According to research, more than nine out of ten startups fail (Marmer et al., 2011). Why is that? And more importantly, how do we best go about starting a startup to avoid failure? 

Since every startup is different we must treat it as such; Unfortunately, there is no such thing as a perfect startup template. However, according to Sam Altman, the CEO of Y Combinator which is responsible for founding more than 1000 startups, about 30 per cent of the startup theory is general, and can, theoretically, be applied to all startups (Altman, 2014).

Furthermore, according to the Pareto principle, or the “80/20 rule” as people often call it, one achieves 80 per cent of the results by mastering 20 per cent of the essentials. Theoretically, this means that if we focus our attention on the few but most important parts of a subject, we should be able to achieve about 80 per cent of the total results. 

Since the Pareto principle has proven to be a powerful tool to grow a business (Lavinsky, 2014), this paper will utilise the Pareto principle and focus on the 20 per cent of the essential general startup theory. Because, theoretically, mastering those will make potential founders better prepared to develop their startups in the future (Altman, 2014) (Lavinsky, 2014).

It is important to note that at its core a startup is a business. Hence it will face a lot of the same hurdles as a regular business. Some of the challenges discussed in this paper and the following advice will, therefore, overlap to some degree with “good traditional business conduct”. However, despite the similarities, all topics discussed is done so from a tech startup perspective.

According to the Colden Circle theory presented by Simon Sinek in his book, Start with Why: How Great Leaders Inspire Everyone to Take Action, we must look beyond what we do and how we do it and rather look at them as actions and consequences based on the reason why we do the things we do. Doing so, Simon claims, will enable us to achieve better results (Sinek, 2011).

Hence, to get a better understanding of the research subject at hand, and following research goal, we have split the goal into three objectives: WHAT? HOW? And WHY?

What?

Define what a startup is, and have a deeper look at the dynamics within and mechanics behind. What is a startup? How do they work? Why do so many of them fail? Is there a way to minimalise risk? How do we start one?

Based on our findings we see if there is a way to “start smart”, i.e. which actions to take to increase chances of startup success with no initial funding, and little or no money. 

How?

Research numerous academic and professional sources, as well as different industries and fields. Furhtermore, collaborate with current founders, as well as record and analyse our interview sessions.

Lastly, present the findings as precise, condensed and easily understandable as possible. There are already numerous articles and books on the subject of launching a startup, but the information can quickly become both overwhelming and confusing.

In recent years, the term startup has become somewhat diluted. Anything from real estate agents to nonprofit organisations calls themselves startups because of the cachet of innovation involved. According to Forbes, there are not many absolute rules identifying a startup, as revenues, profits, and employment numbers differ between companies and industries (Robehmed, 2016).

We can, however, find a few common denominators that help describe a startup more concretely.

Eric Ries, the author of The Lean Startup, defines a startup as an organisation devoted to creating something new under conditions of extreme uncertainty (Ries, 2011). According to Paul Graham, co-founder of Y Combinator, being newly founded or receiving venture funding does not in itself make a company a startup. Nor is it per definition necessary to work on or with technology (Graham, 2012). However, as Harvard business school professor Clayton M. Christensen underlines in his book The Innovators Solution, successful startups have a tradition of utilising new technology to disrupt existing markets (Christensen and Raynor, 2003) (Graham, 2012).

The essential characteristic of a startup is its ability to achieve hyper-growth i.e. scale and grow very quickly, unconstrained by geography

(Robehmed, 2016) (Graham, 2012) (Altman, 2014)

To achieve achieving hyper-growth technology and the internet has proven to be very powerful in terms of the potential rapid momentum of publicity and users. In America, the world’s current biggest market, 98 per cent have access to the Internet, and more than half have smartphones (Robehmed, 2016). In Europe, smartphone penetration is even higher, with Norway leading the way at 67,5 per cent, Sweden at 62,9 per cent and the UK at 62,2 per cent (Fox, 2013), giving tech startups a considerable advantage.

A recent example of the technology advantage is the release of the mobile game Pokémon Go, which enables people to compete against each other globally by catching monsters with their smartphones through the use of GPS and augmented reality. Within 24 hours of its release in the U.S. Pokémon GO had become the biggest mobile game of 2016, and within three days the game attracted more daily users than popular apps like Twitter and Tinder, resulting in daily earnings of several million dollars for its publisher, Niantic (Allan, 2016) (Chen, 2016). Such hyper-growth would not be possible without utilising the internet and having a downloadable product.

