This article was published in the 01-May-2014 issue of Finweek Magazine
All entrepreneurs start their businesses dreaming of mega success. But can moderate success lead to a slow, painful death for your start-up? If you achieve some success but don’t fail outright, at what point should you turn around and start again? Finweek unpacks the issues around entrepreneurial turning points and the important lessons they hold for entrepreneurs.
Accelerators versus incubators
In order to understand entrepreneurial turning points better, it is helpful to look at business incubators versus business accelerators in the tech startup space. The terms “incubator” and “accelerator” describe two very dissimilar models for startup workspaces. Fernando Sepulveda, founder of the Impulsa accelerator in the US, summed it up well on Inc.com when he said: “Incubators help fledgling companies stand and walk, accelerators teach companies to run.”
Both incubators and accelerators help companies grow by providing guidance and mentorship. But they don’t do this in the same ways and, more critically, they don’t this at the same stage of the business’ lifecycle. An incubator supports businesses at the startup stage by providing a workspace, business skills training, and access to capital and business networks. So it gives startups the tools, infrastructure and advice that they need to get going. A business accelerator, on the other hand, aims to help companies to scale and grow rapidly, and to iron out all organisational, operational, and strategic challenges that they may be encountering. Think of it as holistic management consulting, but adapted for small and medium sized companies.
Compared to incubators, accelerators often put more pressure on their startups to succeed. Interestingly, according to TechCrunch.com, recent findings from MIT suggest that this is the difference that helps accelerator-supported startups achieve greater success than incubator-supported startups.
In 2012 the MIT Founders’ Skills Accelerator, or FSA, ran alongside an MIT student-led incubator, known as the Beehive Cooperative. The two programmes were similar in a number of ways: Start-up teams in the FSA and Beehive were all of very strong calibre. Each programme had dedicated workspace, and participants rapidly built strong entrepreneurial communities nurtured by the programme’s leadership.
So what was the big difference between the programmes? It came down to education and the pressure to perform. The FSA startups had to take part in frequent seminars, many meetings with mentors, and monthly “board meetings” that forced teams to track performance against the milestones they had set at the start. Teams could earn up to $20,000 if they achieved the milestones. Compare this to the Beehive, which had occasional guest speakers, but where teams had to schedule their own meetings with the assigned mentors.
Here’s where things got interesting. While some Beehive teams did succeed, their success rate was dramatically lower than the accelerator teams. Their speed of progress was markedly lower, as was their motivation to reach “escape velocity” – the phrase that MIT used to describe a team strong enough to move out of the “MIT bubble” and become a standalone firm.
Beehive teams were reluctant to leave the entrepreneurial hub they had worked hard to create. On the plus side, the sense of community and support had very positive effects, but on the minus side, it created an environment that was simply too comfortable.
In terms of results, what was the key difference between these two programmes? It came down largely to timing.
The Beehive teams typically made initial progress but stagnated with time. By contrast, FSA teams were forced to deliver results throughout the programme. In the first month, they tested their ideas (and teams) rigorously. At the end of Month 1, they either had to show they were on the road to mega success, or they were forced to abandon or dramatically change their concept. Also, the individual elements of their business were analysed often.
The question you’re probably asking is this: “Naturally, great success is the end-goal, but it’s easier said than done. Isn’t moderate success still better than outright failure?”
According to the MIT research, the answer is an unequivocal NO! Companies achieving moderate success are the ones “barely living.” Their rate of progress has slowed to almost-zero – markedly less progress than they could make doing something else, both for the entrepreneur’s benefit and society’s benefit. As the speed of progress drops, the entrepreneur’s rate of learning drops, making them less-prepared to face the challenges of future startups. The startup will plod along only as long as there is money, provided the entrepreneur doesn’t get bored first. By contrast, companies that follow the path of outright failure don’t waste time and capital pursuing something that fails. In failing, they learn a great deal about how to get better. In the end they are more likely to grow into a successful company. Some may even decide, after enough outright failures, that they do not want to be entrepreneurs anymore, giving them the chance to build a career years earlier than the stagnant startup that isn’t going anywhere fast. So, a well-designed accelerator will rapidly force its startup teams onto the path of big failure or big success, preventing or at least dramatically reducing the chances of stagnation. Based on the MIT research, teams that failed outright could quickly pivot and build strong businesses on the road to great success.
