Startups are Destroying the US Economy

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.
To really see any of this work, the unfortunate fact is that we need to re-align values. The only quick way that happens is through a major catastrophe or market crash.
For more information on how Silicon Valley was created I suggest reading the NPR series here. 
My advice for today is get off your computer/phone/tablet for a moment and look outside at a local business. Imagine how long he could give away his product for without you paying for it…The Internet is reality, it must make money eventually.
What I would like to augment in this article:
If there is a university researcher out there that wants to help me gather data on how much startups take from the economy and how much they actually produce, please email me! The only true way to verify the thoughts above is through hard statistics and defining if a dollar invested in a failed company actually creates any value, or if it is a 100% loss.
I welcome your thoughts/comments!

 

Schools not working leads?

Leads360 recently published a white paper entitled “Failing grades: Evaluating admissions processes at for-profit schools.”

The data in the report is shocking. It states most of the schools in the for profit sector are just not working their leads efficiently at all.

Here are some key findings:

  • Most schools did not follow best practices when sending out emails or calling back in a timely fashion
  • Some schools called leads too often, up to 82 times.
  • Some schools took too long to make first contact, allowing for the lead to become cold.
  • Optimizing process can greatly reduce waste.
Being a vendor in the education space for many years I often wondered what really happened to all of the leads that were being sent into the schools. These days all you hear are stories about the leads being over marketed to, when the real story is that most leads are not being marketed to enough.
follow url How does this affect the industry from an economic perspective?
If you look at this from a macro perspective. If leads are universally being worked inefficiently, lead prices will remain low since the overall quality is always low.
Even though EDU has been hit hard with regulation, new competition continues to come into the market, continually pushing media prices higher. This in essence means that the vendor side of the industry is being squeezed on margin because the costs are going up and revenue is staying stable if not declining.
For the schools, several of them have cited lower growth in their quarterly reports due to massive changes in how they handle leads and the enrollment process. They changed compensation plans, and they also changed scripts to make them more compliant with the DOE regulations. What this has lead to is a focus on the process after a student is on the phone and perhaps taken a bit of attention away from actually getting the user on the phone first.
If enrollment rates and growth forecasts are dropping, it seems to make sense to look at the entire process rather than isolate one component.  I think there are lots of things that can be done to optimize the process flow at the for-profit schools. One of them is using better lead management and routing tools like Leads360. Outside of a technology solution, I think it makes sense to also have new funnel metrics for the vendors to help them enhance leads by setting expectations. I for one know a lot of vendors would love to have insight into how their leads are being worked and if they can enhance the process. For the most part the vendors do want to help or better understand the process. A more collaborative environment will make marketing more efficient but also more ethical in the long run.
There are a few considerations one should take into account when reading the Leads360 report too. They mentioned a school like AIU does not send out any emails. This could simply be part of their strategy. I suspect this was highly analytics driven a while ago and needs to be re-evaluated since the market has changed so much in the past 18 months.
The other part of this equation is that, we should ask more about what the consumer wants. Email and phone are somewhat old mediums of communication these days. Perhaps people want to be contacted on Facebook, Twitter or through IM? The Millenial generation is going to start demanding these new paths. It will be up to the advertisers to keep pace with their audience and develop new best practices. EG – what is the optimal number of times you can SMS a person before getting them on a phone call? What is the social etiquette about contacting someone on Facebook or Linkedin and how does that relate to advertising? How does a brand get invited into a user’s inner circle online?