To summarise, a real estate agent, a local food store or a barbershop are not designed to grow fast and therefore not considered as startups. Nor is a franchise a startup (Robehmed, 2016). An online game, car sharing service, dating app or search engine are, on the other hand, as to achieve hyper-growth one needs a product or service many people want and an efficient way to reach and serve those people (Graham, 2012).

However, the growth coin has a flip side. According to the Startup Genome Report Extra on Premature Scaling, a study of over 3200 high growth technology startups, 74 per cent of failed startups failed due to premature scaling, the most common reason for startups to fail. Premature scaling means spending too much money too fast (on marketing, hiring e.g.) while failing to secure further financing or having a business model that works (spending less to acquire users than the revenue they bring) (Marmer et al., 2011). When constructing a skyscraper, there is no point in keeping expanding the foundation if we can not afford to erect the rest of the building.

Another study of 20.000 EU multinational companies between 2000 and 2004 showed that size had a significant negative impact on the economic growth rate, i.e. that with multinational corporations, economic growth rate is decreasing with size. Furthermore, the study showed that multinationals with younger foreign branches grow faster than those with older ones (Falk, 2008), which correlates with Jovanovic’s theoretical model of growth stating that company growth decreases with age (Jovanovic, 1982).

There is some difference of opinion on how long a startup is still a startup. While Paul Graham, says a five-year-old company can still be a startup, but ten years is a stretch (Graham, 2016) (Robehmed, 2016). Natalie Robehmed from Forbes argues that after about three years in business, most will no longer be startups. The reason, she says, is that “by then many startups have been acquired by a larger company, have more than one office, revenues greater than $20 million, more than 80 employees, over five people on the board, and founders who have personally sold shares” (Robehmed, 2016).

According to CrunchBase, one of the world’s largest databases of startup activity, with 1.5 million unique visitors each month (Ingham, 2014), the average age of startups acquired by bigger companies between 2007-2013 was seven years. Furthermore, by the time of acquisition, they had raised $29.4 million and were sold for $155.5 million (Lennon, 2013) (CrunchBase, 2013). These numbers indicate that although Natalie Robehmed has valid points when describing the transition from startup to “normal” company, it seems that the transition might come in between the time frame suggested by Robehmed and Graham.

The recent global recession and the following high unemployment rate, as well as the enormous media attention devoted to startups like Facebook, Twitter, Uber and AirBnB, have inspired many to pursue their entrepreneurial ambitions.

The Guardian reported a 29 per cent increase in companies founded by 18- to 25-year-olds in the UK during the four years after the recession took hold in 2008 (Allen, 2014). From 2010-2015, around 45.000 tech companies alone were founded, according to a study by KPMG and Markit Tech Monitor UK (Spaven, 2015). The reason for this massive increase, according to a report from the Chartered Institute of Personnel and Development (CIPD), is that many from the younger generations have become disillusioned and, lacking other options, want to take things into their own hands (McCartney, 2014).

Although several million jobs were lost as a result of the recession (Peacock, 2011) (Sky News, 2013), the startup boom might have other reasons as well. As the report, Education and Tech Entrepreneurship, underlines, a large proportion of tech founders are well-educated. In fact, according to the report, 92 per cent of U.S.-born tech founders held bachelor’s degrees, 31 per cent held master’s degrees, and 10 percent had completed PhDs. Furthermore, almost half of all these degrees were in science-, technology-, engineering-, and mathematics- (STEM) related disciplines (Wadhwa, Freeman and Rissing, 2008) – disciplines often relevant for disruptive startups.

As technology becomes increasingly simplified, it also becomes more readily available for non-specialists. Easy access to technology, combined with a large number of people with higher education, but lacking other options, might make the decision to found a company and work from home or a co-working space tempting.

However, many entrepreneurs might underestimate the amount of work needed to create a successful company, and ultimately 92 per cent of startups fail (Marmer et al., 2011), most commonly due to the lack of preparations such as market and product research, bad timing, the wrong team etc. (The Top 20 Reasons Startups Fail, 2014). According to Paul Graham, it usually takes around five years of hard work to realise failure and terminate the startup, and ten years of equally hard work to receive a substantial return in terms of success – whether from high revenues or acquisitions by other companies (Graham, 2014). In fact, studies show that getting into Stanford University is 100 times easier than creating a ‘Unicorn’ ($1B company (Lee, 2013).

