Happy Thursday, 👋
To be successful, most founders need to be optimists at some level. They have to believe an idea can become a business before there is much evidence that it will. They convince employees to join something uncertain, investors to provide capital for something still being built, and customers to take a chance on a company that may not have existed a year earlier.
It is also why we encourage founders to celebrate meaningful wins. The first working prototype, the first customer contract, the first successful deployment, or the first meaningful revenue milestone may represent months or years of work. These milestones should be recognized and celebrated because they reinforce the startup’s mission and provide evidence to everyone involved that progress is real.
Up to this point, the team has usually had a single focus: move from idea to reality by signing the customer or building the working prototype. Little else matters to the future of the company because, without that first meaningful win, there may not be much of a future plan. Once that first milestone is achieved and the celebration ends, the company begins shifting from an idea into a real business. A startup’s first success helps reduce uncertainty, but it should not remove urgency. What it should do is redirect that urgency.
The Success Trap
Organizational researchers have studied a version of this problem for years. Research on what has been described as the “early success trap” suggests that an initial win or success can reinforce the behaviors that produced it, which encourages the team to continue following the same plan rather than consider what might need to change.
This is a point we try to reinforce with founders and their teams. Signing that first customer or developing a working prototype is a strong early success, but it is still based on a very small sample size. Early wins are encouraging signs of future growth, but they are not a reason to start believing every future forecast will be easily achievable.
Early successes can also change behavior within the team. People start to relax a bit and pay less attention to subtle market signals. Hiring standards become less rigid as the company needs more people quickly. Expenses grow because revenue is also expected to keep growing.
We are not implying founders and their teams suddenly become reckless. What happens is the perception of risk changes faster than the underlying risk itself. This is the success trap: the team starts to believe in a future when only a small part of that future has actually been achieved.
One of the most dangerous periods we have seen for startups can be the months following that first success. The company is stronger because it has cleared a major hurdle, but the team may also become less focused on what could go wrong and more focused on making the expected future a reality.
What Breaks Us?
One of the questions we ask founders during investment diligence is some version of: what could break this business? We are not looking for an extensive list of everything that could go wrong. Instead, we want to understand how the team is thinking about risk mitigation and protecting the downside of the business. The only wrong answer we have heard came from a founder who told us their business was immune from any type of market risk. Ironically, that company shut down just a few months after we met them.
What breaks a company will change depending on the stage of the business. During the initial stages, the answer is often straightforward: without that first customer or working prototype, the business is not going anywhere. After the first customer, risks shift toward implementation, customer retention, hiring, and building a repeatable sales process. At that point, there can be any number of risk factors, so instead of listing every possibility, it is often more helpful to identify the two or three risks that could actually break the business.
Our goal is not to have teams constantly operating from a fear perspective. Instead, we want founders and their teams to realize that achieving a level of success does not mean the risks to the business have disappeared. The success trap can be powerful in the startup world, so founders need to maintain urgency even as that urgency shifts from creating the first success to protecting that success over the long term.
Final Thoughts
Founders should celebrate early success because building a startup is difficult. The first working prototype or initial customer is a meaningful milestone that represents real progress. It’s moving the company from an idea toward reality.
But every win also changes the company. Before that first success, the team was focused on moving from an idea stage into a real business. After it, the challenge begins to shift toward making sure the business can endure.
These shifts are not always easy and require a level of founder discipline. The best founders do not respond to success by becoming less confident or less focused. Instead, they become more curious about what could still go wrong. They recognize that some of the past risks have been solved, but the company now faces different, and sometimes greater, risks they may not yet fully realize.
As investors, we work with founders to help identify the next two or three key risks the company will face. We ask the question, “What breaks this company?” not to take a negative perspective, but to give us confidence the team is thinking about the downside risk at each stage of the business and planning how those risks can be mitigated.
The first success of the startup is a moment for celebration. It is also the moment the startup finally has something real enough to lose and an opportunity important enough to protect.
Wishing everyone a great weekend,
-Eric.