There has never been a better time to start a company since there is an abundance of capital, talent and growth rate. The rules of game have changed from a “make and sell” mentality to “how fast can one turn ideas/knowledge.” Dynamic, real-time conversations with potential users are now possible on a daily basis, instead of being limited to yearly feedback and this cuts iteration cycles and reduces risk. The startup ecosystem has experienced a major disruption – once again making startups sexy.
More than ever before, investors, potential talents and society at large understand that entrepreneurship is foundational to future progress. Global connectedness means everyone can have direct access to potential users, rather than going though layers of middlemen to interpret customers’ wishes and to a large extent, it is now possible to test the market and technologies by bootstrapping. This entails using well-established lean, agile processes, open innovation and crowdsourcing of insights, together with useful performance metrics. So, how does design contribute to this new reality?
In this new startup ecosystem, design adds tremendous value at the front end of the process. Design, like no other profession, can facilitate a meaningful and dynamic conversation with potential customers though a cycle of creating a Minimum Viable Product (MVP), testing the product on users, learning from users behavior and then updating the MVP.
By designing and creating prototypes that simulate, users are able to see and feel the advertising, purchasing experience and interface and can better comprehend an offering’s potential. Users can then assist in co-creating the value proposition, as well as, formulate and disseminate the story. All this, before a dime has been spent on engineering and manufacturing.
For a startup to take off, scale and experience exponential growth, they need large injections of capital. When it is time to invite investors to finance the engineering, marketing and manufacturing, most startups with a proven value proposition and a market, have already created considerable equity from sweat, tears and risk-taking, enabling them to capture a larger piece of the pie and keep control of their nascent venture. So, how does design attract investors?
Investors will invest in founders and founding teams with passion for a cause they themselves burn for and not on the basis of money. Ninety-two percent of Venture Capital backed startups fail the first time and it is notoriously difficult to reliably predict successful startups. In the early phases, investors go for the jockey (the team) and in the later phases, for the horse (the plan). So, a team with design understanding serves a startup well in both phases.
Thus far, the best indicator of a team’s chances for success lies in the team’s behavior and if a team displays adaptability, they are more likely to be successful. A visual metaphor compares a startup team to a heat-seeking missile. A missile is not path dependent and is extremely flexible since all it cares about is following the energy of the moving target.
When design comes in at ground zero, startups have a higher success rate, however, the amount of impact of design makes is still unknown. So, in April of this year,ingomar&ingomar – consulting, in collaboration with multiple universities, began investigating Design Driven Startups and how design can best support the new lifeblood of our society. Their aim is to provide predictive success metrics thus taking some of the gamble out of entrepreneurship.
Special thanks to Bill Gross for researching and co-writing this article.
Successful startup founders are fueled by passion, a willingness to take risk and do whatever is necessary to make things happen. What they initially lack in financial capital, they more than make up for in human and social capital. So, how do startup teams most effectively match their limited resources and time to a cutthroat market and technology environment? How do they obtain funding and move down the road to becoming profitable?
In collaboration with Stanford’s Studio for Venture Design, Art Center College of Design – The Design Accelerator and Innovate Pasadena, we researched over sixty startups in Silicon Valley and San Gabriel Valley, uncovering a “sweet spot” for these nascent businesses. Positioning the startups in a Market – Technology risk matrix revealed that a somewhat conservative approach to combining market and technology risk leads to the best results.
Startups that opted to focus on “clarifying a user need,” which is associated with medium risk, as opposed to “discovering or realizing completely new needs,” as associated with high risk, faired fifteen percentage points percent better on average. Even more impressive, startups that applied new proven technologies, associated with medium risk, to these clarified needs, were, by thirty percentage points, most likely to be not only funded but also to be acquired by larger competitors.
This intuitively makes sense since the top area of “Developing New Technology” is financial, human and social capital intensive and the large established players have had years to accrue these specific areas of capital.
When addressing the left area, “Recognized Need,” one is competing with equally large, incumbent players. These are intimately familiar with the market and have the financial resources, together with the brand value, to launch mega advertising campaigns.
The right area, “Realizing Needs,” requires a wide network for spotting new paradigm shifts, something startups, with only a few geeks in their organization, are unable to match.
Finally, Applying “Current Technology” and “Clarifying Needs” is the first hunting ground incumbents explore when a quick increase in the numbers are demanded. Therefore, this area has most likely been mined to death, offering few unidentified opportunities.
The only remaining area that offers the best match for the typical profile of a design startup founder is “Clarifying Need” and “Applying New Technology.” This area continues to offer lucrative positioning in established firms as well but it may be more difficult for established firms to get internal backing for entering this area.
So, if the founders are relative inexperienced, they may be wise to gain technical and customer proficiency experience in their field. Most especially, experience in how best to organize and run design team projects, prior to venturing out on their own. In other words, acquire the financial, human and social capital for embarking on a three to five year learning experience with an eighty to ninety percent failure rate.
Clearly identifying and staying closely connected to real users, providing them with new concrete advantages though proven solutions, seems to be a winning strategy for fast moving lean startups on a shoestring budget. Venturing outside this narrow Market – Technology risk niche increases risk disproportionally and may, therefore, be better suited for well-financed larger players. By carefully aligning human and social capabilities with market needs, one can increase opportunities for hitting a startup’s sweet spot.
Investing in new entrepreneurial ventures operating within The Creative Economy may be the best option for creating future progress. Startups have the advantage of beginning with a blank slate and their key strategic advantage lies in creating breakthrough innovative offerings while mitigating exposure to the disproportionately large risk.