Mark Suster, a serial entrepreneur turned venture capitalist, underlines in his blog post, Entrepreneurshit, some differences between common perceptions among aspiring entrepreneurs and reality. First-time founders often believe that their finances will flourish, but the reality is that founders rarely have much money in either their personal or business accounts. The 9 per cent that manages to raise capital from angel investors, or the 11 per cent that receive venture capital (Wadhwa et al., 2009), normally only raise enough money to survive 12–18 months, often less. According to Suster, a startup usually operates with a maximum of 9 month’s cash, out of which they have to pay employees, for office space e.g. (Suster, 2012). In fact, according to inventor and entrepreneur Ray Zinn, “If you’re in it just for the money, find another line of work. Entrepreneurs who are in it for the money never get rich.” (Zinn, 2016).

Furthermore, a common perception is that a startup is going to make the founders´ life easier. In reality, Suster says, startups are stressful, with engineering problems a part of daily life (Suster, 2012). In addition to ‘tech problems’, startups also have to manage ‘normal business’ issues like customer complaints and sales obstacles. So in a sense, a startup founder has double trouble.

Dustin Moskovitz, co-founder of ‘Super-Unicorn’ (software company valued at over $100 billion) (Lee, 2013) Facebook, Asana and Good Ventures, calls the idea of founders being their own boss with self-management and scheduling flexibility an outlier. According to Moskovitz, a founder is always on call, catering to the media, employees, clients, and partners (Moskovitz, 2014). Although this would apply to ‘normal’ businesses as well, startups tend to be more vulnerable, because of their small environments of hand-picked people dependent on sharing a common obsession and serving a potentially very big customer base. At an early stage, a startup can not just replace the CEO or another key employee without risking severely damaging the company culture and potentially, if these employees own non-vested shares, ruining the company.

According to Moskovitz, there are only two good reasons to start a startup: An idea so important that it will impact the world for the better (“the world needs it”), or the founder(s)’ area of expertise or other qualifications makes them best suited to tackle a particular problem (“the world needs you”). Only when the idea becomes a mission, Moskovitz states, will founders have the passion required to get around all the roadblocks ahead (Moskovitz, 2014). We will discuss ideas further in the chapter “Ideas, Think Big!“.

Ultimately, the financial rewards correlate with how many users a startup gains, as well as with its business model. However, studies show that the statistical likelihood of creating a ‘Unicorn’ (software companies valued at over $1 billion) and making a big impact on the world are slim to none. Of about 60,000 software and Internet companies funded in the U.S. during the past decade, only 39 became ‘Unicorns’, in other words, 1 in every 1.538, or 0.065 percent (Lee, 2013).

Thus, unless confident that “the world needs it” or “the world needs you”, it might make better sense to join a later stage company with access to their resources, user base and a team, which could lay the foundation for transforming new ideas into a startup in the future.

A common perception about startup success is that it is all about the unique idea. However, Bill Gross, the founder of the technology incubator Idealab, conducted a study of 200 startup companies and found that the most important success criterium was timing.

When Gross measured the difference between success and failure, timing accounted for a substantial 42 per cent of the successes. Team and execution were the second most important factor at 32 per cent, and the differentiability and uniqueness of the idea actually only came in third at 28 per cent, followed by the business model at 24 per cent and funding at 14 percent (Gross, 2015).

It is important to emphasise that these success factors should not be viewed as a case of either-or. Spending time on execution can be futile without a great idea or the right timing, timing in itself is useless without a great idea and the right team to do the work, and an idea is just an idea without execution. Nevertheless, Gross´ study showed that sometimes timing, team and execution mattered more than the idea itself.

A good example is AirBnB, which was disregarded by many investors who thought that no one wanted to rent out space in their home to a stranger. However, one of the reasons AirBnB succeeded, aside from a good business model, a good idea and great execution, was great timing. The company launched during the height of the recession when people needed extra money; factors that helped them overcome objections to renting out their homes to strangers (Gross, 2015). (In the chapter “Ideas, Think Big!“, we look closer at an infographic of AirBnB´s travel from idea to a multi-billion company). 

Nowadays, technology changes so rapidly that what was a bad idea yesterday can become a great idea tomorrow without anyone noticing (Graham, 2012) (Christensen and Raynor, 2003). According to Moore’s law from around 1970, which has become a measurement of technology advancement, the overall processing power of affordable computers double every two years, meaning smaller and more capable computers. Today, however, most computer technicians claim that technology advance even more rapidly with CPU speeds double each year, a development that will only cease once transistors in a CPU can be created as small as atomic particles (Mooreslaw.org, n.d.).

