The Pressure on Start-Ups to Mature Faster

Startups face pressure to mature in this face-paced era. Although once used in the same sentence, the words “startup” and “inevitable failure” are now uttered with more frequency than one might think. The success rate of tech startups is alarmingly high, so much so that some people say there’s no way it can be called an actual startup if it’s that successful. Others will agree, but only if the startup in question has not raised enough funding to be considered a “real” startup.

Earlier stage funding rounds are more about gaining momentum than hard cash. It’s almost as if the amount of money being raised is less significant than the fact that it’s being presented. It is a qualitative point on its own. Still, when added to all things that go with positive sentiment surrounding a business (employee retention, national media exposure, a growing social following, etc.), it becomes a potent cocktail. For this reason, long before a startup is making a profit or having any real impact on its intended target market, it’s fair to say that its success has been determined.

Growth Investors chasing growth

High capital intensity is one of those dirty words nobody likes to discuss in the investment world. In short, it means that a company’s burn rate isn’t necessarily correlated with its revenue generation. To potential growth investors, this might as well be written off as a failure waiting to happen – whatever the industry – and they’re not wrong for thinking that.

These days, most investors are looking for high growth rates at a relatively low cost. A great example is Pinterest, which in March 2013 announced that its user base had more than doubled since December 2012. Investors loved this, and Pinterest ended up raising a record amount of $225 million just four months after the announcement of its previous funding round. Similarly, mobile ad network InMobi also saw a rapid increase in its market cap, going from an estimated valuation of $1.4 billion to over $2 billion in just a month, following a positive Q1 earnings report.

The point that I’m trying to get across here is that it’s becoming increasingly complex for startups to turn down funding once it becomes available. This is a bad thing for several reasons. Still, the most crucial point to be made here is that it tends to force start-ups into making what could be considered “intelligent business moves” before they’re ready.

Early-stage Startups are Unsustainable

Early-stage startups are not sustainable long-term. I’m not saying that’s necessarily a bad thing, but this is certainly something that many businesses fail to consider when setting up shop. Startups are easy to get up and running these days, with the cloud taking over much of the heavy lifting involved in getting your app or service online. Of course, this can sometimes lead to a false sense of security and prompt founders to take shortcuts that they wouldn’t if the market were more mature.

Forced Startups are not the right way forward.

At least not in these early stages. According to some entrepreneurs, you can’t call yourself a “real” startup unless you’ve raised at least $2 million. This could be true for various reasons, but one of them is that it allows founders more freedom to make decisions about their business. Potentially risky moves, such as expanding into new markets or experimenting with business models, are much easier to pull off when you’re not worried about having enough cash to last another month.

Later Stage Companies in Distress

For later-stage companies that have been left at the altar, there’s a silver lining to be found. Not all those that have turned down funding are struggling as a result. Some of them haven’t struggled at all – they’ve thrived! These later-stage companies seem to hint at a trend towards growth being favored over capital (no pun intended) – at least in the short term.

Companies Acting Fast

Let’s take a look at GitHub, which raised a total of $100 million in December 2012. Since then, they have gone on to open offices in San Francisco and Tokyo. More recently, the company announced that they would be switching to an unlimited vacation policy for their employees. From a product standpoint, it seems as if the organization is making all the right moves, but this could be seen as an ominous sign from a funding standpoint.

Venture Capital Firms On The Lookout

Firms like Sequoia Capital and Andreessen Horowitz are unlikely to invest in a company that isn’t showing solid signs of growth, especially if they’re already getting involved with competitors. This partly explains the rise of “clone startups,” which copy their competitors’ features directly into their apps or services.

Snapchat clones are becoming increasingly common, but the idea of cloning an app or service is not just limited to photo-sharing apps. Spotify has recently been cloned in India, and companies like Airbnb have even tried to trademark words already in use. The list goes on, and it’s becoming more and more typical for startups to clone their competitors in an attempt to keep up. These types of clones can be seen all over the app store.

Rapid Growth, Rapid Failure

Of course, nothing lasts forever. The rapid increase in the value of a company that results from its early stage arena of success is likely to have an inverse effect once it starts to level off, and this is where the above issues arise. Think back to Pinterest’s funding round earlier this year, for instance– just four months after announcing that it had more than doubled its user base, it was revealed that Pinterest’s active users had fallen by 40 percent.

Early-stage Arena

There’s a need for funding, but there needs to be a balance. Companies that fail to secure their series A round are likely to struggle as they try to scale the business – even if they have solid revenue streams – so it’s essential to find a perfect medium.

It’s worth noting that not all startups need to raise such large amounts of money as far as the scaling process goes. There are many organizations out there with different needs and goals, and those with lower monetary requirements will avoid the issues listed above.

