Things are getting out of control. Like many people I know I’ve long had a low-level fascination with tech startups, but as valuations are beginning to escalate my low-level fascination is starting to look more like an addiction. At least I recognise my problem — investors may be spiralling towards madness, but they don’t have to take me with them. By way of therapy I’m going to open up and talk: here, enumerated, is what’s driving me crazy about startup fever, with the hope of a saner future. Let’s go…
1. Economics doesn’t change just because you’re cool
The essential ingredient of business is to make money. You’ve got to pay your staff, your landlord, your suppliers and others. But it seems a lot of people forget that. As I write this Flipboard is said to be seeking $200m in additional financing even though they have no revenue. Not “a little revenue”. Not “less revenue than their costs”. No revenue.
Steve Blank reckons that successful startups will “focus on getting massive user bases first, and let the revenue follow later”. That’s it, apparently: just let the revenue follow. It’s like the pied piper of Silicon Valley. You just walk down the street with a jiggle in your step, play your socially-networked pipe, and glance cheerily over your shoulder as you see all those dollar bills dancing behind you and jumping into your open bank account.
I’m sorry, but basic economics still holds. There’s no change in the definition of “profitability” or “solvency”. There’s no special theory of economic relatively for cool startups, whereby you get a dispensation based on the inverse square of your social graph or whatever. The only economics is the same economics that holds for all of us. Same for you, same for me, same for the plumber down the road… everyone.
2. “What’s your exit strategy?” means “How are you going to cash out while giving your problem to someone else?”
Lots of people want to know what a startup’s exit strategy is. For me, an exit strategy means the founding partners are looking to get out without creating a viable business. They may get out having created the promise of a viable business, but they do so without actually having created it yet. They exit, with cash, and it’s up to someone else to go the last mile.
In reality “What’s your exit strategy?” should be a trick question. The response should be “I’m not intending to exit — I’ve only just started. I’m intending stick around to make sure my business makes money”. But I guess that’s a crazy idea.
3a. Jargon only serves to distance people from reality. In particular “pivot”…
There’s nothing wrong with changing your plan based on data. In fact, there’s everything right about it. But don’t pretend to be special by using a secret language. Yes, I’m talking about the word “pivot”.
“We looked at our log files and realised we needed to execute a pivot.” Would your Grandma Mimi understand that? No she wouldn’t. She’d wonder if your job actually involved any work of value, or maybe she’d think you were hiding something. But say “We looked at what our customers were doing and realised we needed to change,” then she’d understand you. And she’d even be able to put her arm around and give you comfort in your difficult hour, because your Grandma Mimi has more leadership skills than you’d like to believe, if only you’d give her the chance to demonstrate them.
See also the TechCrunch post “From Now On We Will Only Be Using The Word ‘Pivot’ In Mockery” and the New Yorker cartoon “I’m not leaving you, I’m pivoting to another man”.
3b. …and “$1mm”
As in the phrase “Angellist was immensely helpful in Wanderfly‘s recent $1mm round”. On a purely numeric scale $1mm means the same as $1m. But only numerically. If someone wants to express merely the number they could just as easily, and more transparently, write $1m. But if someone writes $1mm they’re communicating very much on a human and social scale. And what they’re communicating is this: “Here is a dollar amount so incredible, and so far beyond your pedestrian comprehension, it exists in a dimension you didn’t even know existed”.
3c. …and “pre-revenue”
What’s with that? Is it like “pre-owned”, and “pre-eaten”? Wouldn’t it be clearer to say “We have no idea how we’re going to turn this into a proper business”? Or is there some reason they don’t want to say that?
4. There’s a very blurry line between “exciting startup” and “another new business”
There’s a cool new startup headquartered right where I live. It’s called Lava Lanes, and to quote the founders’ elevator pitch it “blends luxury surroundings, stunning special effects, state of the art lighting with modern Ten Pin Bowling”. Like FourSquare it’s also got an online social angle which crosses into the physical world, so allowing people to meet up and have serendipitous encounters.