To support startups in the execution of this momentous task, we devised an evidence-based four-step Design Driven Startup method comprised of: “Where to play,” “How to play,” “What role to play” and “Can we win?” Applying this process effectively aligns organizational capabilities with, as yet unidentified, user needs:
“Where to play” – Market – Technology Risk matrix
First, select a promising position in the market – technology space, since this will determine the potential revenue stream as well as the associated risk. Positioning potential offerings in a Market – Technology Risk matrix establishes one’s level of innovation ambition, as well as, the risk design has to mitigate.
“How to play” – Bridging Business & Design
Successful implementation of an offering then requires connecting organizational capabilities to user needs through a business model, then a design brief and finally, iterative design execution. The “Bridging Business & Design” model is an 80/20-rule approach to establishing the most important of these connections.
“What role to play” – Capital Model
Knowing “where to play” and “how to play” one can then ask, “Is the right team in place to play successfully?” There are three types of capital key to the success of a startup: financial, human and social and the following zones have been applied from Design Driven Startups, by Søren Petersen, 2015.
The upper level of technology risk, where new technology is developed, requires vast financial, human and social capital to succeed. This area is occupied by incumbents and is an almost impossible area of competition for startups.
The area to the left, addressing recognized needs, requires vast financial capital and is also an area where incumbents thrive. Huge investments in marketing and incremental development of well-established brands and products make this area nearly impenetrable for startups.
The area defined by realizing needs; combined with applying current or new technology, requires human capital and social capital. This area is less attractive to incumbent firms, since the payback time on investments is long, resulting in a low Net Present Value (NPV). The long time horizon prevents startups from mining this area, as well, together with the need for social capital, which a small entrepreneurial team is unlikely to possess.
This leaves the area of clarifying needs and current technology or applying new technology. In this area, incumbents will often mine clarifying needs and current technology when looking for relatively quick market expansions. The area of clarifying needs and applying new technology can be lucrative for startups, if they possess the unique human capital for mining a specific market segment and the technical skills necessary for implementation.
“Can we win?” – Prediction Model
Having established the premises of the startup, the question then becomes, “Can we win?” As Sun Tzu, proclaimed in The Art of War: “Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win.” To assess the probabilities of success, we applied the Business Opportunity Strength (BOS) prediction model to establish the execution risk and then calculated the combined risk by multiplying market, technology and execution risk.
If the combined market, technology and execution risk has a twenty percent probability of success, the venture falls within the risk profile of venture capitalists. If the probability of success is less than five percent – one is operating in Kamikaze Country where obtaining funding becomes nearly impossible unless the potential return is also perceived to be astronomical.
Startups still remain one of the best vehicles for future progress, however it is important not to be blind to the market, technology and execution risk and to establish the most important connections between capabilities and user needs (job yet to be done.)
One also needs to know the types of capital required to succeed (financial, human and social) because, without a clear idea of the probability of success, one can easily step off the plank into shark-infested waters. So, when answering the clarion call of that sweet startup opportunity, be prepared with where, how and, most importantly, what role your startup will play and luck may yet smile upon you and your intrepid team.
In stark contrast to previous decades, starting a new venture can be accomplished on a shoestring budget. This is due to the diminishing cost of information and tools combined with the relatively high value of knowledge, skills and experience that founders bring to the equation. Bootstrapping is now often possible up to Round A Financing. This is where capital is required for marketing to scale rapidly and New Product Development is required to deliver high quality offerings.
Starting a design driven entrepreneurial venture requires a passionate belief, risk-attitude, adaptability, human and social capital as well as true grit (“never, never give up”). However, with most entrepreneurial endeavors failing, there most likely will come a point when, despite pivoting the business model multiple times and accumulating sunk cost, the best course of action is simply to leave the table and pursue other opportunities.
A Harvard Study of Venture Capital funded startups show that eighteen percent of first time startups fail. Serial entrepreneurs do somewhat better; with first time failing firms succeeding twenty percent of the time and successful firms succeeding thirty percent of the time, the second time around.
Setting out to predict startup performance and the likelihood of success, we joined forces with Stanford’s Studio for Venture Design, Art Center College of Design — The Design Accelerator and Innovate Pasadena. Observing over sixty startups in Silicon Valley and San Gabriel Valley, as well as, fifty entrepreneurial teams at Hanyang University in Seoul, Korea, and Cal State University, Long Beach, California, we found three reliable predictors for Design Execution performance:
– Supporting Philosophy
– Design Expression
– Technology Risk
These three parameters were found to capture sixty-five percent of the variability in the observed performance.
From an investor point of view, assessing design execution performance, in turn, allows these investors to determine the combined market risk, technology risk and design execution risk. Multiplying these individual risks will help to optimize a portfolio of potential ventures.
From a startup perspective, knowing the design execution performance risk and the market technology risk, enables startups to adjust their market – technology position. It also can assist them to pivot or to systematically improve their design execution process.
There are three ventures situations highlighted within the introduction map to this article:
Venture “A” is positioned in low market risk and high technology risk, combined with a strong Design Execution (3.87 or 84% proficiency). The strategy could be to keep up the performance and secure sufficient investment to finance the expensive and often long term development process.
Venture “B” is positioned in low market risk and low technology risk, however displays a weak Design Execution (2.44 or 53% proficiency). The strategy could be to take on additional technology risk by exploring alternative technologies while improving design execution performance.
Venture “C” is positioned in medium market risk and high technology risk, displaying a medium Design Execution (3.37 or 74% proficiency). The strategy could be to improve design execution performance and reassess the extreme technology risk.
Of course, there is much more to a startups success than market, technology and design execution, including team dynamics, the competitive field, surrounding ecosystem and the intellectual property conditions.
Still, with failure rates hovering between seventy to eighty-two percent of startups who received VC funding, knowing where one is from a Market, Technology and Design Execution perspective goes a long way toward deciding whether to fold one’s tent or to mitigate the inherent risk and improve the performance deficiencies.