STarTUPS arE an engine of economic renewal and change around the world (see “Dealing with the Venture Capital Crisis,”
Communications, Oct. 2009). But successful startups are rare, and startups
that go public and yield strong financials like Facebook are even more
extraordinary (see “Reflecting on the
Facebook IPO,” Communications, October 2012). For example, living MIT
alumni created 26,000 active firms
with 3. 3 million employees and annual revenues of nearly $2 trillion as
of 2006. Five to seven years after their
founding, however, only 30% of MIT
startups were successful (
approximately 60,000 failed).
5, 6 The National
Venture Capital Association says
about 75% of startups succeed, but a
recent Harvard Business School study
found this true of only about 25%.
Stricter definitions of return on capital suggest only 5% of startups succeed and merely 1% go public.
It should be possible for potential
1. A strong management team
investors as well as would-be entre-
preneurs to evaluate startup ventures
more systematically. This column
attempts to help them do this with
a short checklist of key elements to
look for. It is based on many years of
working with startups and a list earlier
published in The Business of Software
(2004), with some additional reflec-
tions and examples.
Venture capitalists often say they invest
2. An Attractive market
primarily in people—the entrepreneur or
the management team—and secondarily
in ideas. Some reverse this order, invest-
ing in ideas first and people second.
Ideas, such as beliefs about sectors or
technologies that will be important in
the future (for example, social media,
location-specific applications, health-
care software) are worth little without
a team to execute the plan successfully.
People end up being key in any case.
A strong management team has the
right level and breadth of experience,
and needs strong technical leadership
if it is a technology-driven company.
At the same time, ventures dominated
by technology often spend too much
money refining the product and too
little effort getting ready for customers
and closing deals. Especially with tech-
nology startups, success often depends
on having founders with solid market-
ing or sales expertise.
Successful startups usually focus on
markets capable of becoming large,
fast growing, and profitable for new
entrants. Whether “horizontal” (for
example, everyone with a computer or
a smartphone is a potential customer)
or “vertical” (for example, every financial services company is a potential
Evaluating a Startup venture
Considering the key elements of successful startups.
it should be possible
for potential investors
as well as would-be