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The probability of startup success

February 20, 2017

School reunions are funny things, you quickly rewind back to when you were 18 and awkward and gangly and clumsy, not that I’ve changed that much since then anyway. However, my recent reunion was really quite poignant, former teachers who had such an influencing and formative impact on me are now of an age that each year fewer of them remain alive or are well enough to attend.

My most recent reunion saw the absence of Mr Evans, my former maths teacher. I did four ‘A’ levels at maths, I saw as much of him almost as my mum and dad in those two years. He was my John Keating, the Robin Williams character from Dead Poets Society. Not quite the O Captain, My Captain moment from the Walt Whitman poem, but Pure mathematics is, in its way, the poetry of logical ideas. Well, that’s what he used to say, starting my life-long hobby of collecting Albert Einstein quotes.

I still remember the main school entrance and the huge columns by the door, wooden floors and marble fireplaces in the classrooms. The grounds were amazing, with over ten rugby pitches, lots of trees and rhododendrons all over the place. A vivid memory is of lying under a tree one-summer dinnertime, looking up through its branches into the bright blue sky.

The sunlight is catching the leaves at different angles so that my eyes flicker from open patch of colour to the next, the verdant foliage displaying a host of verdant hues. (I thought I would try to get ‘verdant’ into this paragraph, as my English teachers always believed there were no signs of creative talent. Though I probably shouldn’t have used ‘verdant’ twice).

As far as schoolwork was concerned I was unexceptional until I completed my ‘O’ levels, then Boom! Learning became a serious business.  I ditched the foreign languages – declining nouns and adjectives and conjugating verbs. English had been fine, I enjoyed the class time reading, Jerome K Jerome Three Men in a Boat has stuck with me forever, but French was bewildering, you had to make strange noises I’d never heard before and twist your mouth into a new shapes. The sounds seem to bear no relation to the words on the page to me.

History? What’s the point? Why was I being told King Alfred burned the cakes? Why, if he was king, was he doing the cooking for goodness sake? And King Canute, what was he up to, chatting away to the sea? None of it made sense to me. Worst of all was Scripture. It actually frightened me. It seemed to be filled with random politeness. Thou shalt no covert thy neighbour’s ox. Are you joking?

I was always able to do long division in my head, a four-digit number dividend by a three-digit number was easy, I could see the numbers and the workings out. I enjoyed the step up from ‘O’ level to ‘A’ level maths and the need to be able to learn and reproduce mathematical proofs. Truth is I was a bit of a geek but masked it well.

In maths, a proof is a deductive argument for a mathematical statement. In the argument, other previously established statements, such as theorems, can be used. In principle, a proof can be traced back to self-evident or assumed statements, known as axioms, along with accepted rules of inference. So there.

I recall one late, Friday afternoon in December, 1980. The lesson was about Pythagorean theorem and Euclid’s proof. Mr Evans had issued the homework earlier the week to come prepared to stand up in front of the class and write the proof on the blackboard. But no, I’d been distracted and not done it.

True to form, he walked into the classroom, threw the chalk casually over to me and asked me to parade my knowledge on Pythagoras, and sat down with his back to the blackboard. Silence. No hurried scuffing of chalk on said blackboard as I unpacked my thinking. Within twenty seconds he knew I hadn’t done the work. Tumbleweed passed gently through the room.

And then something magical happened: Brookes, if you care to go to the bookcase on the far wall, second shelf up, take the sixth book from the left, the one with the red cover, and turn to page 134, the fourth paragraph onwards will help you. So off I went, found the book as described and there, page 134, was a perfect recount of Euclid’s Proof.

I stood there and copied out the proof onto the blackboard. It was one of the most stressful episodes in my life since my journey in my mother’s birth canal. To this date, I still carry round a scruffy bit of paper, now fading and in tatters, with the Euclid’s proof. But it was the moment the appetite for learning, curiosity and being mentally agile was borne in me, that day has lived with me ever since. Evans’s passion for knowledge, knowing where the book was, the shelf, the page, the paragraph was inspirational.

So I left school with a head full of numbers, and there is one further learning from school that has really stuck in my mind that involves maths, but is history really. During the English Civil War, Cromwell’s own troops often fell out amongst themselves, and they were never more troublesome than on 15 December 1647, at the first rendezvous of the New Model Army where there was a mutiny leading to the formation of the Levellers.