Considering the above, founders will benefit from asking themselves questions like; What does new technology enable us to do which we previous could not? Why is this the perfect time for this idea and this company? What will the market look like in 10 years? Great ideas should also come with good answers (Altman, 2014). Free tools like Google Trends (Google Trends, 2016) can prove useful in this process with its ability to show how often a particular search term is entered relative to the total search volume in various languages across various regions of the world.

Because of the rapid advances in technology, it is perfectly fine to go after a small, fast growing market; in fact, customers in these markets (early adopters) are often desperate for innovation and will put up with faulty, iterative products (Altman, 2014) (Ries, 2011) (Blank, 2006). Tools like Google Trends (Google Trends, 2016) can help founders discover fast growing markets, and help predict markets that will likely arise in the future. 

Co-Founders

Co-founders and their relationships are arguably among the most important success criteria of a startup (Åstebro and Bernhardt, 1999), (Mata, 1996) (Gross, 2015), and also one of the most common reasons startups fail (The Top 20 Reasons Startups Fail, 2014) (Altman, 2014). According to Suster, many founders have secret doubts about their co-founder(s); Are they working as much as I? Are they as committed as before? Do they still believe in the startup? If the VC finds out, would they lose interest in the next round? (Suster, 2012).

In many ways, we can compare picking a co-founder with finding the right person to marry, since co-founders are going to spend a tremendous amount of time together over a period of many years. Thus, the choice deserves some serious thought.

Nevertheless, according to Altman, Y Combinator often see first-time founders neglect this and treat choosing co-founders as less important than regular hiring, starting companies with acquaintances or even randomly (Altman, 2014). Although studies show that solo founders take 3.6x longer to reach scale stage than a founding team of two (Marmer et al., 2011), it might be better to be a single founder and spend more time than having a bad co-founder with daily operations becoming exhausting and the company ending in disaster.

According to Becker, we should distinguish between generic and specific human capital when evaluating potential co-founders. Generic human capital relates to the general knowledge obtained through education and non-industry-specific working experience, while specific human capital is industry-specific professional knowledge and managerial and entrepreneurial experience, applicable immediately to the newly created startups (Becker, 1975).

When studying 391 Italian startups operating in high-tech industries, Colombo et al. found that, during the first 12 months after incorporation, the specific part of human capital had a greater positive impact on initial company size than the generic part. Furthermore, the higher the specific human capital of founders, the more unlikely they will be to allow the new company to fail (Colombo, Delmastro and Grilli, 2004). This correlates with Åstebro and Bernhardt´s study “The winner’s curse of human capital”, which shows that both the survival and growth rate of startups relates positively to the specific human capital of founders (Åstebro and Bernhardt, 1999).

The above studies underline the importance of finding the right co-founders at an early stage. Sam Altmann follows up, stating that it is highly recommended to find a co-founder that possesses technical knowledge (Altman, 2014). In fact, studies have shown that balanced teams with one technical founder and one business founder raise 30 per cent more money, have 2.9x more user growth and are 19 per cent less likely to scale prematurely than unbalanced teams (Marmer et al., 2011).

Lindh and Ohlsson argue that personal characteristics, such as age, education, working experience, and financial conditions, play a vital role in shaping the decision to become an entrepreneur (Lindh and Ohlsson, 1996). Colombo et al. found variables reflecting individuals’ prior managerial and entrepreneurial experience to be most significant, together with founders’ predicted household income when establishing a successful founding team (Colombo, Delmastro and Grilli, 2004). While Evans and Jovanovic´s study “Estimated Model of Entrepreneurial Choice under Liquidity Constraints” found that entrepreneurial talent was “pre-determined”, i.e. successful founders know with certainty their entrepreneurial talent before starting a company (Evans and Jovanovic, 1989).

These findings indicate once again the importance of possessing specific human capital and the sense of security it can offer a founding team and correlate with research done by (Åstebro and Bernhardt, 1999), (Mata, 1996) and (Becker, 1975).

Furthermore, according to Lees´ study of U.S “Unicorns” co-founders with a history together have built the most successes (Lee, 2013). It is, therefore, suggested to start looking for potential, good-quality co-founders at one’s social circles at the university or workplace since this offers an opportunity to observe them over time (Altman, 2014).

The ideal number of co-founders might change from startup to startup. However, to be a single founder can be tough since that person has to do everything alone, with no sparring partner. According to Y Combinator, a total of two or three founders seems to work best in their experience, maybe four in rare cases. More than that is usually too much because that many voices drown each other out (Altman, 2014).

Y Combinator´s experience correlate well with Colombo et al.´s study of 391 Italian startups where they found the mean number of founders in successful startups was 2.35 (Colombo, Delmastro and Grilli, 2004).

