Founder Friendly Standard and customer-funding can help founders avoid “No market need, Running out of cash, Not the right team,” and 7 more reasons startups fail.
The above graph shows the top 20 reasons why startups fail from CB Insights. I marked up the graph with green checkboxes to show which risk factors customer-funding (also called bootstrapping) can help you manage. Orange checkboxes denote risk factors that Founder Friendly Standard can help manage.
Risk Factor: No market need
If you’re bootstrapping, you’ll find out pretty quickly if there is no market need. Unlike your angel and VC-funded cohorts, you’ll be able to make fast pivots while they’re lining up their organizations’ change management strategies.
Risk Factor: Ran out of cash
If you are bootstrapping, you are financing innovation with organic cash flows. This is a key growth driver in the Credit Suisse Family 1000 research. If your company is controlled by its founders, you’re more likely to pace yourself, spending the money like it’s your own vs. your VC-funded competitors who are quick to spend (principal–agent theory).
Risk Factor: Not the right team
If you’re on the Founder Friendly Standard, your team members have 4-year vesting schedules, and you’re committed to holding quarterly performance reviews. You may be able to manage poor-performing cofounders out the door more gracefully with this framework.
Risk Factor: Poor product
If you are bootstrapping, problems with the product can immediately impact your pay. So you’ll be more motivated to figure out how to make a product that customers love.
Risk Factor: Need/lack business model
If you are bootstrapping, you won’t have anyone to task with finding a better business model. The good news is there is nobody better than you, the entrepreneur, to address this problem.
Risk Factor: Ignore customers
If you are bootstrapping and running your company with the Founder Friendly Standard, you won’t be encumbered with preparing reports for investors and listening to all of their ideas about how you should be running your business. You’ll have more time to focus on customers.
Risk Factor: Disharmony on the team
If you’re on the Founder Friendly Standard, your investors should be completely hands-off. As far as the team goes, you’ll be on 4-year vesting schedules with quarterly performance reviews so you can have an opportunity to negotiate poor-performers out of there.
Risk Factor: Lack of passion
If you’re on the Founder Friendly Standard, you probably won’t be feeling like an employee in your own company—unlike your peers who are running important decisions by angel investors and VCs.
Risk Factor: No financing/investor interest
If you are bootstrapping, you don’t need investors. Sara Blakely from Spanx started with $5K and owns 100% of her company. For more examples of entrepreneurs like Sara, read The Customer-Funded Business and Nothing Ventured, Everything Gained.
Risk Factor: Legal challenges
In my experience, the worst legal challenges came from cofounders and investors. Has this been your experience? With Founder Friendly Standard clarifying commonly disputed terms upfront (voting rights, liquidity, sweat equity), you may be less likely to have legal challenges from co-founders and investors.
In summary, by combining the Founder Friendly Standard with customer-funding, startup founders can manage half of the risk factors that commonly cause startups to fail. This matters because, as I explained in my Quora answer where this article was adapted from, an entrepreneur’s career generally lasts 20 to 40 years. Even if you start one company a year, 20 to 40 years is not enough time to beat the best odds in the country (1 in 326 in Washington-Arlington-Alexandria). Thus, entrepreneurs who want to beat the odds should make an effort to build their businesses on customer-funding and the Founder Friendly Standard. This is the investment case that I laid out in my new book, Grays Sports Almanac for Venture Capital: A new standard for optionality to beat the odds.
Update on 9/23/19: Check out our new infographic comparison of the Founder Friendly Standard to six popular startup term sheets.