It’s a great time to start a company. Wrong!

A lot of people liken the ability to raise money as a strong indicator of great timing to succeed as a startup. I can see the thinking behind that logic. At one time it was really hard to raise startup capital because the landscape was just so competitive. If you did succeed in getting funding, people thought, “Hey, you guys must be legit” because investors had their pick of the litter, so choosing you must be a very good sign of things to come.

To a large extent, that mentality has carried over to today. The difference is that in today’s landscape, getting venture capital isn’t as difficult as it once was. Competing for investment capital is a little less competitive than it used to be because there’s more money going around today. But getting your hands on money from investors isn’t the only thing you need for a successful startup.

The 3-legged stool of startup success

Successful startups depend on more than just money. I see the need for 3 basic elements to succeed, of which money is just one:

  1. Traction
  2. Talent
  3. Money

You might think of it as a three-legged stool:

3-legged stool of startup success


3-Legged Stool of Startup Success

3-legged stool of startup success

The thing about three-legged stools is that one weak or missing leg and you’re going to end up flat on your back.

The Traction leg

Traction is really important. In my mind, more important than money. To get traction you need to build something that people care about. The ability to get in front of people and get people to like your product – gaining traction – is critical. If nobody cares, where will your business be?

Getting traction means bringing in revenue. To me, revenues are what matter first and foremost to determine if your company will succeed. Without revenues, you just don’t have a viable business model.

Face it, the average person on the street is still making the same salary he or she’s always made (assuming they haven’t become unemployed). The pool of available money to be spent on your product or service hasn’t changed all that much. If anything, it’s gotten smaller with people scared about which direction the economy will take next.

Because of the limited (and mostly dormant) supply of money you can take in as revenues, it’s not an especially good time to get traction for your business. I’m not saying that some new exceptional companies won’t succeed. It’s just tougher out there to succeed based on revenues right now.

The Talent leg

Besides traction, another factor that most people don’t consider is the availability of talent. The more money that goes to startups, the more the war heats up for strong talent. And there is a huge war for talent right now, with plenty of very good people going to startups that don’t yet have a proven business model.

People don’t consider this either when saying it’s a good time to start a business, but it should be a major factor in making a smart go or no-go decision. Talent wars drive up the cost and restrict the availability of talent. That’s going to have a very serious impact on any revenues you might generate from the business.

Reality check

The investor capital or Money leg is what’s strong right now. But even if you have plenty of investor capital, it’s only a matter of time before your business will fail without adequate revenues. To grow revenues, you need traction and talent.

So if you asked me if now is a good time to start a company, I’d have to say no. Now is a good time to raise investor capital. But now is certainly NOT a great time to get traction or talent. Startup money without traction and talent won’t get you anywhere in the end. And if raising seed money is your end goal, you need a reality check.

So the next time somebody tells you it’s a great time to start a business, correct them.

3 Responses

  • Jacques Fuentes // // Reply

    So what do you have to say about startups that aren’t looking for seed money (at least for now and the foreseeable future)? I don’t know of many stable two legged stools. Does another basic need replace the quest for capital, or do the other two become even more prominent?

    I suppose my question is really geared towards my current interest: do the basic needs change for a startup that’s entering an existing, but technologically antiquated vertical market? If so, how do they change?

    Also, the stool metaphor is nice as it implies foundation; although, perhaps there’s something more appropriate which underscores the heavy consideration towards “traction.”

  • Adil Wali // // Reply

    Jacques:  This is a great question.  I guess there are a number of ways to think about it/answer it.  Let’s start with the last part.  I agree that the stool metaphor is kind of an oversimplification.  The reality here is that money and talent are early indicators of success and traction is a lagging indicator.  In a lot of ways, the key thing that really matters is sustainable (profitable) growth.  That’s the long term goal.  

    You just typically need talent and capital to get there.  In terms of startups not looking for seed money, I don’t think there is anything necessarily wrong with that.  Not all businesses are created equal.  Many spaces don’t have significant capital barriers-to-entry anymore.  This is especially true in the technology world because the cost of building web/mobile apps has plummeted over the last 3 years.  

    As for an existing (antiquated) space, that’s a harder question.  A lot depends on the space itself and the solution.  My guess is this: the key need that arises for an existing vertical is domain expertise, and (to a lesser extent) existing network in the space.  That way you can do the two critical things that matter: 1) build a product/service that actually SOLVES the problem  and 2) sell it.

    Does that seem right? Would love to talk more about what you’re cooking up soon! 

  • mary taylor // // Reply

    Yes. At some point in the next year we should emerge from the economic
    ditch we’re in — and most of your potential competitors probably didn’t
    survive. At the same time, spending will increase as customers invest,
    replenish and restock all the products and services they scrimped on for
    the last several years. Now is the time!

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