Trademarking

Note: The information in the following chapter is based on English and American law. It may or may not apply in other countries. One should always research domestic laws and/or consult with legal expertise before taking action.

Per Mollerup, the founder of Designlab, writes in his PhD thesis (book), Marks of excellence, that trademarks or devices with similar function have existed for at least 5000 years, and were used to state identification in three ways: social identity (who is this, who says that), ownership (who owns this), and origin (who made this). According to Mollerup, a farmer may mark his cattle to protect them from theft, a potter may mark his bowl out of pride, and an emperor may use his mark instead of a real signature to compensate for illiteracy; e.g. the Roman emperor Justin I (AD 450-527) could neither read or write (Mollerup, 1997).

Too many startups neglect the many good reasons to consider trademarking from the start. In law, a trademark (TM) denotes the protection of a brand, distinguishing a company, product or service from others. A trademark usually consists of one or more words or a logo, but could also be shapes and colours. When officially registered, it protects the owner against unauthorised use of the trademark or other marks misleadingly similar, within specified fields of activity (classes). Such similarity could be phonetic, visual or conceptual (London IP, 2016).

If a startup chooses a name or logo too similar to a registered trademark, it might be unknowingly infringing someone else’s intellectual property (IP), and not only have to stop using the name or logo but even be subject to lawsuits. If the startup has already made itself known to its customers and public using these elements, having to change them later may present serious problems. As a startup´s domain name normally is the same as the company name, and a strong web presence plays a critical role in a startup’s overall advertising strategy, it is essential to decide on a name and acquire domain names in conjunction with trademark clearance as discussed by (Jarvis et al., 2015).

A startup that has failed to trademark its brands, may not be able to prevent competitors from using the same or similar brands at a later stage (London IP, 2011). It is important to be aware of this, as a trademark in itself can become a valuable asset – e.g. the trademark Coca-Cola® is estimated to have a value of more than 70 billion dollars (London IP, 2016). Registering its trademark, on the other hand, can help communicate its intention of building a reliable company to its ecosystem of customers, investors, and partner companies (Ismail, 2013). Some companies use the ® symbol without bothering to actually register. However, this not only provides no legal protection but is, in fact, a criminal offence.

A common misunderstanding is that registering a company at Companies House (UK) provides the owner with trademark rights to that name (In the U.S, incorporating a company is regulated by laws that vary by state). However, an application for protection must be submitted to the right authorities and may be refused. The most common objection to an application is a lack of distinctiveness. For a brand to qualify for trademark protection, it should be distinctive for the brand covered by the application, which is split up into specified ‘classes’ under the Nice Classification.

Within two months of a trademark application being published, anyone can file a notice of intended opposition, i.e. claim the rights to the trademark in question. In such cases, a startup should probably seek professional advice. However, if granted, and the startup then deciding to apply for protection abroad, it can have the foreign rights backdated to match the original rights, provided that the applications are submitted within six months of the initial request (London IP, 2011).

Trademark registrations are territorial rights, i.e. they must be registered in each country in which one wants protection. An exception is ‘well-known marks’, which can be enforced in a country even if not registered there.

In the UK, after registration, trademarks must be renewed every ten years (London IP, 2016). In the U.S. however, it is a bit more complicated. When obtained, trademarks rights must be renewed between the fifth and sixth year after trademark rights have been initially given, then again between the ninth and tenth year, after that, every following decade (Uspto.gov, 2016).

When applying for trademarks, legal assistance is recommended. However, it is possible to do it alone as long as one gets the three main points below right.

Copyright

As well as by trademarking, intellectual property (IP) is protected by copyright laws. While details and length of copyright law vary between countries, the Berne Convention is an agreement signed by 164 nation states, laying down a common framework that guarantees creators exclusive rights to their original work, defined as ‘every production in the literary, scientific and artistic domain, whatever the mode or form of its expression’ across all signatories of the Convention (Article 2(1) of the Convention) (Wipo.int, n.d.). According to the Indian Copyright Act, computer software and software programs are considered as literary works and can be copyrighted under the Act (Indian Copyright Act, 1957).

Exclusive rights are defined as the right to translate, make adaptations and arrangements, perform in public, recite in public, communicate to the public, broadcast, make reproductions, use the work as a basis for an audiovisual work and moral rights. This means that none of these actions can be carried out without permission (Wipo.int, n.d.). The term moral rights, in this case, means the right to claim authorship and to object to any treatment of the work which would be ‘prejudicial to his honour or reputation’ (The UK Copyright Service, 2004).

