The path to success as defined by top-notch authors radically diverges from the current Startup ecosystem players’ advice and behavior!
Venture Capitals (VCs), Accelerators, Incubators, Angel Investors, top-notch Universities and Governments still promote and follow the status quo on Startups, usually with good intentions, but lack of knowledge and devastating effects. Exponential technologies, AI, robotization and the expected loss of millions of non-qualified jobs drives many of these stakeholders to rapidly assign resources to copy paste Silicon Valley’s model without clear understanding.
The Global Startup Ecosystem is full of self-called Gurus which don´t read nor build real companies
Entrepreneurship, as we now call the journey of turning the founder’s vision into a “sustainable”, real venture, is clearly not something new, and has always been ingrained into homo sapiens. It usually demands a mix of courage, intuition, emotional intelligence, resilience, antifragility, creativity, access to resources and networking to succeed. Kind of an art.
Starting in 2003 and 2004 insightful authors (e.g. Steve Blank, John Mullins, etc.) started developing and putting together paradigm-shifting methodologies for entrepreneurship that lead to reducing risk and seriously maximizing chances of success. The influence of many previous business books by other authors can’t be understated (e.g. Geoffrey Moore, Clayton Christensen, etc.). If interested, you can always have a look at some fundamental top-notch literature which influences our own proprietary startup methodology which we teach and apply. But let’s get back to the point:
Startup Gurus and respected ecosystem stakeholders mention and recommend these same books but act and misguide their entrepreneurs in the opposite way!
Is it lack of knowledge? Economical interest? What drives this behavior?
Well, let me try to offer a simplified explanation:
1. Venture Capitals (VCs) are financial intermediaries, not investors. Before investing in Startups they raise their own money from high net wealth investors which are encouraged to assign around 5% of their portfolio to “risky” investments under the financial principle of diversification. Remember the well-known advice “put your eggs in different baskets”? Non-mysteriously there’s another point on which VCs usually insist: “Startups are risky” and then justify “only 1 over 100 succeed”.
2. You don’t need experience on Startups to run a VC. Do you know the world has more than 1.200 billionaires, and this number grows each day? Can you imagine how many millionaires? Just take that 5% of 1 billion is 50M. More money, more liquidity (interest rates have been lower than ever), more opportunities for unknowledgeable financial intermediaries with high net wealth networks to join the game. I’m not generalizing the institution is bad per se. When Venture Capital was originally invented it was instrumental to build many of the big corporations we know and admire today, by combining knowledge, network, and resources, which by then were scarce, and investing on powerful business models, with predictable sales roadmaps. Suggestion: try to find and watch the documentary “Something Ventured” to see the many differences from VCs today.
3. To run operations “properly” VCs charge an annual administration fee on money raised of 2–5%. They need to hire a top-notch team with business acumen and startup knowledge, which will be able to scan and select highly scalable and profitable startups from so many existing ones. Just remember as an example, 3% of 100M is 3M, 3% of 1B, is 30M.
4. Imagine you are now a VC and have just raised 100M.
Would you really have the incentives to spend your annual fee (3M) on building a fantastic team in the belief (uncertain) that you will build a new Facebook and profit from a percentage of the 7 year fund return?
How much time would it take you to select the Startups in an effective way? What about the time-value of money for investors? Why not instrumenting a low fixed cost structure, hiring interns (with fancy titles) just out from 1st year MBA and partnering with “Accelerators”, “Incubators”, “Universities”, and now “TV Shows” for them to organize “Contests” & “Competitions” to access a relevant pool of startups (the missing part of the marketplace) and disburse the money quickly in small chunks (50k to 150k) while assuring great contract conditions for future rounds? Why not try to invest a relevant part of your fund’s money in well-known (not necessarily good) startups where other prestigious VCs have invested too and will almost certainly receive more funding series? (even without due diligence)
5. Distinguished executives, ecosystem stakeholders, government officials, and other figures are invited as honorary “Judges” to select the winners in an elevator pitch competition.
