If you’re an entrepreneur who’s built a startup that consistently scales it’s userbase, you deserve a hearty congratulations. It’s hard enough to build a startup, and that much more challenging to build one that seems to be growing at a steady clip. You’re part of a small group of founders who have actually executed on building a working growth engine. You’ve probably growth hacked your way to a viral factor great than one, or maybe your lifetime value per customer is greater than your cost of customer acquisition. Is it time to break out the champagne and start brainstorming ticker symbol ideas? Not so fast. Many seemingly working growth engines are unsustainable, so remain paranoid. Here are a few reasons growth engines can sputter:
1. Virality erodes:
Some products are ridiculously viral for some period of time. They manage to generate invites to a huge number of users on the platform on which they are built (e.g. Facebook). Then response to invites decreases as they run out of new users who will fall for their viral tricks. For example, at the end of 2007 there was a Facebook app class at Stanford in which multiple students built apps that reached millions within a couple months. Then virality decreased and with low retention, usage quickly plunged. See Andrew Chen’s great article for more on this topic.
2. The platform owner makes changes:
Building on existing platforms can get you access to many users but also leaves you vulnerable to changes the platform owner might make. Facebook has historically changed policies in ways that have deeply impacted growth for many developers. Likewise, If Apple changes their app ranking algorithm or Google changes their search algorithm your growth can go down the tubes.
3. The platform grows competitive:
Even if you have a great product on a stable platform, you aren’t necessarily safe. If you are early to a fast growing platform, you may enjoy tremendous growth until everyone else finds out that it is the place to be. Many developers who were early to iOS reaped the benefits of the first mover advantage until the platform became competitive.
4. Your platform shrinks:
Happy New Year to all the entrepreneurs trying to change the world. Here’s to a meaningful 2013!
Note: This post originally appeared on Techcrunch.
One of the most exciting trends of the early 21st century has been the explosion of hacker culture around the world. By hackers, I don’t mean people who pose security threats to computer networks. I’m referring simply to people who use technology to create useful products. For a number of reasons, the next few decades will see more hackers added to the global population than at any time in history. Because of their skills, hackers are uniquely positioned to become entrepreneurs and start companies. While not all hackers want to become entrepreneurs, those who do need much greater access to training and capital in most places around the world. If we can streamline the path from hacker to entrepreneur, the world can unlock immense innovation and prosperity.
Just a few short years ago, we would have been amazed by any story in which a small team of developers created a service rapidly adopted by millions of users worldwide. Today, we have what seems like a multitude of examples to point to: Facebook, Skype, Dropbox, and many more. The truth is, we haven’t seen anything yet. The striking thing is no longer the existence of such successful hackers — it’s the fact that the sheer number of hackers is expanding so rapidly.
It is becoming less expensive to create web-based services due to the cloud and prevalence of open source technologies. Social media allows well-liked services to spread quickly, and inspires new innovators to jump into the game. As the global middle class grows, increasingly large numbers of engineers are being trained. China alone graduates 600,000 engineers per year. Plus, free educational resources like Codeacademy and Kahn Academy abound for people to learn new technologies.
While hackers can make useful products, in many cases they need mentorship and capital to turn their early progress into massively successful, globally-distributed services. The venture capital industry provides much of the capital, but is mostly structured to leverage local networks of trusted relationships. Venture activity skews heavily toward Northern California and a handful of major cities around the world. Yet, over time, it is becoming more likely that hackers with enormous potential will spring up outside of the few major venture hubs. Why shouldn’t a bright young hacker in Ankara, Turkey have just as much chance to become an entrepreneur as one in Palo Alto, Calif.?
You would think the Internet was designed to solve such problems. After all, why not use the online dating model to simply match hackers with VCs and mentors? The solution isn’t as simple as that. Someone needs to identify and vet the best hackers. Plus, these talented developers and designers often benefit from minimal financial support and experienced in-person mentorship to launch startups that VCs think are ready for further capital. By providing these supporting services, accelerators like Y Combinator and Techstars, and educational organizations like Founder Institute, are at the forefront of clearing the path for hackers to become entrepreneurs.
While progress is being made, there is more work to be done, especially as brilliant hackers start to pop up with increasing frequency in areas across the globe that current accelerators have not yet reached. Now, I’m not necessarily saying that every city on earth should have an accelerator, or that VCs from Silicon Valley should spend most of their time running all over the world.
However, I am advocating for governments in every country to recognize that the health of their economies will be increasingly dependent on whether there is a decently paved path for hackers to start companies. Leaders in both the public and private sectors should be asking questions such as: Are there excellent programs to train potential entrepreneurs and angel investors in my country? Do my country’s most talented hackers have a realistic chance to attend a relatively local, high quality accelerator? Is it easy to incorporate and invest in businesses? Is there reliable Internet access in my country?
Nations should consider hackers to be a precious resource. The amount of innovation and global prosperity in the 21st Century will be directly proportional to how well we nurture this resource. What do you think is the best solution to ensure that hackers everywhere have the opportunity to become successful entrepreneurs?
Several researchers at European business schools have put together a very interesting tool that ranks countries by their attractiveness for VC/PE investments. It is very descriptively called “The Global Venture Capital and Private Equity Country Attractiveness Index.” The tool makes it very easy to visualize investment attractiveness on a worldwide map and then click through for more information on particular regions.
The study takes into account many key factors that impact investment performance and risk: “economic activity; size and liquidity of capital markets; taxation; investor protection and corporate governance; the human and social environment, and entrepreneurial culture and opportunities.”
I think it would be fascinating to create an adjusted report that specifically focuses on the likelihood of successful early stage tech entrepreneurship. It might weight specific factors more heavily such as presence of universities with top computer science programs, number of developers in a population, and presence of accelerators and other forms of entrepreneurship education.
Nonetheless, the current tool is quite useful so check it out. Thanks to Alexander Groh, Heinrich Liechtenstein, Karsten Lieser, and everyone else who participated in this project!
As an entrepreneur, I once thought that any and all efforts to promote my craft should be supported. Of course, the real answer to the question in the title is a lot more nuanced. Harvard Professor Josh Lerner wrote a great book on the subject called Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed – and What to Do about It.
Professor Lerner analyzes the underlying assumptions of those who believe that governments should be involved:
- Innovation promotes economic growth (economics didn’t always believe this but now most do)
- Entrepreneurship and venture capital support innovation (there’s lots of evidence to support this)
- Governments can be effective in promoting entrepreneurship (a tough one, which Professor Lerner spends much of the book exploring)
A main takeaway is that government intervention can play a critical role in promoting entrepreneurship especially when the startup ecosystem is young. The government actually played a key part in catapulting Silicon Valley to the center of the tech startup universe during its early days. However, many government-run programs are poorly run, which at best wastes taxpayer money and at worst hinders development of a healthy entrepreneurial ecosystem. Success of public sector programs depends on paying attention to the history of other efforts and avoiding the major pitfalls.
Today I happen to be writing from the 160 Varick Street Incubator, partially funded by the government of New York City. Hopefully those who designed this program took into account Professor Lerner’s advice. Any government-sponsored programs around entrepreneurship would be wise to consider his analysis. Should Governments Promote Entrepreneurship? In many cases, yes! But they need to pay attention to the details. Execution matters here as much as in any startup.