Why Startups Really Succeed: Strings of Luck

Unicorn Cafe

Luck plays a huge role in everything we do, and where we’re born is the perhaps biggest lottery of our lives. But acknowledging luck makes us feel uncomfortable. Our brain seeks causal stories, and tries to create them from whatever information is currently available. This helps us maintain the illusion that the world is an orderly place we have control over.

Startups are no exception. The stories of those that succeeded, and the post-mortems of those that failed, are always causal stories. In the case of success they are typically stories about visionary founders in a fast-growing market pursuing an idea at just the right time. That’s exactly the kind of story that appeals to our brains (and the press). There’s no mention of luck. Surely, if we could turn back time, and those founders were to start the business again under the same circumstances, it would also succeed, right?

That’s an illusion.

We tend to overestimate the influence that founders, or any element we can control, have on the outcome. I am not discrediting the hard work of startup founders. The intelligence, resilience, resourcefulness, and optimism of the founders certainly play a big role in the success of a startup. But I believe that it’s a required and not a sufficient condition. Let’s take Airbnb as an example. Paul Graham writes:

Airbnb now seems like an unstoppable juggernaut, but early on it was so fragile that about 30 days of going out and engaging in person with users made the difference between success and failure.

There are an infinite number of events, from family problems to legal issues, that did not happen but would have resulted in Airbnb going out of business at some time during its inception. A chance encounter with someone offering an attractive job to the founders would probably have been enough (the founders started renting out mattresses because they couldn’t afford rent in SF). It was lucky that none of this happened.

The combined absence of all events that would’ve resulted in the founders shutting down Airbnb was very unlikely. Similarly, there were a few crucial (lucky) events that had a large impact on Airbnb. What if the initial 2 customers had never seen the website? What if nobody ever recommended that the founders take prettier pictures of the listed places? You can come up with similar examples for most other billion-dollar startups. Google almost sold their company for $750k in 1999 and just barely escaped death.  All companies are fickle in their early days, and it’s usually a stroke of random events that leads the founders to continue instead of shutting down or prematurely selling the business.

In Thinking Fast and Slow, nobel-winning Daniel Kahneman puts it well:

 Narrative fallacies arise inevitably from our continuous attempt to make sense of the world. The explanatory stories that people find compelling are simple; are concrete rather than abstract; assign a larger role to talent, stupidity, and intentions than to luck; and focus on a few striking events that happened rather than on the countless events that failed to happen.

This also gives us the top reason startups fail: Because it’s the default action. In the absence of continuous random events that keep a startup alive there are just too many things that can go wrong, and too many seemingly better opportunities the founders could choose to pursue. Statistically, it is more likely that something leads to the (voluntary or involuntary) shutdown of a startup than it is that everything goes just according to plan. That’s the reason VCs don’t focus on “Will this startup succeed?”, but on “If this startup succeeds, how big could it be?” Some have recognized that there are just too many variables to consider, and that it’s impossible to predict the future of a startup.

The reason so many successful startups come out of Silicon Valley is because it’s a numbers game. SV has the highest concentration of startups anywhere in the world (maybe even more than the rest of the world combined). People move to SV to start risky companies. Statistically it should come as no surprise that most successes start here. To avoid sounding like a hopeless pessimist I want to clarify that  I am not saying that all the other factors (culture, available of talent, etc) are irrelevant. It’s just that we tend to overvalue them because they make for good stories.

Optimism, or blissful ignorance, could be called the secret sauce of startup founders. Being relentlessly optimistic leads the founder to make the (irrational) decision of continuing with their startup when they could be pursuing an opportunity with a higher expected value. And given the large number of samples, this works out just fine in Silicon Valley.