Searching for unicorns: a classic startup funnel has broken
Translation of the article prepared in advance of the start of the course “Product Manager IT-projects”.
According to the Global Entrepreneur Monitor (GEM) report for 2019, more than 100 million startups are launched annually worldwide. That is, it is about 3 startups per second.
Entrepreneurs appear in all walks of life, they all belong to different age groups, they are of different sexes and from different places. Stereotypical entrepreneurs are no longer two guys in a garage in Silicon Valley.
Now we are experiencing a renaissance in entrepreneurship, which is fraught with incredible opportunities.
A blast wave of demand was followed by a blast wave, which resulted in an increase in the number of accelerators, incubators and university programs, and this has all happened over the past 10 years. Only 10 years ago existed only 50 startup accelerators. Today there are more than 5000.
But this barrel of honey was not without a fly in the ointment.
Despite the fact that we produce more startups than ever, the overall success rate of startups has decreased, not increased. This is because while the initial stage of launching a startup is the easiest, it is also the most unreliable and risky.
Today, the task of accelerators is not only to attract investment to startups, but also to educate world-class startups from their founders.
Massive explosion of startup activity destroys a traditional startup funnel and requires a rethinking of the standard model of accelerators.
What is wrong with the 12-week accelerator model?
A typical accelerator passes a batch of 10 teams through a 3-4-month funnel, which ultimately ends with a day of demonstration of projects where startups speak to investors.
But it is incredibly difficult to bring teams to a state in which investments can be poured into them in 12 weeks.
And that’s why.
Problem 1: There are more startups than before
As the top of the startup funnel has expanded, it has become easier to find many applications. But it became more difficult to find and select really worthy teams that would be ready to take a limited number of places.
A typical accelerator starts filing applications 3 months before the launch of a new batch, and during this time it processes more than 600 applications.
The lack of a clear metric-based heuristic leads to the fact that too much time is spent on considering applications, which brings subjectivity to the selection process. As long-term further work with teams is impossible, many good teams with bad applications are eliminated at this stage.
The stakes on teams are too high, because the effectiveness of the work of the entire funnel depends on this.
Problem 2: More time is spent on training, not on team acceleration
When the teams are recruited, the hard work of preparing startups for the pitch begins. Investors only care about one thing: traction. However, entrepreneurs care about something else: their product.
Until you know how to check this indicator, it is quite possible to find startups with a minimum viable product and even several solvent customers … However, such a startup does not know where their next 10 clients will come from, but they will struggle to effectively convey their traction history.
Therefore, you spend time and fill in the gap, forming startups. You build a curriculum for modeling business processes, lean start-ups, metrics and skills of a competent pitch. Add to this UX, sales, marketing, growth hacking and everything else you can put there.
Startups are easy to crush when they simultaneously try to devote time to training, pitching and developing their business.
Twelve weeks INSUFFICIENT for training and acceleration.
Problem 3: Raising Latent Entrepreneurs
To overcome the above difficulties, many accelerators in the early stages simply try to select the idea with the highest traction. This approach leads to better results.
Even a mediocre chef can cook a good dish with excellent ingredients.
However, easier said than done – unless you are in the top 5 accelerators. The law of power always makes itself felt. In addition, when a startup has enough traction, it no longer needs an accelerator and can itself come to investors.
The art here is to catch startups in the early stages of their life cycle.
The ideal time is pre-traction, even before they turn to the accelerator themselves.
This is exactly what Y-Combinator does with Startup School and Hacker News – that is, how they manage to position themselves in terms of the most coveted alternative and make competition among themselves inappropriate.
Since twelve weeks is too little from moving from an idea to an investment, many accelerators implement pre-accelerator or incubator programs.
But these concepts in themselves add problems …
Traditional pre-accelerators and incubators are also not a panacea
A regular pre-accelerator offers a curriculum for a longer 6–9 month period with the goal of turning startups in the early stages (usually only with an idea) into venture businesses ready for acceleration.
Despite the fact that this sounds reasonable in principle, the problems faced by such programs lie in their cost, efficiency and scalability.
Simply put, traditional pre-accelerators / incubators break the whole business model.
Problem 1: Operating Costs Rise
Obviously. Since you are adding a new length of time before the investment phase, the cost of starting the appropriate pre-accelerator program is significantly increased.
Problem 2: An Even More Confusing Stage of Idea Formation
To control costs, most programs offer a uniform curriculum for everyone with fundamental educational content, diluted with a small amount of voluntary mentoring.
However the stage of the formation of ideas (ideaton) is that mess itself.
Ideaton is a kind of start-up honeymoon when everything seems possible. Also this stage, which is penetrated through by uncertainty, we do not know what we ourselves want.
A quick mentoring of startup teams at this stage usually does more harm than good. There is a problem “Advisor’s whip”. Ask ten experienced entrepreneurs for advice and get 10 different answers. Which one will you follow?
High uncertainty + conflicting / prescriptive advice = correct recipe for walking in circles.
Problem 3: Scaling difficulty
In order to overcome the trap of the “advisor’s whip”, you need to invest in mentors who can offer a personalized training program, and not just in advisers and not just in one program that should suit everyone.
Counseling advisors focus on specific recipes for solutions. While mentors should focus on asking the right questions. Such mentors help transform startup founders into entrepreneurs, rather than simply imposing their ideas on success.
The right product at the output of the pre-accelerator is not the promotion of an idea, but the promotion of the founder of a startup.
However, such a model is not easy to scale without a coherent coaching system.
As you already understood, a funnel has formed in us. To get 10 teams ready for acceleration, you need to start with a very large pool of teams on the ideaton.
For this model to work, you need to rethink the funnel for launching startups so that it solves three main problems:
- Search in this noisy world of the best startups at the pre-traction stage.
- Measurement of investment readiness at the pre-traction stage.
- Increased number of mentors / mentors versus number of advisers
And all this needs to be done in 3-6 months instead of the usual 9-12.
Is it possible?
The answer is yes. Over the past few years, we at LEANSTACK gritted our teeth in the early stages of startup life, worked with entrepreneurs and accelerators in search of a repeatable and scalable solution for creating a new startup funnel.
The answer we found lies in finding the right balance between the timely education of the founder, a highly effective coaching system and agreed indicators of progress.
If you are running an accelerator (or university program) and want to learn more, check out our platform LEANSTACK for Accelerators.
Learn more about the course “Product Manager IT-projects”