I must recognize the system has truly adopted some of the methodological discoveries, making the process simpler for more and more startups to be misled through the funnel.
Once we had Business plans and 20-30 minutes pitches, with intensive inquisitive questions. Now, just terribly completed business model canvases, an imaginative deck full of non-tested hypothesis, and a 5 minutes “elevator pitch”. With this respectable allocation criterion in place: “they won a contest where X participated!”, let me ask you something:
Would you really hand your money for risky business to people you don’t know by watching them describe 5 minutes an idea, while mentioning exponential technologies and some kind of plan?
I am continuously invited as Judge and president of the Jury to many of this competitions, organized with the best of the intentions (I’m being serious here), by Governments, NGOs, or Universities, to help entrepreneurs! (help!). When I hear them speak, they haven’t been properly trained, nor have been taught how to apply correctly the new powerful methodologies at hand. They are miles away from a virtuous business model, and worst of all: they are going to get the money! together with the terrible conditions which come with the deal. They will feel really proud, validated by external forces, their ego will rise to the sky! What they don’t really know is everyone will profit but them.
More Startups into the funnel derive in VCs raising more investors funds, executing more rounds, and swallowing more administration fees while preparing for their famous celebrated “exit”.
Not by chance the Startup Ecosystem “traditional knowledge” measures success and Startup maturity as the number of rounds (series A, B, C, etc.), the number of exits or the amount of funds raised.
6. Then entrepreneurs sign the contract (oh, if you read those contracts!) immediately becoming modern slaves (or as I call it, labor without labor rights!). They become amateur actors, pitching full time, selling an image to the world, to their friends, to their families. They become fake heroes! While their anguish is strong and simply grows.
There is no clear Business Model, nor they know their customers pains or gains, results are not coming, they are continuously trying to scale without a proven sales roadmap by pushing demand with more investment.
No one cares about customer acquisition costs (CAC) or Customer Lifetime Value (CLV). More revenue brings more valuation and the illusion of success. More “illusion of success” (and burning of cash) generates more rounds, more pitches and more profits for everyone (unless cash is not raised or investors have an incentive not to continue, and the entrepreneur is the last to cash out, usually losing everything). Even if things go “well”, everyone will assure their exit before the entrepreneur does, or if it goes even better, they will assure the entrepreneur’s exit by firing the founder and keeping the company, after so many equity dilutions.
Luckily, and thanks to the work of many talented authors and researchers, there is another way of starting up! More to be said on the existing literature and methodology on other articles. But for now always have in mind:
Early Stage Startup Success = Knowledge [methodology, reading, learning from others, formulating and testing hypothesis instead of executing tight plans] + Community [networking, diversity, learning from others, learning how to actively listen and ask open questions, giving first, understanding what is important for others] + Hard Work [it will never be easy! forget about the illusion of being your own boss or working less] + Purpose [understand why you are doing what you are doing. It is the only thing that will reinforce your resilience when times are tough] + Emotional Intelligence [the same antifragility, resilience, and attributes, kind of an art old entrepreneurs use to have] — #Risk* [reduced fixed costs, asset-light business models trying to reduce investment, get paid before you produce or need to pay your suppliers] — Seed Capital (which we are sure hurts entrepreneurs at early stage.
*For now, to grab insight on starting up without investment, check John Mullins’ great book: “The Customer Funded Business”
ABOUT THE AUTHOR
Francisco Santolo is an economist and MBA, with General Management, Innovation and Entrepreneurship studies in prestigious Universities such as Harvard, MIT, Kellogg, Stanford & Singularity, recognized by Forbes Magazine as "The Startup Hacker" in 2017. Francisco, besides becoming a successful entrepreneur at a young age (13), has 12 years corporate international managerial experience, has been co-founder and Board Member in more than 50 companies, has credentials as a recognized Consultant, Investor, Entrepreneurship MBA Professor, International speaker, recently invited as Keynote to G20 Young Entrepreneurs Alliance, Member of AIESEC Argentina Supervisory Board, FIJE Board, and Charter Member of TiE Delhi and Hong Kong.
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