Now, like any leader facing a mutiny, Cromwell was in a difficult situation. Cromwell’s answer was to arrest and try the ringleaders in a hastily convened court martial and then let fate play a role. There were three identified instigators, and each was summarily convicted and sentenced to death.

Cromwell needed to make only one example, so he made the three men play a deadly game. Each in turn threw dice to see who would live and who would die. The lowest score fell to Private Richard Arnold. He was shot on the spot.

What an outcome from the roll of the dice! Whilst the situation wasn’t one in which he had much time to consider the probability of certain scores, I’ve always wished I was there in a Blackadder sort of way, as surely it would have been helpful for Private Arnold to know the odds of success or otherwise as he stepped up to throw the dice in the ultimate game of chance? I could have told him his chances as he held the dice, and his life, in his hands.

We don’t know Private Arnold’s score, but seven (17%) is the most common combined result when you roll two dice, and two and twelve (3%) are the least probable, and you will likely roll a pair of doubles one out of every six rolls. I suspect Private Arnold rolled the dice and hoped for the best.

Unfortunately some business owners just roll the dice and hope for the best too, not evaluating risk or assessing uncertainty, they simply ignore the odds. Decisions are either made at random, or left to chance. Often they get the same outcome as Private Arnold.

What are the odds that your new idea will succeed? If it does, what will the returns be? One of the problems that we have in startups is that we simply don’t know the answers to questions like this, which means that if we want to innovate successfully, you not only have to deal with uncertainty, you must seek it out. We can’t use not knowing as an excuse to not act – because we never know.

Although luck is involved and factors into the outcome, strategy plays a more important role in the long-term managing the odds from the roll of the dice. In a changing world, the only strategy that is guaranteed to fail is not taking risks. So take calculated risks, be a wizard of odds. That is quite different from being rash and just rolling the dice and leaving everything left to chance.

Having a head full of numbers means I’ve always toyed with probability, and startup life is about making a choice between things that are within your control versus the things that you feel are outside your control, and those things that just happen, against the odds.

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, so how do you increase the odds of your start-up success? Here are a few thoughts.

Ensure that your passion adds up Passionate entrepreneurs can have rose-coloured world-views, over-estimating sales and underestimating costs. To convert your passion into a tangible business, 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. It’s all about the clarity of your thinking and your assumptions – the numbers fall out from this.

Attach to the market, not your idea Passion is an inner phenomenon, but a successful start-up is rooted outside the founder, in the market and with customers. To turn your passion into customers, emphasise the addressable market, always think about your business from the perspective of the customer, and execute on your market opportunity by placing a priority on your customer’s perception of value. Why would they buy from you? What problem are you solving? What is compelling about your value proposition?

Develop an MVP 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, you can work on tuning the engine. Use your MVP as a process for engaging customers in dialogue, focus on conversations not revenue.

Be agile The most important feature of your startup is your open-mindedness to learning and being agile, be prepared to iterate based on the MVP. 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.

Develop a sense of timing Waiting for the right moment to take a decision often makes the difference between success and failure. Adopt a ‘So What?’ mind-set, and map out implications of alternative options. It’s a marathon not a sprint, reflection and consistency are as important as innovation in getting to a ‘business as usual’ model. You need to say ‘no’ sometimes, and make some bets.

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 come when you pull yourself back. But more than that, delegation empowers the team, accountability creates a team that rises to the occasion and often thinks of solutions you would not have considered.

You can’t beat the odds The ability to scale a start-up is about timing. The are many challenges. Individually, they may seem manageable, but collectively, they represent a test for any startup business model.

For example, suppose you identify five key risks, and you think you’ve eliminated 90% of the risk in each category:

  • A 90% chance there is a real market need
  • A 90% chance that you’ve sized your addressable market
  • A 90% chance that you can implement your innovation
  • A 90% chance that you can 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 that any one of these risk factors presents just a 20% chance of adversity, however, the probability of surviving all five risk factors 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, yet stark insight here is that a start-up that is good at managing individual risks has a marginal chance of survival. The probability shows the underlying challenge. The odds are stacked heavily against a start-up, which is why the rate of failure is startlingly high – 75% according to some surveys.

There are strategies and tactics you can follow to increase the chances of success as outlined above, but alas, being able to recount Euclid’s proof of Pythagoras theorem isn’t one of them, so I’d best pack that 1980 maths lesson away in the file marked ‘nostalgia’.

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