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The Way to Know You’re Looking at a Startup Fantasy That Will Implode

by Tim Denning 3 months ago in startup

Before you’re hoodwinked by a doomed business—lessons learned from my job evaluating startups.

Photo by Meritt Thomas on Unsplash

I used to be a startup-spotter. You could have mistaken me for the host of the television show “Who wants to be a millionaire?”

My job was to find startups to work with and then help them plugin via APIs into a global financial system. I’d attend pitch nights, assess pitch decks, wear startup t-shirts with funny slogans, and write startup hero stories for blogs.

Startups are something I have a soft spot for because I have had several failures of my own. And this year I stepped back into the brave world of entrepreneurship to start a real business again.

The fantasy land of overvalued startups has been a trend over the last year. First, there was the downfall of WeWork. Then, it was the overvaluation and hype of Lyft, Uber, and Snapchat, who all famously lose money. The global health crisis has only made the appetite to invest in startup fantasies weaker.

Smart Company says even “startups with strong growth prospects will still be able to secure funding, albeit at a reduced valuation.”

So in a global recession, the startup myth-making that has been plaguing the headlines is going to be tested.

I believe the hype is going to expose these bad businesses for what they are. But the first step in defeating the startup fantasy is identifying it.

What a Startup Fantasy Looks Like

It’s easy to be hoodwinked by the big bad wolves of startup fairytales. Here’s how to spot a startup fantasy in the making, before the huge climax of empty promises and broken founder dreams.

Worshipping of valuation over revenue

One of the most famous startups I ever met is now valued at more than $1B. Their entire business is a lie and the founders even joke about it. They have a huge valuation and very little revenue. They lie on spreadsheets to look like they have customers that pay them money. They don’t. As a result, employees come and go as soon as they realize the business isn’t real.

Even the startup community has figured out their lies. Yet investors keep pouring in money, hoping to get rich without knowing the dirty little startup secret they’ve been keeping from them. One day I’m going to open my 1986-style newspaper and read about them. Until then, it’s a big secret.

Valuation is meaningless.

Uber and WeWork proved that. They also proved that it doesn’t matter how good you are at fooling investors desperate for a return on their money due to a recession.

What matters is how well a company sells their products or services to real customers who pay real money for them using cash, a debit card, or a credit card (hopefully not the scam of buy now, pay later).

Show me a profit and I’ll show you a successful startup. Everything else is a startup fantasy.

Nobody knows what the hell they do

If your business is so complex that you can’t explain it in seven words, then it’s a startup fantasy ready to get investors mysteriously excited and have them tripping over grandiose headlines.

Kalpesh Rathod and his startup Cubes is a perfect example.

“It’s visual storytelling with any type of content.”

Kalpesh admits he struggles to explain what the hell his startup does.

“Cubes is not quite an email inbox, not quite a Dropbox clone, and not quite a photo library. It’s always hard to get the right verbiage.”

Business isn’t complex. What problem do you solve?

The aforementioned $1B startup suffered from this problem. They kept pivoting—in other words, bullshitting their way to a different business. Nobody in the company really knows what they do.

The worst part? The founder couldn’t articulate what they do. It’s a WeWork-level hot mess ready to explode all over everybody.

It’s a platform. No it’s a magic marketplace. Wait, it’s really a financial revolution. Or is it a business networking site?

Nobody knows. They do everything for anyone that will throw money at them.

I’m not sure whether to laugh or cry. Families are going to have parents who can’t pay their bills because of these startup fantasies, and then be faced with the nightmare of walking out into the job market during a deep recession.

Success may be subjective. But success isn’t lying.

The dropping of buzzwords

Here is a list of startup buzzwords. If you hear too many of these then do this: run for the hills.

  • Blockchain
  • IoT
  • Mobile-first
  • Software that eats the world
  • Decentralized “…” — aka Dapps
  • Capital raise
  • Celebrity endorsements
  • Cloud-enabled
  • Peer to peer
  • Open Source / Inner Source

Startup buzzwords stop founders from working hard at building something and cause them to hide behind a broad trend. You have to actually build something of value to call it a startup.

The business model keeps changing

How do you make money?

Smoke and mirrors. Magic revenue. Flash! Bang! Who knows.

If the way a startup makes money is secret, or worse, part of their IP that requires you to sign an NDA, then you’re dealing with a startup fantasy.

How a legitimate business makes money is no secret. You can read it online and even see it appear on their Wikipedia page. Not revealing your business model is code for “we’re not sure how to make money from this, yet.”

A business model in a startup fantasy can simply be taking investors’ money, living the high life, cashing out some stocks, and then walking away when you run out of funding.

The final red flag

If a company keeps referring to the tech stack (it’s all just cloud dude, consider it a huge red flag.

“Oh the tech stack is exceptional.”

We’re in the age of cloud, and soon we will be in the age of drag and drop code. Let’s not go ballistic over the tech stack.

Why the startup fantasy is harmful

For starters: It’s a lie.

It creates catastrophic failures like WeWork. It causes good people to lose their jobs. It takes investors’ money and burns through it. It encourages young, promising professionals to get a thankless job reporting to investors. It creates bubbles full of companies that won’t be able to ever pay back their debts.

Worst of all — it makes business look easy, which is the biggest lie of all.

How to carve your own path

If you start a business, don’t be romantic about it. Don’t wear your entrepreneurial skills as a badge of honor or a status symbol. Build the business how you choose. Find a way to add real value.

Take the unusual path of never raising money like the founder of JotForm, Aytekin Tank, did. He’s part of the new breed of founders making startup fantasies look ridiculous. On following his own path, rather than heeding the startup fantasies based on VC money and ridiculous valuations, Aytekin writes:

Building your business with real customers (instead of giving away a big chunk of the company) is difficult... it’s also less risky. Customers vote for you with their hard-earned cash — and money doesn’t lie.

With JotForm, I chose to grow organically, one step a time. By the end of my first year, about 15,000 people had signed up to use the product.

Aytekin’s business now has over 5M users. Stupid valuations that are not correlated to profits are old school like the Beastie Boys.

Cleanse your soul from the startup fantasies. Get a job if you choose and don’t be ashamed. Earn money your way, not the startup fantasy way. Do work you enjoy. Fall in love with the process, not the highlight reel. Resist the temptation to spread hype and take a photo next to material possessions that tell people the wrong story about your business journey. Most of all, stay humble. Humble business owners change the world.

Startup fantasies have become a joke. But recessions level the playing field. Your life on startup fantasies forces you to misunderstand how business works.

Trade startup fantasies for admiring profitable businesses, full of humble people, doing meaningful work, to solve a problem that changes the world in some tiny way.

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Disclaimer

The original version of this story was published on another platform.

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Tim Denning
Tim Denning
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Tim Denning

Aussie Blogger with 100M+ views — Writer for CNBC & Business Insider. Inspiring the world through Personal Development and Entrepreneurship www.timdenning.com

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