5 Ways Startups Evolve Into Successful Companies

[“5 Ways Startups Evolve Into Successful Companies” originally appeared on TheStreet and is written by Ellen Chang.]

Among the tens of thousands of startups created each year in the U.S., the burgeoning companies that transition into successful enterprises are few and far between.
Although the failure rate remains extremely high, entrepreneurs continue to seek innovative solutions to existing problems, helping to build a new workforce and increase productivity across various industries.

The pitfalls of starting a new business are numerous as founders often find themselves devoting too much time chasing funding or customers while others expand too quickly and wind up having to lay off a significant portion of their team to remain in the black.

One-quarter of Americans have thought about becoming business owners, but opted out of the prospect, according to a Gallup poll conducted in 2014. This is not surprising since the number of startups which have failed or shut down since 2008 outnumber those which are being created.

The barriers to entrepreneurship are numerous, resulting in 50% of new companies which cease operating during the first five years. A lack of available early-stage funding, especially for minority and female entrepreneurs, job security and coaching also present hurdles, according to Gallup.
The trade-off for founders is often gratifying as they learn from their mistakes and develop new strategies.

“In entrepreneurship, everything starts with why,” said Paul O’Brien, co-founder of MediaTech Ventures, an Austin, Texas-based economic development of innovation in media, and a partner in 1839 Ventures, a venture capital firm providing financing to early-stage technology-oriented companies. “Whether or not you attract co-founders and partners, appeal to investors or customers, or catch the attention of the media and consumers, it depends on understanding why you are doing what you are doing, why anyone will care and why it will matter.”

Here are five tips from startup founders or employees for entrepreneurs who are seeking to transform their small businesses into profitable companies.

1. Don’t Focus Solely on Growth

Controlling a company’s expansion or growth rate is critical since it can lead to burning through cash too fast and creates other problems.
Between the opening of their first and second locations, Leon Chen, co-founder of Tiff’s Treats, an Austin, Texas-based warm delivery cookie company with 28 stores, waited seven years. The delay helped the company which was founded in 1999, ensure their processes and procedures lacked any errors.

“Do not get enamored with growth for growth’s sake,” he said. “Even today as we are at close to 30 stores, we will never grow store count faster than the infrastructure in place.”
Tiff’s Treats has raised over $30 million in funding, including $25 million from the past two years. The company’s first round of funding did not occur until 2008.

2. Realize Bootstrapping Is Not a Failure

Too many startups devote a large amount of their time on fundraising to obtain capital from venture capital and private equity firms and often shift their focus away from their customers or developing a sound business model where generating cashflow is not problematic.

Smarsh, which was founded in 2001, bootstrapped for many years before the Portland, Ore.-based provider of cloud-based information archiving solutions, took on private equity investment. While many start-ups view fundraising and outside investment as an “imperative or a badge of honor,” it can be misguided, said Steve Marsh, founder and CEO at Smarsh.
The company was able to grow “without relying on the crutch of financing while spending responsibly and creating a profitable model,” he said. “We were able to make good decisions and listen to what customers really wanted to guide us to the next phase of growth. It wasn’t always easy, but any bumps in the road ultimately made the company stronger in the long run.”

Smarsh now has 215 employees.

3. Understand the Problems of Customers

Entrepreneurs who create a product they personally find useful are often more successful, because they understand the existing gap, said Dom Sagolla of his experience when he was head of quality at Odeo, a former podcasting service which was founded in 2005.

“Build something you personally need to have,” he said. “Often teams fail because they are not the target audience for their own product and do not realize when it needs fixing or pivoting.”
Sagolla is now director of Developer Camp, a San Francisco-based startup accelerator and community-building organization.

The founders also need to focus on the problems of their customers, especially in the early days instead of merely of approaching it from their original mission even if they have obtained funding, said Sean Wilcox, who was the senior director at Clearwell Systems that was sold in 2011 to Symantec for $420 million.

Startups need to understand the goals of their customers and be agile with solutions, he said.

“It is critical until the startup finds a repeatable playbook that delivers enough value to create a sustainable business,” said Wilcox, who is now vice president at GrandCanals, a Los Gatos, Calif.-based provider of analytics-driven fulfillment and a long-time advisor to startups across various industries. “There are exceptions, but the ideal situation founders foresee in a business plan is usually not fully supported by today’s reality.”

4. Stick to Your Plan

Startups face an enormous amount of pressure from investors and stiff competition from other businesses in their industry.
Companies that do not lose their vision or goal will be able to make their new innovative product a reality. The founding team must be “100% committed to delivering the innovation to market,” said Kim Bond Evans, CEO and founder of Seremedi, a Houston-based patient healthcare tech company which was founded in 2014, has raised $2.5 million and has 11 employees.

“As there will always be barriers and obstacles if you are delivering something disruptive, the founding team has to find a way or make a way and always be asking themselves what can I do with what I have,” she said. “Build a culture of thoughtful truth tellers. In order to fix it, you must acknowledge it.”

Even if your startup only has a handful of employees and lacks funding, do not be afraid to approach larger potential clients, said Tom Villante, co-founder and CEO of YapStone, Walnut Creek, Calif-based payment technology solutions company which was founded in 1999.
“Starting a company takes a good dose of elevated reality by believing that you and a couple of employees in a 300-square foot office can compete and win against billion dollar companies to one day be worth a billion dollars yourself,” he said. “There are plenty of times when it seems like the world’s against you, but you have to get up, brush yourself and say ‘why not us’ and get your employees to believe it, too.”

Yapstone now has 500 employees and revenue in 2017 is estimated to be $300 million.

5. Seek Advisors or Mentors in the Early Days

Whether you turn to advisors who give you advice occasionally or create a formal board, their insight can provide long-term guidance, especially as you are launching the first product.

“The influence of early stage board members can’t be understated,” said Elizabeth Lawler, CEO and co-founder of Conjur, a Waltham, Mass.-based trust management software platform with 20 employees. “Find people who compliment or augment your skill set and look for individuals who will be a steady supportive presence through tough times and periods of change.”
Founded in 2013, Conjur is backed by Amplify Ventures, Avalon Partners and Koa Labs and has 20 employees.

Advisors can help entrepreneurs, especially founders tackle problems from a different viewpoint or seek other solutions.

“When you are in the thick of things, you may develop bias you don’t even realize you have,” said Evans. “You may be set on plan A or B when there is a plan C that’s even better. Wise, thoughtful honest counsel is priceless as it helps you clear those hurdles and enables clear, expansive thinking as you make critical decisions. It helps you be your best.”
Young or new entrepreneurs are matched with experienced mentors and advisors at each Developer Camp, said Sagolla.

“The value of this program is that entrepreneurs get to experience the top echelon of startup life: they are the best of the best,” he said.