The Model for a Successful Startup is Broken

by · January 15, 201310 comments

If you’ve ever watched Shark Tank, then you’ve seen Mr. Wonderful beat up a startup because they will kill his money, Daymond’s questioning to determine whether a product has retail and branding potential, Robert’s uncertainty over whether a product can be successful online, Lori’s probing about whether a company has something that can be patented or Barbara’s reservations about whether a company has a viable long-term business model. I am a huge fan of Shark Tank. And I’m honestly speechless and so proud of Jason Falls, who recently spoke on a panel with Barbara Corcoran at Entrepreneur Magazine’s GrowthCon. Being such a fan of Shark Tank and of Barbara in particular, it spurred some thinking for me about what is happening in the startup community.

As a business owner myself, the reason I love Shark Tank is because it serves as a constant reminder that it’s critical to focus on the bottom line, to ensure that I’m growing a healthy and sustainable business and that we are building something that is “special” and “unique”. Frankly, we are building Social Media Explorer | SME Digital to be more than a top marketing blog and “agency”. We’re building a company that helps to make innovation safe. We’re building a path to help more marketers land CEO positions. I want to help break the pattern that most CEO’s come from finance. And yes, we rock some serious awesome at showing companies how to leverage the digital channel and social media in ways that even risk-adverse companies get excited about.  But is that enough? I went through and did some searches around what defines a successful startup and was seriously disappointed at what I found. The problem is we are using the WRONG measures of success.

The Ability to Raise Venture Capital is Not a Measure of Success

How about we start celebrating start ups who don’t need venture capital?

Almost every headline on TechCrunch about a startup starts with how much funding they’ve raised. Seriously? Is that really the measure of business success that we are using today? Let’s start by understanding that if a company needs venture capital, it is likely because they’ve burned through their own cash, miscalculated the cash they would need when they started the business or aren’t generating enough revenue to support the expenses of the business. At the core, isn’t the need for venture capital a sign that a business isn’t cash flow positive or that the founders don’t have the capital to continue to grow the business and run the business? We’ve essentially replaced getting a business loan to solve short-term cash flow issues with taking other people’s money so we don’t have to “pay” it back in a loan payment. No, instead, we give up part of our “equity”, something that feels intangible.

How about we start celebrating start ups who don’t need venture capital because they built a cash flow positive business and know how to manage growth within their means? How about we celebrate founders who maintain the ownership of their company and create profitable businesses?

Users Are Not the End All Measure of Success

Do Free Platforms Really Have a Business Model?

We can’t have a conversation about startups without talking about the social media start up and the quest for users. Instagram, Pinterest, SocialCam and the plethora of other “companies” who tout users as proof of their success are creating a whole new investment bubble that is going to burst. It’s great that there are a “crap ton” of people using these platforms. I’m an avid user of many of them and there’s nothing I love more than a free app that makes my online experience better. But where’s the revenue? It seems that monetization has become a secondary focus because startups know they can get venture capital if they can get into the millions of users. This is one of the reason’s I love Shark Tank. That crap won’t fly there. It’s not that the number of users isn’t interesting, but it certainly isn’t more interesting than the bottom line. I would argue that these startups are not “companies” until they have a monetization model that is generating revenue. Personally, I have a hard time getting behind the “advertising” monetization strategy because it just feels like you’re selling out on your users. One of Social Media Explorer’s former business partners, Aaron Marshall was smart with his startup. While everyone was building free mobile apps, he understood the quickest way to real success was to combine the quest for users with the quest for revenue. He took the road less traveled when he launched Over, an iPhone app that allows you to quickly place text over photos and share them on your social networks. And guess what, it’s not free, but he was still able to make it into the top 15 photo apps in the app store. I think he was able to do it because it is seriously one of the best designed apps I’ve ever seen. When you use it, you can’t help but tell all of your friends about it. It’s simple, smart, elegant and it forever changes the way you share photos. And totally worth the $1.99 I paid for it. That’s a business model.

An Acquisition is Not a Measure of Success

What Happened to Succession Planning as a Respectful Exit Strategy?

The other thing I found in my searches is a list of stories of companies being acquired by Google, Facebook, or some other “big” technology company only to suffer through a painful, drawn out death. What happened to companies that were acquired and actually continued to exist, thrive and get bigger? The companies whose employees still had jobs 5 years after the acquisition? The companies who built a culture and sold to a company that actually believed and helped that culture flourish? The minute we started celebrating founders who planned their “exit” strategy while leaving their employees to deal with the demise, we created a pretty disgusting business model. One that personally, is really hard to celebrate if you actually care about people. Personally, I still have a ton of respect for companies who actually focus on “succession planning” as an exit strategy.  The founders who actually want to build sustainable businesses that give back to society, build careers, and create legacies that become a Harvard Business Review Case Study are the ones we should be celebrating. I study and learn from the successes and mistakes of leaders like Tony Hseih, Steve Jobs, Bill Gates, Jack Welch, Sam Walton, and Charles Coffin. Personally, I have a hard time getting excited about the founder looking for the quick payout.

