an investor, they gain an experience that will inform their next 10 investments and for the founder it may inform their next 10 years.

This journey of experience creates a lot of opportunities for “self reflection” that then creates a filter for “self selection”. Let me give you two examples, one from an investor experience and another from a founder experience.
Statement of Self Selection:
From an investor’s perspective
“I doubt I will invest in a company based in a second-third tier city”
I didn’t say never. I just said “I doubt”. Why? I have observed that startups that are based in cities with a high quality of life and a low cost of living, creates a level of ambivalence. The people live there because work is less important and the ambition to drive a unicorn like outcome is less. I read an article about a woman who sold her startup based in Manhattan for $50m. She said the only thing that changed in her life is that she went from renting her walk up to owning her walk up.
So now as an investor, I carry this experience/bias with me. Also, in markets that I know like
Atlanta, a single outcome for an entrepreneur of $50m and they are “done”. Next thing you know they are getting into safe investments like real estate etc. They aren’t off to build the next unicorn. For an investor, there is always a bias to invest in the founders next startup. Rinse and repeat. Too many of these markets fail to yield serial entrepreneurs.
Statement of Self Selection:
From the founder standpoint.
“I will never build a services company, it doesn’t scale.”
During the dotcom, I essentially built a web development and internet services company while also building an ISP. One was driven by high demand. Help us connect to the internet, build a website etc etc. The other was an Internet Service Provider that once a customer was provisioned, as long as their internet worked they sent money in every month. At one point we had $50k/month in revenue with 3 people. Which in that era, was good money. However, people kept asking for other professional services. So we diverted our efforts to build that business. The challenge was that every month we had to sell more projects and hire more people. The ISP business was purely MRR (monthly recurring revenue). We were helped by a frothy IPO market and through a series of events we were able to exit. My opinion was that services companies are easy to start but a pain to scale. Product companies are hard to start and easier to scale. From this experience I started several services companies. Some were more successful than others but these experiences further galvanized my position that any company that is defined by the number of people on staff is a
pain. So while I do some advisory work these days and have a small team. I have to constantly remind myself that services businesses are not great.

So the initial question was, “What is success?”
The answer, it depends on who you talk to. For an investor it is a very simple question. Did the startup exceed the financial return expectations that were set in the first place?
For a founder, the definition of success varies. Sometimes financial and sometimes experiential.

I have also observed that the single point of misalignment between investors and founders around success is due to the “sunk cost fallacy”. For an investor, a startup is one of many investments. An investment may reach a point where they intellectually and financially “move on”. For a founder, their startup is the only investment they have going for them (in most cases). They are financially and intellectually all in and struggle to move on, even when it’s best for them. Grit gets you far, it also gets you digging even deeper into a quagmire.

A few things to consider is how you develop and plan for your startup is essential to its success. When incubating your idea, it’s a great time to define what success is to you. I would also have daily, weekly, monthly milestones of success that tie into what you think the ultimate success is defined.