Nascent Startups are Forced to Scale

When a high-profile forced startup makes its rounds in the news, more and more investors are likely to get involved. These new investors for nascent startups may try to renegotiate or restructure an existing investment deal in some cases. At best, this is a good thing for both parties involved. At worst, it can be highly detrimental to a company’s growth.

In most cases, companies only have a certain amount of runway before they need to start making money or risk running out of funds. If their investment is renegotiated too early, it can seriously affect their long-term prospects. In this regard, I’d argue that it has an even more drastic effect than the “funding rounds” that we often see news sources reporting on.

Customer Acquisition Costs

CACs, for short, are the typical metrics used to track a startup’s growth. They can also be misleading, as they don’t consider how money is spent across the small business.

This metric tends to be flawed because it doesn’t provide insight into what happens after acquiring a customer base. Suppose a company goes out and spends thousands of dollars on billboards, radio ads, or television commercials to attract new customers. In that case, it’s not going to be included in the CAC, which only covers the costs associated with bringing people into the funnel.

Seed Companies Acting as a Springboard

Seed companies are now acting as a springboard to help tech startups grow and mature. A seed company is any company that invests in startup projects and pre-seed rounds, providing money and other resources needed to keep the most start-ups going. These companies may also provide guidance and mentoring on making their mark in the industry or marketplace, for instance, by helping to set up the marketing strategy or designing an improved product.

Building vs. Buying or Selling

The first and most apparent indication that this point has been reached is when a startup attempts to buy another company to achieve its goals instead of building it internally. The reasons for not doing so may vary from saving time to reducing risk, but the result is the same: startups fail to expand upon their foundation. The pros of this strategy include enabling a startup to build a better network faster while minimizing common pitfalls that come with bootstrapping, such as the inability to attract quality talent and maintain focal points. Also, because these startups have already achieved success in their industry, there is usually no need to worry about failing before it gets started.

The Challenge of Capturing Value

A startup must be careful not to mistake being disruptive for being creative. Getting people’s attention is great, but they will eventually tune out if they are turned off by what you say or how you say it. This is especially true when your words are directed towards customers that you should be trying to win over instead of alienating. Startups pressured to mature quickly must also realize that they aren’t the only ones with a say in capturing value. Customers have a vote too, and if they think your startup is being unfair or otherwise problematic, they will punish you for it with hesitation the next time you ask for their money.

A Strong Foundation Matters

Though startups must adapt and evolve to remain competitive, the foundation they’re built upon is paramount and should not be compromised or forgotten just because customers want something new. A strong foundation gives a startup the ability to change and grow while providing its customers what they need instead of what they think they want. A startup that manages to keep its customers satisfied while it changes and grows will have a significant advantage over those that don’t because their customers will feel secure with them even if the market changes beneath them.

The Business of Adapting

All startups should be willing to adapt to remain competitive, but not all startups are cut out for it. For some, it means evolving into something completely different than what made them successful initially. In contrast, others prefer to adapt to the market by expanding their specialization or offering new products and services. Though both can work, startups that attempt to do both tend to struggle with each approach because of the inherent conflict. Like it or not, some things will need to change, but startups must be careful how they go about doing so to maintain what made them successful in the first place.

The Quest for Consistency

Startups often find themselves competing with their customers and growth investors, but this is balanced by the fact that they’re usually small enough to adapt quickly without losing what made them successful in the first place. Unfortunately, as a startup grows, it loses that flexibility and becomes increasingly focused on appeasing everyone instead of keeping its customers happy. That’s not to say that a company can’t adapt as it grows, but the bigger it gets, the less likely it will happen without significant consequences.

A Matter of Priorities

The most successful companies emphasize the important aspects instead of getting caught up in trivial matters like excessive meetings, over-analysis and over-communication. Though these things appear harmless when viewed individually, they can add up quickly to create an environment where nothing gets done. Unfortunately, this isn’t restricted to startups. Even big companies can fall into this trap when their vision becomes a moving target that everyone is afraid to question for fear of being blamed for failure.

Innovation through Focus

The secret to staying focused lies in knowing what’s important rather than making everything important. For example, focusing on the value your customers receive is essential, but working towards an unrealistic goal because others pressure you to do so isn’t. Likewise, setting achievable goals instead of simply doing whatever everyone else wants can help a startup focus its efforts and achieve something instead of wasting time and money running in circles.

Publicly Traded Startups

The pressure to justify a publicly-traded startup’s valuation can be overwhelming, especially if its business model involves advertising. Instead of meeting impossible goals that will drain the company’s resources without providing much in return, startups need to focus on delivering a solid product without going overboard with unnecessary expenses. Though early-stage ads may seem like cheap investments, they’re often expensive and it is difficult to measure their actual effectiveness.

Good Luck!

Startups need to take care of their workers first and foremost if they want them to truly see the organization as a long-term commitment instead of simply a job that pays the bills.