Gross is the Founder of American incubator Idealab, which has in the past two decades been responsible for launching over 100 companies, including Citysearch, CarsDirect, GoTo, NetZero and Tickets.com, to name a few.
“If you take a group of people with the right equity incentives and organise them in a startup, you can unlock human potential in a way never before possible. You get them to achieve unbelievable things,” he added.
“But if the startup organisation is so great, why do so many fail?,” he asked.
That was the objective of a short but incredibly interesting seven-minute presentation, to find out, in Gross’s own words, “what actually matters most for startup success“.
He said, “I wanted to know this because I’ve been starting businesses since I was 12 years old, when I sold candy at the bus stop in junior high school; to high school, when I made solar energy devices; to college, when I made loudspeakers. And when I graduated from college, I started software companies. And 20 years ago, I started Idealab. In the last 20 years, we started more than 100 companies, many successes and many big failures. We learned a lot from those failures.”
Gross has looked at companies in his portfolio, combined with industry knowledge and has eventually come up with a list of five factors, which he believes, “account the most for company success and failure.”
First, the idea. “I used to think that the idea was everything. I named my company Idealab for how much I worship the “aha!” moment when you first come up with the idea. But then over time, I came to think that maybe the team, the execution, adaptability mattered even more than the idea,” he said.
In regards to the second factor — team — Gross said, “I never thought I’d be quoting boxer Mike Tyson on the TED stage, but he once said, “Everybody has a plan, until they get punched in the face.” And I think that’s so true about business as well.
“So much about a team’s execution is its ability to adapt to getting punched in the face by the customer.”
“The customer is the true reality. And that’s why I have come to think that the team maybe was the most important thing.”
3. Business model
“Then I started looking at the business model. Does the company have a very clear path generating customer revenues? That started rising to the top in my thinking about maybe what mattered most for success,” Gross said.
“Then I looked at the funding. Sometimes companies received intense amounts of funding. Maybe that’s the most important thing?” Gross said.
Finally, Gross looked at timing. He said, “And then of course, the timing. Is the idea way too early and the world’s not ready for it? Is it early, as in, you’re (in) advance and you have to educate the world? Is it just right? Or is it too late, and there’s already too many competitors?”
However, this was not enough for Gross. He wanted to go deeper into these five factors and figure out which one was a larger factor than the rest. Thus, began a long process of research and introspection for Gross as he, “looked across all 100 Idealab companies and 100 non-Idealab companies to try and come up with something scientific.”
The process, as far as Gross was concerned, had to be as scientific as possible in order to get an end result that startups could actually leverage.
Therefore, the first thing Gross did was look at Idealab companies; the top five companies — Citysearch, CarsDirect, GoTo, NetZero, Tickets.com — those all became billion-dollar successes. “And the five companies on the bottom — Z.com, Insider Pages, MyLife, Desktop Factory, Peoplelink — we all had high hopes for, but didn’t succeed,” he said.
He continued, “I tried to rank across all of those attributes, how I felt those companies scored on each of those dimensions. And then for non-Idealab companies, I looked at wild successes like Airbnb, Instagram, Uber, YouTube and LinkedIn.”
Gross also factored in “some failures: Webvan, Kozmo, Pets.com, Flooz and Friendster. The bottom companies had intense funding; they even had business models in some cases, but they didn’t succeed. I tried to look at what factors actually accounted the most for success and failure across all of these companies, and the results really surprised me,” he said.
Eventually, this research led Gross to believe that,
“The number one thing was…timing.”
“Timing accounted for 42 per cent of the difference between success and failure. Team and execution came in second, and the idea, the differentiability of the idea, the uniqueness of the idea, that actually came in third,” he said.
“The last two, business model and funding, made sense to me actually. I think (a) business model makes sense to be that low, because you can start out without a business model and add one later if your customers are demanding what you’re creating. And funding, I think as well, if you’re underfunded at first but you’re gaining traction, especially in today’s age, it’s very, very easy to get intense funding,” he added.
Gross went on to use Airbnb as an example. He said that at first Airbnb was “famously passed on by many smart investors because people thought, ‘No one’s going to rent out a space in their home to a stranger’. Of course, people proved that wrong. But one of the reasons it succeeded, aside from a good business model, a good idea, great execution, is the timing.”
He believed that Airbnb came out right during the height of the recession during the last decade, “when people really needed extra money, and that maybe helped people overcome their objection to rent out their own home to a stranger.”
“Same thing with Uber. Uber came out: incredible company, incredible business model, great execution, too. But the timing was so perfect for their need to get drivers into the system. Drivers were looking for extra money; it was very, very important,” he added.
Gross then talked about the failures, companies that should have succeeded, but came into the market at a poor time. “We started a company called Z.com. It was an online entertainment company. We were so excited about it — we raised enough money, we had a great business model, we even signed incredibly great Hollywood talent to join the company. But broadband penetration was too low in 1999-2000. It was too hard to watch video content online; you had to put codecs in your browser and do all this stuff, and the company eventually went out of business in 2003,” he said.
He then talked about how, just two years later, when the codec problem was solved by Adobe Flash and when broadband penetration crossed 50 per cent in America, YouTube entered the market.
It was a “great idea, but unbelievable timing. In fact, YouTube didn’t even have a business model when it first started. It wasn’t even certain that it would work out. But that was beautifully, beautifully timed,” Gross explained.
Timing is everything
Overall, according to Gross, there is only one way to understand timing and that is to “really look at whether consumers are really ready for what you have to offer them. And to be really, really honest about it; not be in denial about any results that you see, because if you have something you love, you want to push it forward. But you have to be very, very honest about timing.”
The major takeaway here is that while you might be ready and believe in your idea, perhaps it’s a futile venture unless the larger market is ready as well.
Gross ended the talk saying, “Startups can change the world and make the world a better place. I hope some of these insights can maybe help you have a slightly higher success ratio, and thus, make something great come to the world that wouldn’t have happened otherwise.”
Image Credit: TED