When can startups be called successful, e.g. reddit, dropbox?

 
My last post on startup company failure rates engendered discussion on what constitutes success in the context of a startup company. I specifically avoided this subject because it was ancillary to my point that some startup sub-groups have inherently different failure rates than others. 

Common metrics for failure are going out of business or not having a Web site (without a known liquidity event of some magnitude). Thinking about these it seems clear that success metrics are not the opposite of failure metrics. I think this comment on my last post gives this perspective well.

I think the failure rate is better than the oft quoted 90%, but the success rate is not better than 10%.  Of course, what failure and success mean drives the answer.  In a pool of smart technology based startups, if failure means losing all the invested capital, I suspect the failure rate is 60%-ish.  If success means an annual IRR of 100+% and liquidity within 5 years, I suspect the success rate is much less than 10%.  These are investor centric definitions.  If you used more entrepreneur focused definitions, the rates would change somewhat.

So yeah, a lot is in the eye of the beholder. However, I think we can do better than that. In a lot of cases, most people will agree x company was a success. Where is that line?

Let's take this other comment about reddit as an example. Reddit sold to Conde Nast for an estimated $12M after having raised ~100K (according to crunchbase). Even if those aren't the true facts, let's just suppose they are for the sake of argument.

Yes, it definitely does depend on your definition of success. For a lot of young entrepreneurs, getting funded, an early exit, or a buyout from Conde Nast are all success. That makes sense in a way, especially because these outcomes are all popular and well-publicized. 

If you think of a business as something that benefits society, makes sustainable jobs and can outlast a founder, I think the bar is very different. Put another way, I am more proud to have started sustainable companies than I am to have sold them, and I would like young and new entrepreneurs to have the same perspective. 

I think the vast majority of people would say reddit is/was successful. Their site is used by millions of people, and they returned good money to both the founders and the investors, though seemingly not yet to CN. 

It wasn't a 100M+ exit for sure, but I think it certainly passed the bar of success. Clearly you can keep being more and more successful, but there is a line somewhere and they passed it. 

I'd say the same thing about the sustainability and jobs reference. Those are more ways (like more money) to be even more successful, but aren't necessary conditions of success.

Let's tweak the original outcome though. What if they had raised $12M and as a result the investors got their money back and the founders got nothing? It would still be used millions of people, but I find it hard to call it a success from either the entrepreneur or investor perspective. Maybe you'd say it is a successful site, but wasn't a successful company.

What if they had raised $10M, and the founders ended up with $1M each and investors the rest, i.e. a meager return? That would definitely not be successful for the investors, but I think most people would still say successful for the founders. However, I don't think that crosses the general line because a big subgroup, i.e. investors, would not look at it as a successful outcome.

What if it was the original financial outcome but CN shut down the site immediately? I think you'd still call it a success for both the entrepreneurs and investors, and a success in general. That is, I don't think what the acquiring company does matters that much in terms of evaluating the success of original entity. It's a sad fact that most acquisitions screw up the company, but it is what it is. 

In that case, I think you'd say reddit was a success, but the acquisition was not successful. Again, I take the commenter's point that creating a sustainable company might be considered more successful, but that doesn't mean it wouldn't have crossed the bar of general success.

Here are some more:

  • Is Dopbox successful? It's used by millions and making money. I think if you asked anyone at this point they'd say it is successful except maybe the investors because they haven't exited yet. But if Dropbox tanked tomorrow, would it still be a success? Probably not. So then...

  • Do you need an exit to be successful? I don't think so. When my last company exited, it had a run-rate of about $1M/year with ~85% gross margins and was trending upward on both. If we never exited and that had stayed for a few more years and then died, I would still call it a success. It would have returned the founders a decent amount of cash. We had no investors though. So then...

  • Does success depend on the return of your investors? Certainly it does in their eyes. You could walk away with a decent exit and they could get a measly return. In that case, you might think it is successful, but I think from the outside there will always be an asterisk that goes along with the story about your company.

    That is, to be universally thought of as a success, I think you need a good return for both the investors and the founders. Since my last company took no investment, I think it can be called successful in the no exit scenario, but if we had taken money and not made a good return for the investors, I think that would make it not successful. So in a real sense, the bar is perhaps lower if you don't take money. With that in mind...
  • Is ramen profitability successful? Taking the above into account, if you don't raise any outside money, and it enables you to live how you want indefinitely, then I think so. If you do take money, then no; it's a good milestone along the way, but you aren't successful yet. But...

  • Is YC successful? I think it's in a similar situation to dropbox, perhaps even further along. In an anything's possible world it could tank tomorrow, but that is rather unlikely. They seem to be about break-even, though a few 100M+ exits could change that quickly. And there are a lot of possibilities on that front: justin.tv, posterous, dropbox, etc. 

    But from another perspective, they're probably already successful because they've changed the startup landscape, right? So...

  • Can a company be successful without a good return for anyone? I think no, though I think the people involved can get a lot of respect from the whole ordeal. If YC tanked tomorrow they'd still probably be thought of as visionary the way companies who enter new markets are thought of visionary even if they aren't the ones that end up capturing those markets. In other words, they would made a recognizable difference in the world, even if they didn't return much to the founders or investors.

Another way way to look at this question is would a given scenario result in future investors being more or less likely to fund the founders. I hesitate to tie anything to funding, but I think it puts an interesting twist on it.

Suppose the founders choose an exit that makes them money but not the investors, e.g. a talent acquisition. Future investors may be wary of those entrepreneurs. Does that make them any less successful? What about their companies?

The amount of money you have also seems to drive a lot of the eye of the beholder stuff. A $1M personal exit looks very different depending on where you sit.

Finally, another nuance seems to be tied up in expectation and potential. If Dropbox had taken no money (not true, but go with me) and tomorrow sold for $12M would it be considered successful? I think people expect more since the potential seems way higher.

Similarly, if a famous entrepreneur has an early exit, is that any less successful? If Marc Andreesen had taken no money for Ning (also very not true, but go with me) and sold it for $12M, would it be considered successful? Again, I think not because people expect more.

 

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