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The Start-Up Myth

Date - 12 June 2017/ Category - Volume 2
Volume 2

I love the film “The Social Network” but it’s helped fuel a start-up myth that’s got the world in a spin.

The myth is a simple one, that the goal of a modern start-up is to turn a profit.

Something has happened to the world of start-ups, something that was unfathomable forty years ago and yet today is absolutely rife; profitability is no longer king.

You see forty years ago a little known entrepreneur would come up with an idea, go to their garage and make it, then spend years trying to launch it. Take for example Microsoft, Apply & Dyson. All companies that reinvented the way we do things by taking everyday frustrations and applying technology to them.

They weren’t overnight hits, in fact they spent a lot of their own money trying to get off the ground. Their founders often lived on next to nothing, selling all their worldly positions in order to fund their company’s growth but grow they did, because their start-up was a great business.

They succeeded through a combination of hard work, great ideas & luck, growing from nothing into the giants we see today.

Yet that’s not how start-ups today get off the ground.

To be fair I can’t really blame it all on facebook; the likes of google have to take some of the blame too and this trend has been steadily growth over the past two decades.
You see both facebook and google were founded on a completely different premise; get big fast and worry about making money later.

It worked for both of them, but there are countless others which this method hasn’t worked for, but don’t worry the founders still got rich because it seems investors are endlessly chasing the pipe dream google and facebook created.

Take hubspot, snapchat & twitter. All giants of their sector and all hugely lauded start-ups, but none of them have ever made a profit despite the high buyout prices or IPO valuations put against them.

If they were normal everyday businesses they would have been thrown on the scrap heap by now yet for some reason they literally can’t stop getting money thrown at them while their founders get rich and lauded as the next big thing.

The fact is the market now seems to think that big is good and for some entrepreneurs it’s actually easier to get rich by going big & lose money, than offering their investors any hope of ever turning a profit.

If then the success of the few is partly to blame over the failure of the majority, there is an equal burden for this market failure that needs to be carried by the investors themselves.
As technology has leaped forward over the past 40 years, the people with money to burn’s knowledge certainly hasn’t.

Investment decisions seem to be taken based on fame not prospects, much like a celebrity being famous simply for being famous, investors now invest simply because other people invest.
It’s like a Ponzi scheme of epic proportions except this one’s legal; in fact there’s a whole industry built around sourcing money for businesses that will never work (not that these fund raisers would ever admit it).

I’m going to coin a name of my own for the consultants that specialise in raising funds for start-ups that never intend to make a profit; “Bubble Funders”, endlessly blowing up a start-up bubble that one day will have to burst but not before they cash out and get rich.

It seems that today in order to be regarded as a successful entrepreneur you need to come up with an idea that no one understands and regardless of whether it can be monetised or not you need to find a rich vein of investors that are ready and willing to be sold the dream of future profits in order to hand over their cash no questions asked.

Even when the venture never makes a profit it’s ok because the founders who got rich taking all of that cash for themselves can simply start again.

At no point in my mind has anyone ever said “Do the founders of twitter know what they are doing?”.

Unlike most modern day crimes though their lack of profits isn’t exactly covered up. Losing money is in.

Regardless of their often poor management and high staff turnovers, in 2017, being bad is great for business. Want to party all week in your shorts? Great, investors love it.

The “Bozo Explosion” so aptly coined by Steve Jobs is rife in investment and start-up circles alike, it’s no wonder the markets have ended up like this. We’ve built up success to mean focusing more on generating hype about a product than the actual product itself and that’s only the start of the problem.

What then can we learn from the start up myth?

Well a lot actually.

Firstly you should never invest in something you don’t understand.

Secondly creating hype about your company is a good thing, it will attract outside investment no matter whether your product is good or not.

Thirdly (and finally) just because other companies are getting investment doesn’t mean they are any good so don’t go ploughing your cash in just because they’ve got funding lately.

In a world that’s more bothered about perception than reality, there will always be great ideas that don’t succeed and terrible ones that do; it seems the difference to investors depends on how great your PR is, rather than how long you worked in the garage on your idea.

Read our next blog post “The Founder“.