Entrepreneurship is dying

We have a lot of startups in the world today — perhaps too many. But most of them contain very little entrepreneurship…

We have a lot of startups in the world today — perhaps too many. But most of them contain very little entrepreneurship.

Photo by Zachary Keimig on Unsplash

My first encounter with a startup was when I was 22 and in my second year of university. We were tasked with interviewing an internet startup for a module and my project mate had arranged for us to visit this young dot.com company.

I cannot remember exactly what they do now but I think it was some kind of free service or information portal. (This took place back in 1999…)

The founder walked in wearing slippers, shorts and a t-shirt. During the course of the interview, he jokingly said that he was living off his wife now. His parents frown ever so often but he was glad he could ditch the shirt and tie.

There used to be a time when parents would scream at you for starting a business instead of securing a job in a respectable company after paying for your university tuition.

Those days are over. These days fresh graduates are proud of the fact that they’ve turned down glamorous investment banking or consultancy jobs to become a startup founder or work in one.

It is cooler to be spotted in sandals or hoodies and grinding it out at a hip co-working space than clocking-in at a sober building with a big corporate logo in front.

The young and bright want to work hard, play hard, and clock 18 hour days building their dreams rather than climbing the ladder in a corporate cubicle.

So what’s so wrong with that?

The bottom line of business is often forgotten

From Apple and Facebook in the west to Alibaba in the east, modern young entrepreneurs worship the renegade college dropouts and brazen risk takers who make it to billionaire status within a decade. But the result is what I call ‘OPM entrepreneurship’ and ‘PPT valuations’ rather than real businesses — read: Other People’s Money & PowerPoint…

Everybody approaches building a business these days by putting together a startup story and raising venture capital. What happened to doing business the old fashion way — step by step making a profit?

Venture capitalism is also to blame for the current state of affairs. As they say, it takes an indulgent parent to bring up a spoiled kid.

Venture capitalism has always been about funding disruptive innovations and moonshot ideas that could change an industry. These ideas need to generate double digit, even triple digit multiples on returns to justify the risk. But the yardstick by which they measure the potential for that sort of payoffs has become more and more of a mega long term gamble.

In the dot.com era, VCs valued internet portals by counting eyeballs landing on the website and banner advertising. That startup I visited at 22; they gamely admitted to us how they created the illusion of revenue by doing ‘contra’ arrangements with other websites. Put simply, they booked advertising banners on each other’s sites for a fee on the books but with no actual cash flow exchanged.

Then came the smartphone and social media era. Mobile apps and social networks were valued by the number of users they have. Build the numbers first and worry about monetization later.

Now in the AI and IoT era it’s all about big data. Data is gold. Accumulate enough of it and your company can command great theoretical value. There’s nothing wrong with this view. In fact, I’ve argued myself that data is going to be the next most important commodity in my article “Data is Oil, Wheat and Pork Belly”.

Such venture capital valuation models aren’t necessarily wrong. But it’s a big money race to the top. Only the players occupying the top spots in a certain category can hope to win big on monetization later on. Just think for a second — how many Google, Amazon, Facebook or YouTube style businesses do we have today that have truly grew to IPO size?

But so many people want to try that model now. Most will inevitably fail based on both statistics and logic. Because it takes a lot of capital and deep pockets to attempt these sort of long term, cash burning business models.

At this stage, a young, ambitious startup founder reading this would probably be cussing me in his head and thinking, “Yes, but I think I’m smart and driven, why can’t I be the next Steve Jobs or Jack Ma?”

As I’ve shared in my article “The Truth Behind How Venture Capital Chooses Startup”, when thousands across the world have the same idea and all are pitching themselves as unicorns, getting picked is really about the network you have and how uniquely suited you (and your team) are perceived to be in terms of knowledge, passion and experience. You’ll also have to convince the VCs you can be very tenacious even when the going gets really tough and uncomfortable without money being thrown at it.

Million dollar PowerPoint slides

And that leads me to the next point.

Most startups founders these days go after venture capital money the minute they can. Many spend more time chasing investments than improving their products and finding customers.

It seems to be the only way any startup idea can get going these days. You often hear struggling founders lamenting, “If only I was funded, my idea would have taken off.”

What happened to good old ‘making a profit’?

Moonshot tech plays aren’t the only sort of businesses that build the economy.

Most aspiring actors hope to audition for a part in a big Hollywood movie, get noticed, and make the news. But many work their way up the scene by taking on stage plays, bit parts on local networks, soap drama gigs etc. before finally hitting the big screen.

It’s the same thing with young people and startups these days. The Jack Ma’s and Steve Jobs’ of these world gets all the glam and attention but there are many more businesses that were built on sustainable revenue models and growing a steady balance sheet.

Everyone’s sprouting unicorn ideas and asking for millions to burn to get there. They’ve lost the meaning of money and how hard it can be to make it all back. All they have to show is an exponential revenue growth curve on a PowerPoint slide.

Source: Pixabay

Their justification for a 10 million dollar valuation today is because “we think we will be worth a billion dollars five years from now”.

It’s what I call, the ‘PPT Valuation’ method. And it only works when it’s based on spending ‘OPM’.

The easiest way to spot PPT valuation and OPM entrepreneurship is to ask the founder to throw his life savings into the business before you invest. If they start their next sentence with ‘But….’ — then you can tell they are not convinced by their own revenue projections.

Business is about making money. And at the end of the day, someone born for entrepreneurship must be able to show that he or she can turn an idea into profits.

Anybody can spend somebody else’s money.

Startups and founders are now targeting certain ideas only because they attract venture capital. Their first premise to making the idea work is that money… big money, must be raised.

And for a while it got so crazy in the crypto world that a mere white paper could result in millions of dollars raised…

Show me you can hustle, and I’ll show you the money.

Let’s get back to honoring the hustlers. The door-to-door salesmen who can sell ice to Eskimos. The born entrepreneurs who were peddling lemonade on the sidewalk as soon as the thermometer went above 75 Fahrenheit.

That, in my mind, is true entrepreneurship. Getting deals done. Getting purchase orders signed. Not going after a VC’s cheque.