Why is running a startup so complicated?

A decade ago when I began the path of entrepreneurship, I was amazed that 90% of all startups fail. Now, I'm more amazed that 10% don't fail. Over this decade, I founded 3 startups -- 2 didn't go well and 1 into which I'm into the 4th year. In the middle I was a part of a successful startup that eventually went to an exit and I got a full-time MBA from Babson College, world's leading business school for entrepreneurs. Here is my experience.

The founder problem

The founders have to be crazy enough to give up better options in life, but still sane enough to scale the company to great heights. They have to be foolish enough to pick up problems ignored by large companies, but still smart enough to build up on the start provided by a combination of luck and grit.

Many of the great founders are fairly egotistic [think Jobs or Musk] that makes working with them hard. However, they still had put up with each other for long enough. Jobs and Woz had a lot of friction as things progressed. In 1982, Allen quit Gates at Microsoft. Zuckerberg survived great co-founder clashes.

Most great founders would find it hard to survive in any job, but in the company they founded they have to have the perseverance to stick on to decades.

If the founders are quite young, they would have the advantage of a large pool of smart people available to work for them, but the founder might not have the emotional maturity to keep building the enterprise at that age. If the founders are older, they would get the experience & maturity, but would lose the network willing to join them on a crazy pursuit.

The people problem

Unlike in a large company, a startup employee needs to be able to juggle multiple things and work on great things without the help of established processes. They need to be able to figure a lot of things on their own. To do that they need to be much smarter than a big company employee doing the same task.

If that smart employee is not really financially secure, he/she would prefer a big company to yours. And if the smart company is quite secure financially, he/she might be tempted to start a company on their own.

In short, you need employees who are smarter than a big company equivalent and still be willing to work for you. It can get extremely expensive to do all that.

This is why in successful companies the founders manage a lot of critical tasks among them in the early stages and also have a strong pool of smart people they can convince to join without paying them the full market price. This is why single founders or a bunch of MBAs starting a company are not taken as seriously by the VCs -- it would be too expensive to really outsource essential elements.

And as a successful startup goes through multiple stages you need different types of people -- the mavericks to begin with, the rockstars to build and later a disciplined force to consolidate and defend. At each stage you might have to let go a few people who fit great for the previous stage, but not as good a fit for the next stage.

Most importantly, an early stage company doesn't have much slack. If a key employee goes on a vacation or is sick or goes on a honeymoon, everything can come to a grinding halt.

The product problem

The problem can neither be too big nor too small. When Amazon started e-commerce was not as big a market. The number of people who can enter credit cards in fairly insecure pages with no real design, was not big. This is why the big retailers ignored the market.

When Google got the deal with Yahoo to serve search results, Yahoo didn't think Search was a very lucrative problem. When Microsoft got the chance to build the OS for PCs, IBM didn't think the PC market as really big.

The problem has to be just at the right size for a startup to build a niche and then before anyone can realise it must build a fort around it. You need to be able to seamlessly move among different stages of a startup without crashing the company.

The money problem

It takes a long time for many great ideas and companies to find footing. Even great companies like Microsoft had fairly ordinary beginnings. In the first 2 years they made just $16000 and $22000 (1). What gave them the first break was Apple launching their microcomputer for which Microsoft's BASIC was a popular compiler. Amazon and Google had to survive the dotcom apocalypse.

What sets these companies apart is the rigorous focus on money management and capital efficiency. Bezos made everyone use cheap furniture and stressed on frugality from Day 1. Google's founders were reportedly super careful with spending.

And of course, you need loads of luck including the ability to be in the market at the right time and the mistakes of your key competitors.

Any number of things can go wrong. Founders might develop cold feet. Their marriages might fall apart. Their cofounders might find other interesting problems or great offers. Their relationship can explode given the craziness and egos. They might not be able to convince smart people to join them. They might have key employees leave at critical times due to misfortune. They could pay less attention to financial controls and mismanage all the investments. They might run out of money during a major financial crisis. Their investors might lose confidence, interest or fight amongst them. They could be early to a market or too late to a market. The customers might not find the offers engaging. The margins might not be good enough to sustain. Big companies might undercut them. Regulators could squeeze them. Market conditions might completely change.

With all this stacked against them, the fact that a few hundred startups succeed every year is in itself a miracle.