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JANUARY 24, 2019 //     

Startup Roulette: Why The House Usually Wins

Credit: Don Mason / Getty ImagesBy: Scott Allison 

There’s always great anticipation when new companies with old ideas and old companies with new ideas flock to CES. Las Vegas provides the perfect backdrop to the startup community as the place where gamblers come in droves hoping and expecting to “win big” at the casino. But there’s a reason they keep building humongous new hotels and casinos there … the house almost always wins.

The odds aren’t much better for startup companies. The failure rate is 95%, which is about the same odds you get on a roulette table. As a fellow entrepreneur who has been fortunate to study startups closely from a three-dimensional vantage point over a 20-year period, I would not want to discourage anyone. Starting and owning your own company is an amazing experience, but a reality check is also in order.

Eighteen years ago, Allison+Partners was a tiny startup that was woefully under-capitalized. Yet we were able to make it profitable in under 12 months and have delivered an astounding 6,000% growth since then. Now, we have 30 offices and more than 450 people around the globe. During our trajectory, I’ve had the opportunity to work with some of the world’s best and most disruptive startups, including YouTube, Dropbox and Whatsapp, as well as many small companies that never made it. I’ve also been fortunate (or unfortunate depending on your point of view) to do some angel investing on the side.

The culmination of these experiences has given me a clear perspective on why startups are so difficult to get off the ground and why so many fail. To the brave of heart who decide to roll the dice, I offer a few nuggets of advice…   

Having more money to invest does not mean you’ll survive.

We built our company with an initial investment of $300,000. It wasn’t enough, but we made it work. We knew that as a professional services company, few outside investors would be interested and we’d have to bootstrap it on our own. But we had a clear business plan in place and were very cautious with how we invested and spent.

Entrepreneurs are optimistic by nature and always believe they could be successful if they could only raise one more round. Unfortunately, many startups raise tons of money and then waste it. I won’t ever forget working with a startup in 2000 that raised and blew $750 million. The challenge wasn’t that they didn’t have enough money. It was that they couldn’t clearly articulate what their company stood for and were constantly changing their business model. Put simply, they did not know who they were. If you’re not clear on your objectives and your business strategy is wrong, more money won’t solve the problem. 

Know who you’re selling to and if there’s a viable market. 

Seems easy, right? Wrong. I’m always amazed at how many startups haven’t done their homework and don’t understand the marketplace. Many also don’t focus on sales or fall victim to “fascination with shiny objects” – constantly changing their product or service.  

When we launched our company, the founding partners had all been in the business for 15+ years. We knew the market and how our services would resonate in the marketplace. This deep understanding, combined with our focus on investing in our core offerings, laid the foundation for our success today.

Profits matter.  

We’re all familiar with Uber and know the company isn’t yet profitable. Think you can survive the same way? Sorry, you’re not Uber. Very few companies are. You need to make money. 

The startup graveyard is littered with companies that had great ideas but couldn’t turn a profit. This theory was proven many times in the dot.com era and still persists today. Turning a great idea into a great company is not easy, which is why I’ve always admired successful entrepreneurs like Dropbox co-founder Drew Houston and WhatsApp co-founder Jan Koum. They had great ideas, focused on building robust and sustainable companies and surrounded themselves with good, smart people to help bring their visions to life. They had passion, but also knew there is seldom a substitute for being profitable through both good and bad times.  

Scott Allison is the chairman and CEO of Allison+Partners.

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