There is a series of more or less systematic examinations, which deal with the question, why startups become successful. Exemplarily I would like to refer to the examinations provided by Bill Gross, who founded the incubator „Idealab“ (http://www.idealab.com) in California in 1996, and since then accompanied roughly 100 startups, of which from his point of view „many were successful and many failed“.
Gross analyzed the success of 200 startups based on 5 major critical success factors (compare: https://www.inc.com/chris-dessi/this-ted-talk-explains-the-5-reasons-why-startups-succeed.html).
- The ideas
- The team
- The business model
- The funding
- The timing
For each of the 200 examined startups Gross rated each of the 5 critical success factors on a scale between 1 and 10. When starting Idealab he thought, the ideas were most important. Over the years, the team gained more and more importance. But the analysis led to a totally different result. According to the analysis timing is the most important factor, which makes the difference between success and failure.
Gross provides examples: Airbnb’s idea, to believe, that people would rent their private rooms to strangers, was considered as absurd at the beginning. However the timing was perfect, since Airbnb’s start fell into a phase, where people needed additional money (and the principle of shared economy rapidly gained importance).
On the other hand, a video platform, which was promoted by Idealab, was not successful, since at that time neither browser, nor network bandwidth were mature and efficient enough. Two years after the project was shut down, the technology reached the necessary level of maturity and efficiency and YouTube started its triumphal procession.
So far, so good and comprehensible …
But, what do particularly successful startups, which developed to digital champions, have in common? Or asking the same question in a different way: Is there a „cooking recipe“ with ingredients for the digital champions of tomorrow?
When you look at digital champions, such as Apple, Google, Amazon or Facebook, as example, you can already deduce from the tremendous success of the iPhones, the Google search engine, the Amazon marketplace or Facebook’s social networking platform, which led in most of the cases to a market dominating position, a multitude of „ingredients“, which can be utilized in terms of critical success factors as well by other companies, e.g.:
- Cool image („Think Different“, „Don’t be evil“, „Work hard, have fun, make history“)
- Provision of a concrete customer value add, such as listen to music, watch movies, social interactions with friends and even unknown people (multimedia-based), research information (which insurance or which energy tariff is most advantageous?), shopping without the necessity to visit a physical store, perform banking transactions on the way or learn languages – note: starting point of a successful digital champion consequently should be (besides others) the question: „Which wishes, problems or inconveniences are in place, which keep a lot of people at the world busy?“
- Very simple, user friendly utilization (reduction to the essence, less is more) – note: the intuitive user interface is one of the biggest strengths of the iPhone, the success of Google is based as well on the simple design of its website and the success of Amazon of the possibility to place orders via 1-Click®.
- The possibility for users to present themselves, their experiences and competencies to a broader audience, e.g. in form of „profiles“ or „timelines“ – note: this feature addresses the human need for individuality, as well as affiliation to a group. Mean instincts, such as human vanity and the impulse for self-profiling probably play an important role as well in this context under consideration of the motto „Be connected. Be discovered. Be on Facebook.“
- Leverage ludic drive and/or competitive orientation of users, e.g. by „gamification“ of business models including rankings with rewards or bonuses for the highest ranked users.
- The possibility to leave comments or ratings e.g. for evaluating products, solutions or services; utilization of swarm intelligence or use-cases such as crowd-funding
- Value add for users by provision of location-based services (e.g. all hotels below 50 USD within a radius of 5 miles) – note: linked with map services, such as Google Maps, it is possible to develop very useful offerings based on this functionality
- Creation of an exclusive system with leading or even dominant market position, where content-providers have to pay for its usage – Apple controls with iTunes the access to content for its devices, Amazon and Ebay charge for the usage of their marketplaces considerable fees
- Composition of an eco-system with all important content-providers (for music, movies, books, consumer goods) on a win-win-basis, so that the user can be sure, to have access to the maximum range of content right from the beginning – note: this is an essential success factor for Apple as well as for Amazon
- Setup business models with „monthly recurring revenue (MRR)“ and low barriers for the users to join/book a service (avoid big one-time investments at the beginning, set up short cancelation periods and provide flexible pricing schemes), such as Software-as-a-Service (SaaS), streaming services, subscriptions or memberships.
- User-friendly pricing-model, which allows to provide and purchase content (apps, music, videos) in small slices at affordable prices (99 cent).
- Foster the „scalability“ of the business model, which means the ability to increase revenue or number of users without additional investments into production and infrastructure.
