Why We Shouldn’t Be In Love With Startups
Why We Shouldn’t Be In Love With Startups
We all love a good story, especially those that involve rags-to-riches path. We love the zero-to-unicorn stories of Microsoft, Facebook and Uber. We often tie this type of success to proof of the American experiment–an ever-present reminder to some that if they put in the time and eventually get funded, they too can scale a business into the stratosphere.
Unfortunately, however, our love affair with startups is unfounded, especially as it relates to those who may be looking to provide, market to or target their product/service to the startup segment.
Why We Are In Love With Startups?
The most commonly-referenced startup story is fun to tell:
- Founded by 20-somethings
- [insert founder number] of the founders dropped out of [insert Ivy League school]
- They initially worked out of a garage, a basement or a dorm room
- They were quickly funded with [insert $ amount in the multiple-millions] by [insert common Bay Area VC]
- They scaled to [insert # of billions of users]
- They exited before 30 @ [insert billions of dollars]
Yes, these types of stories are fun to talk about, but they’re more of the exception than the rule. Here are some startup stats that should illustrate the point:
- Only 80% of startups make it to their second year
- Failure rate increases to 34% in total by year two
- Total year three failure rate his 42%
- 53% by year four
- Construction, utilities, transportation, retail, finance, insurance and real estate startups are industries that hit hardest on startups with an average failure rate among them of 40%
We’re ultimately infatuated with startups, likely because we want to insert ourselves into these Cinderella stories. We wish we were the founders, experiencing this testosterone-fueled melodrama of success.
The infatuation is real. It’s one of the reasons sites like Fortune, Entrepreneur, Inc and Forbes spend a large majority of their content creation time filled with stories of startups, new companies and “the next big thing.” All while the majority of the economy is driven greatly by boring industries often owned by private equity, not venture capital.
Why We Shouldn’t Be In Love With Startups
Countless statistics abound on the prolific failure rate of most startups, but startup failures are not the only reason we should cut our ties with this murky American institution.
- Most Startups Lack Budgets
The Pareto Principle is at work when it comes to startups. That is, the top 20% of startups take 80%+ of the funding. That leaves the bottom 80% of well-meaning nascent companies with hard-working staff and great ideas to struggle to come up with coffers large enough to fund their lofty ambitions. In fact, one of the main reasons most startups fail is they simply run out of cash before they reach profitability.
What does that mean for those with a product or service they want to pitch to fledgling startups? Seller beware. While there are those who hitched their wagon to a star (like Proctor & Gamble and Walmart), in most cases, servicing startups with an advisory business is a fools errand.
I have personally seen the impact of the startup funding gap as a recurring problem in both of my advisory businesses. It’s one of the main reasons startup founders often shy away from reasonable SEO pricing models, opting instead for the riskier, cheap, outsourced route or the DIY approach—which are both fraught with their own perils. We found most unfunded or under-funded startups unable to compete with larger budgets, backed by some of the most prolific venture capitalists.
Even some of the best idea-based startups are no further in process than a non-profit struggling to survive.
Now, if you can somehow tap into the top tier with your product or service, you have a fighting chance. Otherwise, you’re better advised chasing boring, old businesses, especially if you intend to provide a high-quality, high-margin service yourself.
- Many Startups Lack Demand
In both funding startups and servicing them, I have seen almost every idea under the sun. It’s like a repeating episode of the hit television show Shark Tank.
I saw one company that wanted to restart the American Constitution, American voting and overall democracy through blockchain.
Yet another wanted to fund solar-powered out-houses to third-world countries.
One feature that is prevalent among many failing (or soon-to-be-failing) startups is an overall lack of demand. There may be a large addressable market, but that market itself is not demanding things like solar power for Porto-Potties or a major societal shift that involves changing the Constitution.
Without demand, startups falter and ultimately fail.
- Most Startups Are Poorly Managed
The reality is, most 20-somethings that start businesses lack the operational, managerial, sales and financial expertise to scale anything.
In fact, some 23% cite lack of managerial prowess as a leading cause of failure. It’s not just a lack of direct formal education, many of the startups I have seen—especially those in the bottom quartile—are run by very inexperienced managers who think that all businesses is run on a shoestring or by trying to bleed a stone.
- Startups Can’t Compete With Big Brands
Many startups like to enter markets already dominated by some of the world’s largest brands. For instance, I saw a local, Seattle startup with a high-value exact-match domain name that (if they launched in this segment) would have put them in direct competition with the likes of Microsoft Azure, Amazon Web Services and Google Cloud.
While their domain was good, the scale they would have required to get the exposure for their non-existent brand would have broken the bank many times over. That was before we even discussed the required software development.
What Startups Should Do
While some startups have adopted an aura of failure, stating that the best thing a startup can do is to “fail fast,” most would likely agree that the ultimate goal is not failure, but rampant success. In avoiding failure, the principle of “measure twice, cut once” is helpful. Addressing some of the reasons for startup failure should be pre-eminent, including:
- Establishing a winning, experienced management team. As the saying goes, a “C” idea with an “A” team is better than an “A” idea and “C” team. Getting the right people on the bus and the wrong people off the bus is critical.
- While easier said than done, make sure funding is forthcoming or that the business can reach profitability rapidly without it.
- Like Sun Tzu states: “So in war, the way is to avoid what is strong and to strike at what is weak.” Find blue ocean opportunities. Don’t try to compete with large brands on their own turf.
- Similarly, find a product or service that would result in high demand and preferably high margins.
These may be overly-simplified solutions, but they are the first start in overcoming the many pitfalls that can hamper startup success.
What Startup Advisors Should Do
If you’re a business owner looking to target startups: don’t.
If you do, tread lightly and—like any good investor—make the targeting of startups less than 10% of your overall marketing and sales portfolio. Spend your time on businesses that have budgets and the ability to feed your own operations into growth mode.
In some cases, finding a serviceable niche among startup businesses can be very lucrative. I have close friends in accounting and finance that have tapped into newer businesses and taken the ride with them as they have doubled and then doubled again. Making it the focal point of any outbound marketing campaign is ill advised, however.
Conclusion
While I am a big proponent of startup ingenuity, grit, sweat-equity and the success stories of our American experiment, when it comes to targeting startups as B2B clients, the cards are stacked heavily against us. No, I prefer boring businesses and established companies that are not seeking their own sweat equity for services provided. Yes, I love the idea of a baby, but I prefer to spend my time with something a bit more mature.
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