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Beating the odds: winning a World Cup sweepstake & start-up success

June 23, 2014

Life is all about polarity and probability, making a choice between things that are not within your control versus the things that you feel are within your control, and those things that just happen, against the odds. I’m in that mode of thinking now that we’re into the second week of the 2014 World Cup, and I’m having mixed success in a number of sweepstakes I’ve entered. I’m holding tickets for:

  • Germany: Sitting pretty, started thinking about how to spend the cash
  • Iran: I knew this anyway, I’ll go and buy a scratch card instead
  • Russia: Hope for best, fear the worst
  • South Korea: Keep an eye on them, they’ll be back in 2018
  • Holland: Keep hold of your ticket

What do my chances of scooping the various sweepstake pots look like at this stage? When it comes to the odds of winning a sweepstakes, there is always good news and bad news. The odds of winning are never in your favour, but the joy of taking a chance and the sweetness of victory, however sporadic, makes up for it.

But have you ever wondered what your odds of winning sweepstakes really are? To determine the odds of winning sweepstakes, you simply divide the total number of sweepstakes entries by the number of entries you’ve submitted and by the number of prizes being awarded. But of course, it’s not as simple of that, while multiple entries do increase your odds of winning, the odds of any given entry winning are so small that this effect is rarely significant.

But of course the key is that you don’t have a 1:32 chance of winning the World Cup sweepstake. 32 teams, £32 with £1 for every team at random, but unless you get one of the top four teams, in reality you’re horrifically ripped off, so 28/32 means you’re fodder and bank rolling your colleagues.

It was the same in the recent McDonald’s Monopoly sweepstake, which I’m sure you’re familiar with, where with every purchase you got a peel off sticker comprised of two stamps. These stamps gave either an instant prize, or a space on the Monopoly board. For spaces on the Monopoly board, if you collected all the properties of a single colour, you won a prize.

What were your odds of winning a prize? There were 600 million game stickers issued, thus 1.2 billion game stamps, or individual attempts at winning. There were 135 million food prizes and 16 million instant win prizes in the sweepstake. The odds of winning a prize were thus 1 in 8, or a 12.5% chance.

If you won a prize, it was probably going to be a food prize, an 11.25% (1:9) chance.  So what does this mean?  Well, comparing the two probabilities, 89.4% of the prizes will be food prizes. Hope you’re hungry. In fact, 4 out of every 11 prizes allocated will be a medium friesSince there’s a 12.5% chance of winning an instant prize, and a 11.25% chance of winning a food prize, that means that there is roughly a 2.6% chance of winning one of the other instant prizes, or 1:38. Worse odd than my World Cup sweepstakes!

But let’s get to the real fun. Here’s the secret to McDonald’s Monopoly. Many people assume that all the spaces are equally likely. This means that almost all the game pieces are entirely worthless, and only one game piece from every set is actually tantamount to winning the prize. It’s easy to get a hold of some of the worthless properties. They’re outstandingly common, most with a 1 in 10 or so chance of popping up.

So much for World Cup sweepstakes and McDonald’s Monopoly, they’re just a bit of fun, but what are the odds of success in a business start-up? Everyone knows that launching and living in a start-up is risky, but few appreciate just how the odds of success are stacked against you.

Recent research from Paul Graham, founder of start-up programme Y Combinator, showed that 37 of the 511 companies that have gone through the Y Combinator programme over the past five years have either sold for, or are now worth, more than $40m. Most entrepreneurs would view creating a company worth $40m as a success (unless the company raised more capital than that), and on the face of it, 37 seems relatively impressive. In fact, however, the number tells a scary and depressing story.

This number suggests that a startling 93% of the companies that get accepted by Y Combinator eventually fail. Not all companies that sell for less than $40m are failures obviously, but a high percentage of Y Combinator companies end up being worth zero. A company accepted by Y Combinator, therefore, has less than a 1-in-10 chance of being a big success. More alarmingly, the companies accepted by Y Combinator are only a tiny fraction of the companies that apply – their acceptance rate is 5%.

If we use the 5% rate, we can estimate that Y Combinator has received about 10,000 applications for the 500 companies it has chosen. Assuming Y Combinator has a modest ability to pick winners, the odds that a company applying to Y Combinator will be a success are significantly lower than the odds of success of the companies accepted into the program.

If only 37 of the companies that have applied to Y Combinator over the years have succeeded, this is a staggeringly low 0.4% success rate. Put differently, only one in every 200 companies that applies to Y Combinator will succeed. The reality is that Y Combinator probably misses a few winners, so the actual odds are probably slightly higher.

What this tells us is that any entrepreneur or investor is deluding themselves into thinking that start-ups are an easy way to creating success. Indeed, acclaimed Harvard Business School research by Paul Gompers et al, and Vineet Nayar, tells us that 75% of start-ups fail. Give me that World Cup sweepstake ticket for Iran instead!

So, you have the perfect business idea. You can’t believe no one has thought of it before. Or, if someone has, he or she doesn’t have your vision, skills or passion. You are convinced this new business is the key to your successful future, how do you increase the odds of your start-up success?

1. Create a sense of purpose More than an idea or a vision, a start-up must be driven by purpose.  People like working for start-ups not because of the salaries, but because of the excitement involved in pursuing a purpose, one that challenges the status quo and promises to change the world.  That often creates the feeling that a start-up will succeed irrespective of what it does; it will survive because of the way it does things.