Yet for some reason this exciting and innovative venture didn’t get covered in TechCrunch or elsewhere, while — inexplicably, and to pick just one example — ModCloth did. You know what ModCloth is? It’s a clothes shop. They sell clothes. And like all other clothes shops they’ve got a website and some other mobiley bits and bobs that go with it, but basically they’re a clothes shop.
I don’t know why, as a journalist covering startups, you’d prefer to spend time on clothing retail when you could be talking about “glow in the dark, ultra violet lighting and high definition video projection screens”, but apparently you would. Maybe Lava Lanes didn’t have such a good PR agency. Maybe it’s something to do with them creating a successful business without a $19.8m series B funding round. I just don’t know.
5. Nobody knows anything
As in Hollywood, so in Silicon Valley: nobody knows anything. Odeo was a ho-hum podcasting site until it launched Twttr as a side-project. Flickr was a multiplayer game until they focused on photos. And Instagram was originally a service for medical practitioners to share information about hemorrhoids.
Okay, so I made up that last one. But the point is, the founders of those companies went into their startups with a really clear idea of what would be successful, and they were wrong. At the point of their later successful venture they had a success rate of 50/50. So those founders now carry with them fantastic and rare experience of growing an operation, but they do not carry a gift of vision or foresight. In the end everyone’s just making their best guesses, and some people get lucky.
6. When you spend all your time in the maternity ward it’s easy to forget there are teenagers out there
Everyone loves startups in the same way everyone loves babies: they’re small and cute, with their little button logos, full of promise and hope for the future, so innocent and untainted by bumps and bruises in the nasty outside world. They get more than their fair share of love and attention, but we don’t begrudge them that because in a few years they’ll be teenaged companies ignored by most of the media.
When we spend so much time cooing over babies it’s easy to forget that most of the world around us is inhabited by older, established companies: the place you buy birthday cards or groceries, the gas company or the coffee shop. And they have real problems, too. Some might say more interesting problems: trying flex an embedded business model, stabilising the mess they necessarily created in the course of getting through those early years of uncertainty, and finding ways of motivating the staff now the initial rush has worn off. This is the daily challenge of most businesses, and no-one has the answers, but the attention still goes to the gurgling cuties.
7. Yes, I know the babies are cute but you still can’t take them home with you
Or to put it another way, you can’t just take the idea of a startup and drop it into an established business.
Particularly in my own industry, the beleaguered news industry, I hear a lot about how our companies would do a whole lot better if we’d just act more like startups. The standard argument is most clearly expressed in a piece over on 10,000 Words: (1) Startups seem to be doing well, (2) the news industry is having problems, therefore (3) the news industry should act more like a startup. There are at least a couple of flaws here. First, how startups are “doing well” is rarely defined, and if it is defined it’s unlikely to be the same way the news industry needs to do well. Second it’s a non sequitur. You might as well say “The arms industry is doing well, the NHS is having problems, therefore all our hospital staff should carry a pistol”. (And if you think that’s exaggerated “logic” take a look at one of the recommendations to save the news industry from that 10,000 Words piece, which is to have colour photos of the contributors.)
To be sure, there are lots of things an established company can and should take from a startup. Energy, imagination, and common responsibility, to name three. But you can’t simply take that, plus any other ingredients you fancy the look of, and expect it to produce a winning formula. Especially if your definition of a winning formula includes healthy revenue generation, which — in case we’d forgotten — is notably missing from most startups.
Nor can you literally start a startup inside an established company. One of the determining forces of a startup is a founder who has risked their own money, and is therefore driven every second of their waking day to make it a success. You don’t get that kind of person joining an established company, and you don’t get that kind of drive if you give a salaried employee a budget that everyone knows the company can afford to lose.
In the end, what unique asset would an established company really bring to startup? Committee meetings? HR policies? Office parties? Any company, from startup or global corporation, has a unique culture and ecosystem. It is possible to change it, but it has to be done in a way that is uniquely appropriate to it, and not a direct transplant from one organisation to another.
Thank you for being part of my therapy. I have no idea if you feel better, but I certainly do.