What do you think? Are we celebrating the right kind of startups? Are we creating a dangerous view of business success that is hurting society? If you own a startup, what legacy do you want to leave? If you are an investor, do you think you are investing in the right type of businesses for long term sustainability? Let’s have a healthy debate on the right success measures for a successful start up. Leave a comment and join the discussion.

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About Nichole Kelly

Nichole Kelly

Nichole Kelly is the CEO of Social Media Explorer|SME Digital. She is also the author of How to Measure Social Media. Her team helps companies figure out where social media fits and then helps execute the recommended strategy across the “right” mix of social media channels. Do you want to rock the awesome with your digital marketing strategy? Contact Nichole

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  • http://blog.socialmediahq.com/ Nick Robinson

    Good points Nichole! The word “lifetime value” comes to mind when thinking about what success means for a start up. It’s tough to predict what lifetime value will be when you don’t know how you’re going to make money in the first place, which is a recipe for disaster in most cases. As for succession planning, too many people get blinded by dollar signs and forget about the people that made them successful. I think those people need to take a step back and look beyond themselves for a change. Every great company was built upon a mission higher than oneself.

    • Nichole_Kelly

      Thanks for jumping in Nick. Obviously I agree with you. I think the bigger challenge is that we keep celebrating these companies for raising money and getting users and at the same time founders for selling and leaving their employees with a crappy lot to deal with. It’s a shame. I wonder how many Harvard Business Review Studies will come out of today’s startups? Facebook and Twitter? There are a lot of companies trying to ride the wave and a lot of people getting hurt in the process. Not to even mention the bad business of it all. As an ROI junkie, I can’t imagine investing in companies who can’t answer the types of questions I posed here. You rock!

  • http://www.boom-online.co.uk/ Amy Fowler

    There’s definitely too many people starting up companies with little more of a plan for the future than: “When can I sell? And how much can I sell for?”

    It’s a sad reflection of today’s culture. Many kids are growing up thinking about how they can get rich with minimal effort. Whether that means starring in a reality show and getting their bits out in a magazine, or starting up a company to make their millions on when they sell a few years later.

    It seems that as a whole, the world is becoming increasingly selfish, and they think; “If I can make lots of money and retire, I don’t care what happens to my employees or the careers we’ve began to build for them.”
    Maybe we *are* celebrating the wrong kind of startups. And I agree that what a lot of people think constitutes success in business is harmful.

    But how do we change this? Surely it involves changing people’s desire for a quick fix to get rich; but that desire is so ingrained in modern society that I’m not sure we can.

  • http://www.boom-online.co.uk/ Amy Fowler

    At the same time though, there’s a lot of great companies who make creating a great company culture for their employees a priority. Something that I don’t think was that common even 10 or 20 years ago.

    There’s always going to be good guys and bad guys in every walk of life. As an employee we just need to choose who we work for wisely (of course, not all of us have the privilege of being able to choose who we work for….). 

    • Nichole_Kelly

      Yes, it’s an interesting challenge. I think for starters sites like TechCrunch can start sharing success stories from companies that didn’t need to raise venture funds, they can start writing stories about what happened 24 months, 36 months after an acquisition. That’s the dirty little secret. How many of these companies are bigger and stronger after the acquisition? It starts with sharing the stories of those who are doing the other things right too. Thanks so much for commenting.

  • http://www.microsourcing.com/ MicroSourcing

    It’s true that businesses should be more focused on monetizing their efforts instead of platform usage because revenue generation keep their organizations alive.

  • http://mailVU.com Alan F.

    I completely agree with you Nichole. Scoring a big exit with your company, with no profits, is only
    a Ponzi game. Giving something for free and getting users is easy; charging and getting people to
    pay you means that you have to be good. Funding can’t save a crappy business model. Sometimes I laugh at TechCrunch, and other times I just shake my head.

    I like the approach by the sharks and Jason Fried and wish the media would highlight startups that are making money, particularly ones who are bootstrapped. Lynda.com grew to $100M in annual revenue while bootstrapped. They were highlighted by TechCrunch yesterday….only because they just raised their first external capital!

    Alan Fitzpatrick
    co-founder
    mailVU.com

  • nannasin smith

    make their millions on when they sell a few years later.

    2N7002

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