In a nutshell, acceleration is more likely to lead to big success or big failure, while incubation is more likely to lead to stagnation. In these two circumstances specifically, the fixed time period of the accelerator, hands-on mentoring, and ruthless board-meetings lead to tough decisions being made sooner rather than later. Accelerator startup teams could not stay in a ‘comfortable state’ like the incubated startups could.
So the lesson for entrepreneurs is this: go big or go home. Eleanor Roosevelt once said: “Do one thing every day that scares you”. If you want your business to be great, let this be your motto.
And don’t be deceived by the glorified first sale. Even if you’ve gotten your first customers, if you’re battling to get more customers on board, and your startup is just plodding along, don’t wait too long to cut your losses.
Do you give it a month? How do you know when to pivot or walk away? The MIT FSA accelerator used one month as the entrepreneurial turning point, but this may not be realistic in the real world. Another valuable guideline that could help is “The Rule of Three”. Whether you apply it in business or in your personal life, this powerful measure acts as a safety buffer to help you recognise early on that it’s time to walk away.
How does The Rule of Three work? If you’re on the right path, you’ll get signs. And the same is true if you’re on the wrong path. Most importantly, it’s up to you to recognise and act on these signs. A sign could be anything that has a connection to the project you’re involved in. The key is to remain objective and open to feedback about the project, and to assess the signs early on, for example after three signs. If there are too many negative signs, it may be an indication to abandon ship, or at least, to adjust course.
The key is to fail forward, a phrase often used by Silicon Valley entrepreneurs. It means failing fast to learn fast, and it underpins many pioneering companies. The main premise is to launch, then tweak. In other words, get your product out there as soon as possible, even if it is only a minimum viable product, in order to get feedback and find out about opportunities and obstacles, so that you can adjust and improve along the way and your mistakes don’t incur big costs. This is the way Pixar Animation Studios works. Ed Catmull, Pixar’s cofounder and president, says their creative efforts go from “suck” to “non-suck.” The moviemaking journey gets going with rough story boards where a few good ideas are buried in mountains of vague concepts and very bad ideas. The animation team then weeds through countless corrections and changes before reaching the final cut. By allowing themselves to fail over and over again, animators sift out the bad ideas as fast as possible and reach the point where real genius can emerge.
Too many times we hear the phrase “Winners don’t quit.” Or even worse are entrepreneurs and managers who say: “We can’t quit, we’ve already spent so much time and money on this project!” But if there are repeated signs that you’re on the wrong path, quitting or markedly changing your offering may well be the best thing you can do. Not only could it steer your business on the road to mega success, but it could also save your company a lot of money, time and frustration down the line.
Accelerators and incubators in South Africa
With the explosive growth in tech entrepreneurship in South Africa and worldwide, we’ve seen a lot of start-up accelerators and incubators mushrooming up in recent years. But just how effective are they at producing big successes? The jury is still out on this one.
In the US, Y Combinator and TechStars are two of the most famous and successful accelerators. Both Dropbox and Airbnb have come out of the Y Combinator stable and in June-2011, its top 21 companies were worth $4.7 billion.
In SA, notable business accelerators, incubators and entrepreneurship hubs include:
- Bandwidth Barn, 88mph (in partnership with Google Umbono), Springlab and RLab in Cape Town,
- Founder’s Institute, Seed Engine, Tech-in-Braam, JoziHub and Impact Hub in Johannesburg, and
- mLab and the Innovation Hub in Pretoria.
It’s difficult to keep track as more and more are springing up all the time. There also doesn’t seem to be much documented in the public domain about their successes. According to VC4Africa, an impressive startup to emerge from 88 Mph is South African online film platform Wabona.com, founded by South African Simbarashe Mabashe. From 2012 to 2013 Wabona grew from a few thousand to half a million users and Mabashe raised his initial funding.