However, according to national laws of fair use, using quotations or excerpts may be legal even without authorisation, provided that the work is published, the use is deemed acceptable under the terms of fair dealing, the quoted material is justified (i.e. no more than necessary is included) and the source of the quoted material is mentioned, as well as the name of the author. These exceptions are typically made for the purpose of news reporting, incidental inclusion, and limited private and educational use (The UK Copyright Service, 2004).

Contrary to trademarking, copyright protection begins the minute the work is created. However, legal registration for copyright protection (a copyright certificate) is not automatic. Although filing for copyright protection is not a mandatory procedure for startups, it can be helpful, as it makes it easier to get a preliminary injunction from the court in cases of copyright infringement. A copyright registration serves as a prima facie evidence and will make potential lawsuits stronger, as well as making it easier to license and assign the rights to others (YourStory.com, 2014).

As the logo, website, interface and services/merchandise constitute the very identity of many startups, founders should ask themselves if these elements are at risk of copyright infringement (i.e. that others might copy their unique style). In cases where a startup is not sure of what product categories it aims to target, a solution could be to first make a copyright registration of the logo and then trademark it under the specific classifications when these are determined later.

According to the Berne Convention, copyright protection lasts for 50 years the from the author´s death (Post Mortem Auctoris). In the case of anonymous and pseudonymous publications, the work is protected for 50 years from the year it was first published. For photography, cinematography, or sound recordings, the protection lasts 50 years from the year it was first published (Wipo.int, n.d.). However, national copyright laws among signatories of the Berne Convention can offer extra protection. In the EU, copyright protection was increased to 70 years in 1993, in addition to the already perpetual moral rights applying in countries like France, Spain, the Czech Republic, Italy, the Scandinavian countries etc. (Angelopoulos and Jasserand, 2011).

Equity Allocation & Vesting

Equity Allocation means how many shares each founder gets to buy from the company. According to partner and CFO at Y Combinator, Kirsty Nathoo, this subject is paramount when two or more co-founders start a startup. Nathoo recommends that the ‘stock purchase engagement’ should be in written form and cover what the parties will pay for their shares (e.g. a cash payment, contributing IP, inventions or coding), and also secure that the startup owns everything produced by its founders and employees. Verbal agreements tend to be harder to prove, and the relationship between the founders could change over time (Nathoo and Levy, 2014). 

An important startup success criterion is that all co-founders are equally dedicated (Åstebro and Bernhardt, 1999) (Jovanovic, 1982). The General Counsel at Y Combinator, Carolynn Levy, recommends that the founding team allocate shares more or less equally among themselves. According to Levy, none of the top YC companies has a radically disproportionate equity split, and it is not significant who thought of the idea, did the coding, built the MVP etc., since the whole team is necessary to achieve great execution (Nathoo and Levy, 2014).

However, a nine-year study published by Harvard Business Review of the equity splits adopted by more than 3,700 founders in 1,300+ startups in the U.S. and Canada, shows that an uneven equity split reflecting differences among co-founders might be better. According to the study, founders who just split the equity equally at an early stage will face much uncertainty later regarding future roles within the team and each co-founder’s commitment over time – particularly where co-founders have never worked together before (Wasserman and Hellmann, 2016). These findings seem to correlate well with the points raised by Mark Suster in his blog post; Entrepreneurshit (Suster, 2012).

In fact, according to Wasserman and Hellmann, companies with equal splits have more difficulty raising external finance, especially venture capital, because an equal split may send worrisome signals about the team’s ability to negotiate with others and to deal with difficult issues themselves. Based on their findings, Wasserman and Hellmann argue that startups might benefit from waiting until they get to know each other and then divide equity trough dialogue that takes into account each founder’s past contributions, outside opportunities, preferences, and anticipated future contributions (Wasserman and Hellmann, 2016).

Vesting: According to the U.S. Internal Revenue Service (IRS), the shares allocated among the founders (or employees) should be vested: If a co-founder or employee leaves before the vesting period is over, the startup has the right to buy back unvested shares for the same share price that he or she paid on acquiring them (U.S. IRS cited in Nathoo and Levy, 2014). The standard vesting period is four years with a one-year cliff; i.e. after one year, a founder/employee fully owns 25 percent of his shares, the remaining shares vesting monthly over the following three years (Bhatti, 2011).