- For devices, such as the iPhone, a high-quality, tidy and simple product design (look&feel) – from outside and inside as well as a simple and robust systems architecture (with a minimum number of interfaces or keys)
- Successive, evolutionary further development of a proven formula for success: Apple started with the iPod as pure music player, extended it into a multi-media player for music, photos and movies; by adding telephone and internet functionality the iPod became the iPhone and later the iPad; Amazon started its business with books and extended its marketplace after the first success rapidly to other product categories
- Leveraging networking effects, i.e. the increasing benefit of a product for a consumer, based on the increasing number of other consumers using the same or complementary product – note: this is a deciding success factor for social networks, such as Facebook, XING, LinkedIn, but as well for messenger apps, such as WhatsApp or Snapchat (the more friends or business partners utilize the network, the higher the value add for me or my company)
- The higher the number of consumers or click rates, the higher are the possible revenues resulting from advertising – note: advertising revenues e.g. from videos posted at YouTube in Germany are calculated based on the following formula: clicks per month x cushioning factor (usually 50% to 70%) x cost per mile (usually 3 to 5 Euro per 1,000 clicks); the cushioning factor is deducted from the click rate since not all visitors really watch the advertising; YouTube claims 55% of calculated revenues, whereas the rest stays for the YouTuber; example: 17,500 clicks x 0,6 : 1,000 x 4 Euro x 45% = 18.90 Euro
- Targeted addressing of dedicated user groups and their specific requirements (e.g. moviegoer, residents of specific cities, potential car buyers, bank customers) – note: besides the affiliation to a certain group, the access to insider information (field reports, know „how to“) can be an essential motivation for utilizing the respective service or app
- Addressing and leveraging global trends, such as shared economy (Uber, Airbnb) or environment protection (e.g. by eco-friendly delivery of food via bicycle)
- Leveraging of the internet as global, cost-efficient sales platform including the possibility for downloading or upgrading software and content
- High-productive logistics, which allows a speedy delivery of products to the end user as well as simple processing of returns
- Excellent customer service besides others including exchange of faulty devices
- The right timing: when the first iPhone was released in 2007, fixed and mobile networks were able the first time to transfer storage-intensive content at a reasonably acceptable speed
Important: In many cases the business models of digital champions lead to a sneaking elimination or displacement of local/regional middle-men or brokers/agents, which have been dominating the regional market for decades. Amazon for example reduced the market share of book stores at the beginning and now penetrates other markets, which were covered so far by e.g. food stores, perfumeries or builder’s merchant’s. Uber pushes local taxi operators and taxi companies aside, Airbnb attacks travel and tourism agencies and the blockchain technology poses a threat to the business model of banks and insurance companies. Comparison portals, such as check24.de or smava.de already significantly changed the nature of the insurance branch.
By the way, you don’t need to invent innovations always by yourself. Apple, e.g. picked-up and leveraged third party innovations, such as the Xerox mouse, and made it available for a broader group of buyers. In Germany several startups were able to develop quite successfully, since they picked-up ideas from the US and adapted it to the needs of the German market and/or specific user-groups (e.g. StudiVz.de, Lokalisten.de). During the past years digital champions rose in China, e.g. Alibaba, which copied the business models of Amazon or Ebay and adapted it to the Chinese market. The most popular categories of the app stores (e.g. shopping, social networks, games, photo&video, entertainment, travel, food&beverage, health&fitness) provide indications, which business models could be most promising.
Summary of Critical Success Factors for future Digital Champions:
Paradigm Shifts for managers in charge of linear business models:
The aforementioned (still comparably unstructured) list of obvious, reusable patterns is a first draft, which I will successively further develop and refine. Suggestions and ideas for improvement are highly welcome.
Unicorns are companies (usually startups), which have yet to show any special success, but already have reached market capitalization of 1 billion USD or more. CBINSIGHTS.com provides a continuously updated list of all global Unicorns: https://www.cbinsights.com/research-unicorn-companies. On August 8, 2018, this Unicorn list comprised 259 companies with a total cumulative valuation of $837 billion.
STARTPLATZ is a German start-up incubator and accelerator with locations in Cologne and Düsseldorf and a meeting place for the Rhineland start-up scene.
As the comments at the beginning of this blog show, financing is a very important success factor for startups. On June 4, 2018, Carolin Gattermann published a very informative blog on the STARTPLATZ homepage on the topic „5 crowdfunding possibilities in Germany – crowdfunding platforms“: https://www.startplatz.de/crowdfunding-plattformen/.
There you will find basic explanations on the differences between crowdfunding, crowd investing and crowdlending, a short description of the offerings of well-known crowdfunding platforms (such as Kickstarter, Startnext, Steady or Indiegogo) or tips for designing your own crowdfunding campaigns.
An exciting question is whether platforms will still be needed for such purposes in the future, or whether a direct connection between microinvestors and entrepreneurs can be established, e.g. with the help of blockchain technology. A simple, uncomplicated mechanism, which, for example, enables 50,000 microinvestors to invest €1 each in an attractive startup at the click of a mouse, would open up new, very dynamic and flexible possibilities for financing off the beaten track. However, the cases of fraud in initial coin offerings (ICOs) show that this is not risk-free.
In my complementary blog „The Chief Information Officer’s ultimate reading list“ published on May 18, 2018, you’ll find an overview of my most important blogs on digitalization, platform economy, organization and company culture development, hiring of employees, personality development, crisis management, data privacy, cyber security and many other topics: https://kubraconsult.blog/2018/05/18/the-chief-information-officers-ultimate-reading-list/.
Interesting source illustrating the development of Apple computer devices from 1976 on:
Another interesting source describing the „50 most influential gadgets of all times“: