A Note on Startups and Innovation, and Funding
Every moment in business happens only once. The next Bill Gates will not build an operating system. The next Larry Page or Sergey Brin won’t make a search engine. And the next Mark Zuckerberg won’t create a social network. If you are copying these guys, you aren’t learning from them.
Why aren’t we creating something new? Something beautiful? Technological innovation comes once in every decade, maybe twice. And what follows it for several years is rapid globalization. Innovators, hackers today have a business model before they have an idea that can truly change the world.
What Are Startups, or what they are supposed to be?
New technology tends to come from new ventures — startups. From the Founding Fathers in politics to the Royal Society in science to Fairchild Semiconductor’s “traitorous eight” in business, small groups of people bound together by a sense of mission have changed the world for the better. The easiest explanation for this is negative: it’s hard to develop new things in big organizations, and it’s even harder to do it by yourself. Bureaucratic hierarchies move slowly, and entrenched interests shy away from risk. In the most dysfunctional organizations, signaling that work is being done becomes a better strategy for career advancement than actually doing work (if this describes your company, you should quit now). At the other extreme, a lone genius might create a classic work of art or literature, but he could never create an entire industry. Startups operate on the principle that you need to work with other people to get stuff done, but you also need to stay small enough so that you actually can.
Positively defined, a startup is the largest group of people you can convince of a plan to build a different future. A new company’s most important strength is new thinking: even more important than nimbleness, small size affords space to think. Questions you must ask and answer to succeed in the business of doing new things: Because that is what a startup has to do: question received ideas and rethink business from scratch.
-Abridged from Peter Thiel’s Zero to One
“Everything that can be invented, has been invented”. This is Wrong.
Startups are supposed to create new things, disrupt industries, change the world and then, make some money. However, a startup founder shouldn’t be worried about valuations and funding, but should be more concentrated towards creating new products, helping people complete tasks easily and towards disruption.
Startups are raising hundreds of millions of dollars, with valuations in billions. These startups are called unicorns. Only some of these startups are actually valuable, like Airbnb, WeWork, even Medium. There are startups, raising money, but they are not disrupting anything. These are just ideas with millions in funding. One example, I believe is Shazam, which identifies music based on tunes and lyrics. How can it be valued at a billion dollars? It has no significant revenue model; only hundreds of millions of downloads. Shazam can be a great feature maybe the Unique Selling Point of a larger service, but it doesn’t do anything as a startup. It may compliment other-services like Spotify and Pandora well.
Innovation is the Key
Every innovation is new and unique, no authority can prescribe in concrete terms how to be innovative. Indeed, the single most powerful pattern I have noticed is that successful people find value in unexpected places, and they do this by thinking about business from first principles instead of formulas.
Of course, it’s easier to copy a model than to make something new. Doing what we already know how to do takes the world from 1 to n, adding more of something familiar. But every time we create something new, we go from 0 to 1. The act of creation is singular, as is the moment of creation, and the result is something fresh and strange. Unless they invest in the difficult task of creating new things, American companies will fail in the future no matter how big their profits remain today. What happens when we’ve gained everything to be had from fine-tuning the old lines of business that we’ve inherited? Unlikely as it sounds, the answer threatens to be far worse than the crisis of 2008. Today’s “best practices” lead to dead ends; the best paths are new and untried.
In a world of gigantic administrative bureaucracies both public and private, searching for a new path might seem like hoping for a miracle. Actually, if American business is going to succeed, we are going to need hundreds, or even thousands, of miracles. This would be depressing but for one crucial fact: humans are distinguished from other species by our ability to work miracles. We call these miracles technology.
Technology is miraculous because it allows us to do more with less, ratcheting up our fundamental capabilities to a higher level. Other animals are instinctively driven to build things like dams or honeycombs, but we are the only ones that can invent new things and better ways of making them. Humans don’t decide what to build by making choices from some cosmic catalog of options given in advance; instead, by creating new technologies, we rewrite the plan of the world. These are the kind of elementary truths we teach to second graders, but they are easy to forget in a world where so much of what we do is repeat what has been done before.
-Abridged from Peter Thiel’s Zero to One
We need new technologies or new approach to doing things, startups are supposed to do so. SpaceX is an example:
SpaceX was to be Americas’s attempt at a clean slate in the rocket business, a modernized reset. The aerospace companies had little competition and tended to make supremely expensive products that achieved maximum performance. They were building a Ferrari for every launch, when it was possible that a Honda Accord might do the trick. As a private company, SpaceX would also avoid the waste and cost overruns associated with government contractors. At a time when the cost of sending a 550-pound payload started at $30 million, SpaceX believed that Falcon 1 (Their first rocket) would be able to carry a 1400-pound payload for $6.9 million.
-Abridged from Ashlee Vance’s Elon Musk: Tesla, SpaceX and the Quest for a Fantastic Future.
Thus, Elon Musk didn’t create anything new, he is making them better. Being first doesn’t matter anymore in the time when corporations like Yahoo and Dell are going out of business. It’s about being better and crazier.
A more humble example would be Wordpress. It revolutionized the publishing industry. Many online publications (If not all of them) wouldn’t exist if it was not for Wordpress, directly and indirectly. Wordpress made publishing easy for people who were technically handicapped. However before Wordpress came into existence, there was Blogger, started by Ev Williams CEO of Medium. Although Blogger was first but it didn’t become popular because it was simple to use and was mostly used by protesters and for pornography. It was used by people in the tech industry, mostly in Silicon Valley. Later bought by Google, it lost significance there. Wordpress was simpler, more beautiful and appealed to the common people. Plus it had a lot of features.
The Imitation Game
Microsoft is an example. When Netscape’s Mosaic browser became super-popular and they went public, Microsoft came following. They created IE only to make money, and they made it. When Facebook was gaining traction, thousands of social networks sprung up, chasing the big money. There are social networks in each country or one in each college.
Only people I know who create new technologies, the ones who dream, are Steve Jobs, Elon Musk and Jeff Bezos. Steve Jobs created many things: beautiful, magical and refined. In his absence, Apple is losing its position as the world’s most prestigious innovation hub. However they are still the most profitable. What are they giving us know? Apple Music, a clone of music-streaming services Spotify and Pandora, just because they are trendy now. That’s not the Apple Jobs built. They are just selling the variations of products his team designed and dreamt of. Steve Jobs disrupted three industries in his lifetime, but what Apple is doing now is not disruption or technology, its globalization.
Every new venture needs funding: some entrepreneurs self-fund their startups, some ask their friends and then there are angel investors, VC’s, incubators and hedge funds, even crowdfunding. Google raised $25 million, Amazon did $8 million and even Apple raised $2.3 million, in 1980. These companies are wildly successful and among the biggest tech companies in the world. And then there are startups that have raised huge capital but are yet to make profit. Like twitter which raised $1.16 billion, Spotify raised $188 million; even Medium received $57 million recently. Today, startup founders plan how to raise funding than to plan their product.
Capitalists are funding Series A rounds, even Series E and F. Founders should avoid rapid expansion, if the company is not profitable, as it destabilizes the company. But if a startup is not expanding, and hasn’t been turning profits; this could be red light for investors. Raising too much funding can also be a hindrance for startups. New investments will bring new board members, which reduces the control of the founder over the company. Capitalists reduce the ‘lean’ factor of a startup.
Some startups are taking the money and banking it, as more funding may be harder to come in the future. Netflix is an example of a company that did just that. Right before the dot-com bubble burst in early 2000, Netflix received $50 million in financing when its main business was renting DVDs out by mail. “Even though our business model was working quite well, we would not have [had] access to capital and we would have had to close the company if we hadn’t raised the extra money.”
Mammoth-valuations and funding aren’t necessary to keep a new venture afloat. In 2001, just after the dot-com crash, a cloud company named Exodus went bankrupt which was valued at $50 billion two years ago, and had raised $800 million just a year ago. Maybe the time wasn’t right, maybe their product wasn’t good enough. Your idea doesn’t need hundreds of millions to succeed; if it doesn’t there is too much competition or the time isn’t right. If your idea is innovative and provides value, you don’t need to market it too much, in the era of the internet.
You probably can’t be the Google of 2016 in terms of compensation or perks, but you can be like the Google of 1999 if you already have good answers about your mission and team.
So why do startups raise so much money? Startups basically raise money to hire more people or for global expansion, or for visibility and marketing. It can encompass anything from spending on bloated head counts to 10-year leases on pricey real estate to gourmet cafeteria food, while not turning a penny in profits. Many startups also raise money only to increase their valuations, which results in more money at the time of exits for founders and funders. For example, Buzzfeed recently raised $200 million from NBC Universal at a valuation of $1.5 billion; but do they really need the money? No one knows. Needlessly diluting control may result in administrative problems in the future.
Startups try to copy Google’s success by offering perks like it does. But Google didn’t start giving perks before it started making profits. Hiring too many employees and giving too many perks will increase the startups cash-burn rate, which results in troubles during the next funding rounds.
“Don’t just copy good ideas, make them better, simpler”
Startups and disruptors are supposed to create new thing or simplify old ones, not just clone them. If your idea is good it won’t need hundreds of millions in funding. It should create value before creating money. Set your priorities right: people, products and profits; in that order. We don’t need more social networks or money transferring startups or unicorns. We need technologies that can change the world, in the smallest way possible. We don’t need funders or founders; we need innovators, disruptors.
About The Author
Ayush Kumar writes about technology and media. He is a content strategist and has worked for many other publications. Contact him on Twitter (@realayushk) or via mail: firstname.lastname@example.org
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