In the past few weeks, I have been lucky enough to visit a variety of conferences regarding entrepreneurship.
One of the most recent events was sponsored by Bain Capital and the Accelerator at the University of Texas at Austin. It had three engaging speakers, a professor from Rice University who had done well in business, a CEO who had sold a company for over a billion dollars, and an entrepreneur who sold a small personal item belt.
During the course of the discussion I think most people discounted the entrepreneur who sold the belt, since it was low tech, it was a physical product and she had not taken money to develop her business. Kim Overton’s company SPI Belt is 100% bootstrapped.
People started paying attention her once she said that she was making close to $8 million dollars on these tiny low tech belts. And the kicker was that she didn’t have to answer to anyone and she still had 100% ownership. By most definitions she runs a successful small business.
Why I bring this is up is because it hints at an issue with American culture. In 2012, millions of entrepreneurs have taken the route of creating a startup instead of creating a small business.
The laymen distinction between a Startup and a Small Business is that a small business is an industry that already has a definitive revenue model. A startup just has an idea with no current revenue model.
From a macro-economic perspective, my personal take on this is that early stage investors are actually destroying value by taking a strip mining approach to entrepreneurialism. In a traditional strip mine, thousands of tons of earth are moved to find ultra valuable minerals in tiny concentrations. This is not sustainable since it disrupts the larger eco-system which doesn’t repair itself quick enough.
In current day startup investing billions are spent to find the next Facebook or Twitter. On top of the engineering costs millions more are spent on PR to create buzz. In reality they are trying to be market makers to define the value of a particular technology. Most of the PR is professing why you should be using X technology to share, communicate, be involved, engaged etc.
Daily, companies are funded that have no revenue model and intentionally shun traditional monetization programs like advertising.
Now, what are the effects of this approach?
- Thousands of well educated individuals go into jobs being mainly compensated via investment capital or even worse shares of equity. This usually equates to a shoe string budget for the person and it greatly limits disposable income. From a macro-perspective I am sure that thousands of entrepreneurs choose not to buy a home or durable goods since they are not sure if their income stream is going to be consistent. This undermines economic value creation.
- From a time perspective, if a young person spends 2-3 years in various start ups that all ultimately fail, this is time that could have been spent working in a traditional business driving real sales, and potentially more tax revenue.
- They are repeating failure. They are encouraged to continue to take risks and continue to waste time and money. There are few instances within the Silicon Valley culture where people say “hey, I think you failed enough, I think it is time for a regular job.” Silicon Valley has created a culture which is a kin watching a gambling addict. They will double down on every hand even if they know they are going to lose.
- Startups are fairly elitist. They look for people with pre-existing skills or a higher education in many cases. Startups don’t usually create jobs for under-educated people and don’t really have the resources to train people. Once again preventing larger economic growth for people who don’t have access to higher education.
- Startups are clustered. The investment and startup community is rather incestuous. If you really want money for a startup the most common advice you will get is to move to Silicon Valley. This creates a brain drain in communities which need it the most and relegates them to stagnation. Imagine what would happen if those sample people stayed in their community, grew a small business and infused their enthusiasm to a more traditional business. Perhaps their community would start to see growth again and retain talent long term.
- Start up culture has rebranded the concept of panhandling or begging. Asking for money in exchange for an idea/vapor is the exact same thing as begging. If you have no intent to ever monetize your idea but create really cool technology, your concept or start up is undermining fundamental business rules.
By now, most of your are thinking, this article is really offensive and doesn’t cover every start up. And you are right. I apologize for that. But keep reading it gets better.
Should early stage investors stop gambling on new ideas? No.
So what should change?
There are a few things that need to change to create more talent in America that generates real revenue.
- An investor should embed startups with the concept that having a revenue model from day 1 is not only good but also necessary for funding. No exceptions.
- Startups should understand that the ultimate goal is to get information about users and get more eyeballs. What that statement means is that ultimately we need to sell advertising/products to your user base. If you don’t feel comfortable with the concept of selling, you shouldn’t be starting something up. The other perspective on this is that your start up should reduce costs. EG – making transmission of data, faster, cheaper, easier. That is value people will pay for.
- Larger companies need to restructure research in house. Millenials fear large companies since they appear to be boring, slow and lack innovation. Internal skunk works will create macro-economic value through salaries/taxes and potentially create new revenue streams for the company. Plus you get to train the person to work in a much more diverse set of individuals. The idea of an internal skunk works department also helps keep knowledge in a system where it can deliver value now or later. If a start up dies, most of the knowledge dies with it. There are lot of start ups which come up with the same idea but with minor variations. If the core idea is corrupted or not able to make money, we are now wasting resources two times over. There really should be a site of concepts that never worked. F**Kedcompany used to be that resource. I suspect that this site will come back very soon. The IBMs, HPs and Ma Bells of the world were some of the best incubators of all time. The US military is also one of the best investors on the planet. Why aren’t more startups aiming at being inside HP or selling to the US military?
- The concept of early stage investing should always include mandatory focus groups and professional managers with a record of selling a product or service to customers. Focus groups of real customers keep your product realistic. Only work on ideas that people actually want and understand. Technology should work for us, we shouldn’t have to learn it. Having a person on the team that knows how to make money will force you to compromise. This is a short term compromise. Once your company is large enough you can start experimenting more with “cool” features.
- Investors need to get back to fundamentals of revenue and costs. Coming up with bullshit metrics to justify the company’s growth curve is selling snake oil. Time on site, number of page views, engagement, social velocity are useless terms unless your site has a true way of making money from all of those people.
- Instill common values about not wasting resources, be it money, brain power, or time. If you are interested in seeing how spending limited resources might actually cause a collapse check out this MIT Study.