Unicorns, frothed-up valuations, astronomic losses and the absence of basic business principles – why we keep falling for star start-ups that don’t succeed.
Veteran business owners could be excused for suggesting that the thirst for personal status or fame is driving some founders – and even venture capitalists (VCs) – into believing they have a real company, when all they have is hype, fiction and something that lacks the basic tenets of business 101.
There’s no shortage of start-ups across the globe being showered with adoration and mind-bending amounts of VC money, only to do little but lose stratospheric sums of money.
Consider just a fraction of these hyper-funded start-ups that closed. Theranos ($600 million-plus lost), Jawbone ($900 million-plus lost), Powa Technologies ($180 million lost). It’s the nature of the beast, start-ups fail. At high rates. However, a common theme could be drawn from some of the better-known failures that raised vast sums of money only to crash and close. Many were plagued with management failure, along with product and technical failure. But all received adulation and hundreds of millions in funding.
“Limited funding separates the pretenders from real-deal founders.”
As a business community and society, we have allowed tech companies to never even attempt to make a profit. Instead, we’ve stood by and accepted the questionable isolated notion of ‘user growth’ as a key metric for success. Further, we’ve allowed many unicorns to break laws and regulations, all in the name of ‘disruption’.
Unfortunately, the word ‘disruptor’ has become synonymous with poor behaviour, ignoring logical business practices, and encouraging founders with a lack of empathy and only sometimes genuine subject matter expertise, to spend ungodly sums of other people’s money in a pursuit destined never to make a profit.
The end game is either the next funding round, aimed at driving up an already over-hyped valuation, or an IPO where retail investors are left carrying the can on a business that, while possibly exciting on the surface due to expensive PR experts constantly reminding us it is, will never focus on business basics or generating a profit. All the while, a young founder, sometimes lacking meaningful business skills, becomes mega rich, along with a handful of VCs.
Recently, Adam Neumann, from WeWork, returned with a $70 million raise for a new venture in blockchain. A quick google of Neumann offers insight into the antics during his time at WeWork, leading to his ousting by his own board and investors. But he’s back, with VC support and money. What message does this send to aspiring founders? Is it one we want to encourage?
Battle-hardened operators practise sound financial management and have profitability at the core of their mission. Profit is a key sign of success. Without it, it’s reasonable to suggest that many ‘unicorns’ are failures, either now, or at some point in the future, when the party stops and the admission of failure drops. Astronomic revenues are somewhat worthless if a path to profit isn’t clear. Merely being propped up by someone else’s money isn’t a real business long term.
The best operators understand that hyped up valuations don’t build businesses or mean anything other than to serve a few individuals personally. Figuring out the basics of selling at competitive yet sensible prices that allow you to make a profit, managing resourcing and cashflow, and offering a healthy and safe workplace with a great customer experience are what ultimately make a successful company. Not a business that still hasn’t turned a profit, but has a founder who’s become mega rich alongside a couple of VCs excusing his or her behaviour as a maverick or a disruptor. Seasoned operators will tell you that limited funding separates the pretenders from real-deal founders, especially in the early years. Limited funding demands founders exercise restraint, business acumen and efficiency, to build a talented and committed team and ultimately a real business, capable of showing a profit and standing on its own two feet over time.
The strategy of raising eye-watering levels of capital to subsidise unrealistic user growth and a position in the market predicated on ludicrously low pricing isn’t a business. It’s guys and girls with little industry or subject-matter expertise – but strong likeability and presentation or sales skills – masquerading as real businesspeople. It involves no risk, no methodical or critical thought process, no need for the founder to understand or learn the basics of unit economics, resource management, or cashflow. It removes entire elements of business operations from the C-suite and encourages poor conduct, buoyed by huge money and the next magazine cover.
Without massive cash subsidies allowing unicorns to price themselves so low, would the appetite from the market still exist for their services? Unlikely.
Many of our modern-day unicorns are suffering losses greater than half of revenue some 10 years on from being founded, but continue to enjoy wild valuations and support to continue unsustainable cash burn and terrible unit economics.
Are we celebrating the wrong businesses? WeWork has annual revenues comparable to that of IWG Regus, but has never turned a profit, and operates fewer locations than IWG, yet enjoys a valuation vastly larger than that of the profitable IWG business. Carvana operates in fewer locations than CarMax, shows losses, yet enjoys a much larger valuation than its profitable rival. Spotify has balance sheet challenges, while Universal delivers year-on-year profits. Which has the higher valuation? You guessed it, Spotify.
Are companies calling themselves disruptors or tech businesses really worth more? Was WeWork really a tech business?
Why has being profit focused become unfashionable? Why aren’t we demanding that young founders ask for the money they realistically need to accomplish the objectives in front of them, remain laser focused on core objectives, and spend money carefully and wisely?
The start-up space in Australia and New Zealand is thriving, with some phenomenal founders and young businesses out there, operating with integrity, subject-matter expertise and a laser focus on financials. Let’s stop offering the hyped-up start-ups with no path to profitability the spotlight and instead celebrate those great young founders with not only the skills to execute, but also an appetite to evolve both their businesses and themselves as entrepreneurs and operators.
This article first appeared in issue 38 of the Inside Small Business quarterly magazine