The rationale for vesting is to give founders and employees an incentive to stay and contribute to the growth of the startup, by being entitled to a potential future value. Someone with a significant part of the equity ownership leaving the company at an early stage can severely damage the motivation of the people left behind. The same thing applies to solo founders, to set an example of commitment for their employees. Furthermore, investors want to see people incentivized to stay on at the startup for a long time and might not invest money in a company where founders and employees with shares can quit whenever they feel like it and still retain significant equity ownership (Nathoo and Levy, 2014).

Note: It is important to be aware of that the vesting of shares can have a significant impact on both personal and company taxes. Therefore, it is paramount that both founders and employees research domestic tax laws and if possible obtain legal advice before signing any contracts to protect both themselves and the company (Tremaine, 2010) (Global Rewards Update: United Kingdom – taxation of restricted shares for internationally mobile employees, 2014).

Business ethics is a guide of principles to help professionals conduct business honestly and with integrity. It goes beyond just balancing what companies must do legally while maintaining their competitive advantage but serves as a company´s moral compass

(Investopedia, 2009)

Since startups are in essence project management, the Code of Ethics and Professional Conduct issued by The Project Management Institute offers a set of helpful guidelines to ethical behaviour (The Code of Ethics and Professional Conduct, 2006).

According to entrepreneur turned academic Vivek Wadhwa, ethics should be incorporated into a startup from the beginning, as it should in any other business (Wadhwa, 2010). In his book, High Commitment High Performance: How to Build a Resilient Organization for Sustained Advantage, Harvard Business School professor Michael Beer states that the core reason many companies fail is the lack of customer service, honesty and transparency and a clear strategy with a higher purpose. It is also not unknown for companies to silence the internal voice of conscience through intimidation of employees by superiors focusing on short-term gains, profits, and bonuses (Beer, 2009).

In an interview with Wadhwa, management guru and head of the CEO Institute of Yale School of Management, Jeff Sonnenfeld offers his advice on how founders can incorporate ethics into building successful startups (Sonnenfeld cited in Wadhwa, 2010). Several of his points correlate with both Tuckman (1965) and Wheelan (2009):

Create and encourage a culture of openness and welcome dissent: Founders blinded by their own greatness, enthusiasm and vision, surrounded by puppets kissing up to them, can quickly lose their moral bearings. Internal constructive critics are a startup’s best friend.

Lead by example: Since the authenticity of a leader’s character is essential to get colleagues to trust them, they should lead by example. If workers do not trust and believe their leaders, they will not take needed risks on their behalf.

Learn from both peers and distant models: Many founders confuse the possible unique quality of their business or technological mission with their own ‘unique in leadership values’. But in fact, many of our most successful and charismatic leaders, such as Steve Jobs and Michael Dell, have studied and learned from other leaders’ strengths and weaknesses.

Recognise and be honest about your limitations as a leader, and beware of the myth of immortality: Many entrepreneurs fear leadership succession. Instead, they might learn from the founders of companies such as Google, Cisco, Amgen, and Microsoft, who have all prepared for the day when their leader will no longer be the internal boss of daily operations and, therefore, have time to find the right successors.

Be aware that institutional character is fragile and easily lost: If a company lose their character due to personal grandiosity, greed, and deception, such impressions can be hard to erase and the goodwill lost almost impossible to regain.

Establish an independent board; Venture firms often demand a majority of board seats as a condition for investment. Conflicts may soon arise when the board serves the needs of VCs and management, rather than of the company as a whole (Wadhwa, 2010).

Although the number of interviewees (5) does not qualify as quantitative research, the amount of time spent with each one (1,5 hour on average) could be considered as qualitative research.

What is both interesting and striking is how well the interviewees´ experiences, as well as the subjects themselves, correlate with academic and professional sources already discussed in this paper. Some themes keep reoccurring:

Age: Two of the five started their first company in their early twenties, while the three others started theirs at the age of 28, 30, 34. These findings correlate with research done by (Wadhwa et al., 2009) (Holly, 2014) and (Lee, 2013) indicating that youth superiority may be a myth, as discussed in the chapter “Experience Above Age“.

Gender: Although the goal was to have an even split between males and females among the interview subjects, it turned out to be just males volunteering. These findings might indicate that it is not just in venture capital-financed, high-growth technology startups the female founder percentage is low (9 per cent), as discussed by (Raina, 2016) in Harvard Business review and mentioned in the chapter “Team Means the World“.

Team: Every interviewee emphasised the importance of having the right team with the right skills (specific human capital), and three had experienced a poorly chosen co-founder as a destructive force. These findings correlate with research done by (Lindh and Ohlsson, 1996) (Colombo, Delmastro and Grilli, 2004) (Åstebro and Bernhardt, 1999) (Mata, 1996) (Becker, 1975) (Gross, 2015) and (Altman, 2014) as discussed in the chapter “Team Means the World“.

