The Startup Success Fallacy

Startup culture tends to posit the idea that raising funding equates success. And that one’s level of success is determined by the level of funding raised.

If you get a seed round, you are off to a good start.

Series A, and you’ve made it (as the equity your own has grown astronomically in value).

Yet what really is ‘success’ in the context of a startup?

If you strongly believe that raising investment and exiting at some point in the distance future is the key to success and happiness, then this article probably isn’t for you.

If, on the other hand, you find something unsettling about the perpetual pursuit of rapid growth & investment that leads you to simply sell your dream four or five years down the line, then this is for you.

Because I strongly believe - and there’s a growing movement that agree with me here - that jumping on the investment bandwagon as a metric for success almost always leads to failure.

(The founders of Basecamp, billionaire investor Chamath Palihapitiya, all the other entrepreneurs quietly getting on with running their own business. People are starting to speak out against the way startup & investment culture works.)

What Venture Capital and Investment Really Means

A startup initially raises investment to keep the founding team funded for a year or two, with a bit of extra cash for marketing and other running costs.

So they turn to an Angel investor (a rich, usually white, middle-aged man) and say,

“Ok, so here is 20% of the company that you now own. Give us $500,000 in exchange so we can go and work on this problem for a year or so. Here’s some data on what we are up to and how we are probably gonna spend the money.”

Everything starts out pretty well, with many Angel investors bringing a lot of experience and enthusiasm to the business as they see the seed they have planted gradually grow into a flower.

However, the Angel investor wants to get his money back. If he doesn’t, he’s gonna bankrupt himself pretty soon with generous handouts to these startups.

So the Angel investor expects growth. Not long-term, sustainable growth. Just enough to get the startup growing at 10-20% per month so that, when that seed money runs out in a year or so, the startup can turn to someone with more money - a Venture Capital firm - and say,

“Ok, so here is 20% of the company that you now own. Give us $2,000,000 in exchange so we can go and work on this problem for a year or so. Here’s some data on what we are up to and how we are probably gonna spend the money.”

The Angel investor is happy, as its now the Venture Capital firm’s job to push that startup to get 10-20% growth per month for another year or so in order to make their money back.

So the VC (Venture Capital) firm pushes the startup to grow - and grow quickly. But again, they aren’t particularly bothered with long-term sustainable growth here.

The guys running the VC firm make their money off putting their fund together (taking a cut off other rich guys’ and companies’ investments in the fund) and gradually shave a bit off as the startup they invest in goes through each stage of investment over its (short) lifetime.

So Google and Facebook ads are fine. Let’s just pay these guys a load of our money to hand us customers from the adverts we run. It just needs to get us through the year until we can hand the startup off to the next VC firm willing to invest.

And so, after another year or two, the startup founders turn say,

“Ok, so here is 20% of the company that you now own. Give us $10,0000,000 in exchange so we can go and work on this problem for a few more years. Here’s some data on what we are up to and how we are probably gonna spend the money.”

And so the cycle continues until either the startup collapses when it runs out of money - as it was too fragile to support itself as a self-sustaining, profitable business - or another, bigger company comes along and buys it.

At which point the founders take a good chunk of money away from the whole thing & the investors get their piece of the pie.

 The “Winners”

In the vast majority of cases, things just don’t work out well for most people involved.

The investors have made their cut from all the transactions and valuations already, so they are happy. The sale is just a nice bonus for them.

The founders breathe a sigh of relief, able to cash out after the intense stress and scrutiny of running a VC-backed business. Although I would say relieved, rather than happy, as they usually are required to work 1-2 years in the parent company that acquired them, seeing their team and their product butchered by an out-of-touch corporation that doesn’t quite know what to do with it.

The employees, however, are left high and dry. The equity they were offered as part of their pay package seemed pretty good on paper, but after all the investors and founders take their cut first, that little equity package seems far less than it did when they signed on. And, suddenly, they are working for people they didn’t sign up to work for and, inevitably, the direction and purpose of their work starts moving away from the very reason they joined the company in the first place.

So who really wins? And how really is this success?

The investors make their money, so they’ve succeeded in what they set out to do.

The corporate that has acquired the startup is pretty happy, as they’ve got a pre-packaged solution to something they couldn’t succeed at building internally.

The founders, though?

The founders have put their blood, sweat and tears into realising their dream:

Building a business and a team of people all focused on solving a problem they are passionate about.

The lucky ones have sold and made enough money to keep them financially secure for life, true, but what now? What do you do once your purpose is taken away from you? What do you do when you see it bastardised by those now in control? What do you do when you see those around you, the team you hired and sold your vision to, become dejected and demotivated when its clear they too have had their purpose taken away?

And the employees, promised financial rewards and the infinitely more valuable reward of purposeful work? They are simply left, high and dry, with the founders running for the exit.

They are the ones that go down with the ship.

Is that really success? Because if that’s what success looks like, then it’s not for me.

It’s far from it for me. It looks like abject failure. It looks like selling yourself - your morals, your beliefs, the vision you worked so hard for - down the river. It looks like selling your friends and colleagues down the river. It looks like hoping to make a quick buck at the expense of everyone, including yourself.

If jumping on the investment train leads to this, then it’s not a train I want to get on.

How to do things differently

Let’s not be too naive and polemic, though.

Investment unlocks opportunity. Fact. Investment at times also makes a whole lot of sense.

If you want to engineer and market artificial meat, like Impossible Foods, for example, or come up with an alternative to fossil fuels, then clearly you are going to need to hire a big team of engineers, scientists and the like to work on the problem for a few years with the idea of profitability five to ten years in the distant future.

But in most cases, we simply don’t need the money.

We can bootstrap, take freelance work to fund ourselves, pursue profitability from day one.

Trust me, I know. I’ve tried both approaching.

I spent so much time with my first business working on the business plan, pitching to investors, tailoring the business to the needs of investors, that I forgot to focus on the business.

And I forgot to focus on why I started it in the first place:

For the freedom and purpose I could derive on working on something I was passionate about and had my own vision for.

So now, with my company Scribe, we do things differently.

We have a founding team that freelances and does consultancy work on the side in order to fund ourselves.

We have a founding team with the internal skills to build and market a digital product, so don’t need to outsource or hire externally.

We pursue organic growth through writing, videos and our App Store listing.

We focus on one key metric: The number of paying users, so we can aim to be profitable (and therefore self-sustainable) as quickly as possible.

We don’t spend frivolously, only using our limited resources - our time and our money - where it is going to have the biggest impact.

In short, we focus on being effective where it matters, not on getting a lot of things done and simply being more efficient.

And, within this year, when we reach profitability, we can really see tangible, credible success:

A small team of friends dedicated to a mission, a clear problem to solve, able to enact our own vision for what the world should be on our terms and at our own pace.

If that isn’t success, I don’t know what is.

And you must, therefore, ask yourself:

What principles do you want to live by? How would you define success for yourself? What is the right thing to do?

“We control our actions, but the consequences that flow from those actions are controlled by principles.”

― Dr. Stephen R. Covey

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Henry Latham

Henry Latham

Founder, Prod MBA

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