I recently read an excellent article by Eduardo Rodrigues, Managing Director at Bergman GCS titled, "The Startup Economy: Trouble in Paradise."
Mr. Rodrigues describes the current state of startup economy: "We live in exciting times as far as the startup economy is concerned. Incubators are popping up everywhere, venture capital funds are seemingly more active than ever, seed capital and business angels are everywhere these days."
In describing the current state of the startup economy, Mr. Rodrigues identifies two concerning trends:
"The fact that startup valuations are seemingly going through the roof, with significant implications in the economy."
"A possibly more pervasive issue is the recent evolution of the startup culture itself. The success stories are in the spotlight, there's more publicity and awareness than ever. Entrepreneurship is cool and entrepreneurs are rock stars. In my experience, this is having a detrimental effect on the approach that would-be (and many established) entrepreneurs are taking in their projects and companies."
I'm not qualified to comment on startup valuations, but I do have a thing to say about startup culture.
Hey entrepreneur, what's your purpose?
Too many entrepreneurs want to be rockstars. Keith Richards is a rockstar. He shoots heroin, carrys a switchblade and does pretty much what he wants to do. Keith Richards would never get funding for his idea because he's his own boss and wouldn't kiss a venture capitalist's ass.
Many entrepreneurs look at a round of funding as their endgame. But guess what - you get funding, you get a boss. I've bootstrapped my business for a reason - I don't want partners and I don't want a boss.
There's only one way to fund your business if someone else isn't funding you - YOU NEED TO GO OUT AND SELL SOMETHING! You need to have a product or service that has enough value that a customer will be willing to pay you for it.
Whatsapp is an aberration - I'm pretty sure that your company isn't Whatsapp. Perhaps Facebook's acquisiton of Whatsapp will make financial sense over time, but most startups should focus on developing a product or service that solves problems and selling it.
If you sell your product, you get capital without a boss attached to it. I recently had a conversation with a young entrepreneur who travels in my circles. I was pleasantly surprised to find that he shared my penchant for being his own boss. We discussed a potential monetization strategy for his product and he's charging down that path. It truly made me happy to see someone in his 20s who wants to be his own boss - it gives me faith in the future.
I was in Seattle during the late 90s dot.com boom. I was a service provider for the local tech community and watched the high-flyers go from boom to bust over the course of 18 months. At the time, it seemed that all you had to was put .com at the end of your business name and some sucker would give you money (which they quickly lost.) I was one of those suckers. I got friends and family access to an IPO that was priced at $16 per share. It rapidly rose to $43 per share and just as rapidly fell to where I finally sold it....9 cents per share.
The few companies that made it through the dot.com bust had what Mr. Rodrigues prescribes for startups: "....real solutions to everyday problems, even the ones we don't know we have yet. The keywords here are product and solutions." And if you have "real solutions to everyday problems", you can probably sell them!
I understand that businesses need capital to quickly scale growth. But if you need capital, do it on your own terms - have a revenue-producing business model that is actually working. You'll get funding or sell your business on much more favorable terms if you do so. That's how Keith Richards would do it.
Hey entrepreneur, do you want to make money or do you want people to talk about you?
In today's narcissistic society where Kim Kardashian becomes famous for doing absolutely nothing, many of us long for our moment in the spotlight. This is true for entrepreneurs as well - they spend their funding on PR and advertising to get a "buzz" around their business and themselves.
As HubSpot's Dharmesh Shah points out, "you're not really buying attention, you're renting it. When you stop paying the rent, you stop getting attention." Startups should focus on creating success stories for happy customers. The word-of-mouth attention and referral sales resulting from solving customers problems have far more long-term value than interruptive adverstising and PR stunts.
Really, GO OUT AND SELL SOMETHING!
It's not easy, but nobody ever said being successful was going to be easy. Develop a product or service that has real-world value and go out and sell it. An investment in integrated sales and marketing process will be have a much higher return for most startups than PR or advertising.