2. Ensure that your passion adds up Passionate entrepreneurs tend to develop rose-coloured world-views, over-estimating sales and underestimating costs. To convert your passion into tangible business value, emphasise a business strategy that makes financial sense based on a compelling story, covering how the elements of your business will come together in a way that is cashflow positive over time.

3. Attach to the market, not your idea Passion is an inner phenomenon, but a successful start-up is rooted outside the founder, in the marketplace. To turn your passion into profits, emphasise the addressable market, always think about your business relative to the customer, and execute on your market opportunity by placing a priority on your customer’s experience and perception of value.

4. Develop an MVP, perfectionism slows you down A core component in a start-up journey is the build-measure-learn feedback loop. The first step is figuring out the problem that needs to be solved and then developing a minimum viable product (MVP) to begin the process of learning as quickly as possible. Once the MVP is established, a start-up can work on tuning the engine.

This will involve measurement and learning and must include actionable metrics that can demonstrate cause and effect question. Many founders have a hard time keeping things moving due to a desire for perfection in every little detail, delaying making important decisions because they feel the circumstances weren’t optimal. This ultimately stunts growth, it is often more important to make a decision promptly than it is to get it perfectly right.

5. It’s about learning, not profit What’s important is the willingness to evolve by learning about customers. The evolution takes place in small steps, pivoting from one plan to another, evolving from customer discovery to customer validation. If you’re climbing Mount Everest, which is pretty much what you’re doing when you launch a start-up, you won’t be able to see the peak from base camp, you navigate your way one step at a time, focusing on how to climb the mountain facing you, thinking and rethinking your strategy at each cliff along the way. The minimum viable product is that version of a new product, which allows a team to collect the maximum amount of validated learning with the least effort.

6. Put people first Start-ups provide the most important management lesson that it’s people who make companies, not the other way around, and only start-ups that realise that will be left standing.  That’s why implementation of ideas such as employee first, customer second increases the probability of success.

7. Be agile, jog fleet-footedly The most important demand on a start-up is flexibility – a flexible structure, flexible markets, flexible solutions. Many start-ups begin with one idea, shift to a second and then move to a third before they succeed. For example, PayPal started in encryption and Flickr in gaming.

No amount of planning can anticipate the unexpected twists and turns of reality. To succeed, a new venture needs both iteration and agility. Establish an ongoing process for translating ideas into actions and results, followed by evaluation. Test and adapt your concept as early as possible. Work on continually improving the fit between your big idea and the marketplace.

8. Develop a sense of timing Waiting for the right moment to take a decision, and holding off until then, often makes the difference between success and failure. A farmer knows when to sow and when to harvest. When he plants rice, he doesn’t think about the price he may get, but when the crop is ripening, he will negotiate the price.

Adopt a ‘So What?’ mind-set, and map out implications of alternative optionsA core pivot will touch every aspect of your business. Map out what the redefinition looks like across process, profits, costs, brand, team structure, culture and more before putting your final vision into motion.

9. Create governance mechanisms It isn’t necessary to define roles and responsibilities in a start-up, everyone must be prepared to do anything for success. People usually get excited by this, but to navigate through the turbulence, governance mechanisms are needed. They don’t create rigidity, but maintain financial discipline, with quarterly and monthly reporting. This may seem superfluous when revenues are hard to come by, but it’s imperative to have them in place in order to stay capital efficient.

10. You need to say ‘no’ sometimes Learn how to say ‘no’ more. Commit selectively so you can focus on your core business – ‘stick to the knitting’ – instead of getting distracted at every opportunity that comes by. The most successful entrepreneurs I know are laser-focused. It’s a marathon not a sprint, reflection and consistency are as important as innovation in getting to a ‘business as usual’ model.

11. Don’t micromanage Getting deep in the weeds gives you little time to get that 20,000ft perspective, you should work ‘on’ the business not ‘in’ the business, you’ll find your greatest contributions and creative pivots come when you pull yourself back. But more than that, delegating responsibility empowers the team, by giving and expecting accountability you create a team that rises to the occasion and often thinks of solutions you would not have considered.

12. You can’t beat the odds The ability to scale a start-up is about market timing and beating the odds on risks with both a relatively high likelihood of occurrence and major consequences. These risks can sink a start-up, the survival of your venture depends on your ability to identify and mitigate the ‘killer odds’.

The thing that makes these issues so deadly is that there are so many of them. Individually, they may seem manageable, but collectively, they represent a true challenge for any entrepreneur. For example, suppose you manage to distil your world down to just five key risks, and you think you’ve eliminated 90% of the risk in each category:

  • A 90% chance that you’ve identified a genuine market need
  • A 90% chance that your addressable market is as big as you believe
  • A 90% chance that you can actually implement your innovation
  • A 90% chance that you can figure out how to sell it for more than it costs you to make it
  • A 90% chance that you have assembled the right team

You might take comfort in the fact that any one of these risk factors presents only a 20% chance of sinking the company. However, the probability of surviving all five risk factors (making an assumption that the risk factors are statistically independent of each other) is: 90% × 90% × 90% × 90% × 90% = 59%

Surprising, isn’t it, five factors, each mitigated by 90%, but an outcome of just 60% of success, just a notch above 50:50. However, if there are another five key risk factors, again each mitigated by 90%, then the chance of success is just 35%.

The key insight here is that a start-up that is good at managing individual risks has a marginal chance of surviving overall. Generally speaking, the odds are stacked heavily against the average start-up, which is why the rate of failure is startlingly high – 75% according to Harvard academics. There are strategies and tactics you can follow to increase the chances of success, but perhaps the odds of winning my World Cup sweepstake aren’t too bad after all.

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