Rapid prototyping / MVP: Every interviewee emphasised the importance of utilising MVPs to create the best product, as discussed by (Ries, 2011) (Blank, 2006) (The Top 20 Reasons Startups Fail, 2014) and (Blank and Dorf, 2012) in the chapter “Great Execution is Vital“.

Market and user testing: Every interviewee stressed the need for market and user testing. Two stated unequivocally that the lack of such testing was a direct cause of their failure, as discussed thoroughly by (Ries, 2011) (Blank, 2006) (Blank and Dorf, 2012) (The Top 20 Reasons Startups Fail, 2014) and (Maurya, 2012) in the chapters “Great Execution is Vital” and “Ideas, Think Big!“.

Equity allocation and vesting: Two interviewees experienced problems due to lack of proper agreements, correlating with work done by (Wasserman and Hellmann, 2016) and as discussed by (Nathoo and Levy, 2014) in the chapter “Legal“.

Failure rate: As mentioned, two of five interviewees failed with their startups which are equivalent to 40 per cent. These findings are much lower than the failure rate of 92 per cent presented by (Marmer et al., 2011) in their study. However, findings throughout this paper indicate that the interviewees have done far better than average.

According to Eric Ries, we can learn to engineer startup success by following a process (Ries, 2011). In this research project, my primary motivation was to study available academic and professional sources to find if there really is a way to ‘start smart’. And if so, what should one do, and avoid doing, to increase one’s chances of startup success?

To be able to conclude on the matter, it felt imperative to first define what a startup is and obtain a deeper understanding of the dynamics within and the mechanics behind it. In addition to studying written sources, I have also conducted several interviews with founders, as well as spending some time at a startup co-working space in Oslo, Norway.

Due to time constraints, I ended up interviewing fewer founders than originally planned. I should, of course, have realised from the start that, although most founders are very helpful, they are also very busy developing and growing their startups. Their highest priority simply was not talking to a master student. More interviews, as well as some female participants, would have strengthened the quantitative aspects of this study. However, the sifting of data from several thousand startups from numerous academic and professional sources constitutes quantitative research, even so.

Also, while interviewing fewer people, I was able to talk to those few over time and on multiple occasions, and I do believe that his has strengthened the qualitative side. One particular benefit is that with the help of these founders, through multiple iterations and much correspondence, I feel that the list below of startup recommendations is vindicated not just by theory, but by practice.

Analysing the available material, a number of themes keep reoccurring. When it comes to startup failures, the great majority seem due to a small number of common factors: having the wrong co-founders and team, doing no or poor market and user research (resulting in bad timing, an average idea and no users), and taking too long on product or service development (resulting in bad execution and ultimately bankruptcy) (The Top 20 Reasons Startups Fail, 2014) (Åstebro and Bernhardt, 1999)  (Beck et al., 2001) (Blank, 2006)  (Blank and Dorf, 2012) (Ries, 2011) (Wadhwa et al., 2009) (Moskowitz, 2014).

Likewise, startup successes show marked similarities. As presented by Gross in his study, the most important factors here are timing, team, execution, the idea and business model, indicating successful startups’ emphasis on finding the right team, doing proper and continuous market and user research, developing a ‘big’ idea based on that research and available technology and launching a series of MVPs to continue their product development and user growth. Gross´ findings correlate well with studies done by (Beck et al., 2001) (Mata, 1996) (Åstebro and Bernhardt, 1999) (Wadhwa et al., 2009) (Christensen and Raynor, 2003) (Blank, 2006) (Ries, 2011) (Altman, 2014) (Graham, 2012) as well as (The Top 20 Reasons Startups Fail, 2014). 

The academic findings correlate well with my interview findings showing that the two failures came as a result of bad co-founders as well as poor market and user research. Furthermore, all interviewees emphasised the importance of experience (specific human capital) as well as allowing for trial and error through the use of MVPs.

With both quantitative and qualitative research supporting the same findings, this seems convincing evidence–although there is always a luck factor involved–of Eric Ries´ claim that we can, in fact, learn to engineer startup success. On this basis, and in collaboration with ‘my’ founder interviewees, I have permitted myself the liberty of compiling a shortlist based on the Pareto principle, covering the most essential startup recommendations. If followed, it should, theoretically and statistically, increase the odds and make potential founders well prepared for the gruelling project of developing a startup.