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The Startup Killer No One Talks About

What happens when you give 2,000 companies each at least a million dollars?

Well…as it turns out, about 1,500 of them will fail. They will either slog along without growth or shut down altogether.

But, why?

James Allworth, of the Exponent podcast, has insight on this question — 

“At a high level, it’s going to be easier to start things at the bottom, but even harder to break through to get to the top. The middle is getting destroyed and that middle is what you need to get through to get to the top.”

Let’s unpack that statement.

It’s easier to build Google circa 2000, but way harder to build a company that turns into Google, circa 2017. 

Put differently — more companies can win small, niche parts of the market.

And, bigger companies can thrive with huge swaths of the market.

But, it is even harder to grow from a niche startup into a tech giant.

Hasn’t it always been hard to grow a company? What’s changed?

 

It’s easier to make startups that thrive in their niche.

There is more cash for startups than any time in the history of tech.

Early stage investment went from ~$2.5 billion per year in 2002 all the way to nearly $13 billion last year.

What else makes the journey easier for startups? 

Here are some key pieces:

You know what else? There are just more people making companies. The rate that US workers start new businesses is at one of its highest points in 15 years. More cash, more support and more companies. That’s the landscape for small players. If you want to go deep into why there are more startups, give a listen to this episode of the Exponent podcast.

What has changed for big companies?

It’s harder to challenge the incumbents.

Because tech giants have ballooned in size. You can use IBM and Apple as an example. In 1995, IBM brought in about three billion dollars in profit. In 2015, Apple brought in roughly fifty-three billion dollars in profit.

You can see this same effect amongst all the tech giants:

The ten biggest tech companies went from ~$9.5 billion in profits in 1995 all the way to ~$115 billion by 2016.⁵ The consequence is that they can out-spend and out-compete companies that would otherwise be a threat. Did you build the next platform for photos? Get eaten by Facebook. (Instagram). Or chat? Same deal. (WhatsApp)

Maybe you built the best, new ecommerce site to buy shoes? Or diapers? Or soap?

Get clobbered and then purchased by Amazon. (Zappos, Quidsi)

I know, these startups sold and made tons of money. Boohoo. But, for each example, there are lists full of stories from startups that got stomped by the big tech companies. 

Why are the tech giants so damn big? 

Network effects.

The internet creates a world where companies can make billions from connecting two groups who want to exchange value with one another. 

Uber drivers want passengers. Amazon sellers wants buyers. AirBnB renters want travelers. Facebook users want their friends. And, when a company becomes big enough to own a network, they become incredibly hard to challenge. Note — there are other contributors to the growth in tech profitability and size. See this a16z presentation for more.

Wait. What is the startup killer?

If it is easier to make startups that get investment, then why do so many companies fail? 

It’s all about the Valley of Death. It’s about the period in a startup’s life when it ramps up to take its solution to a bigger market. Specifically, it is the time when costs exceed revenue as the startup attempts to grow into a large, enduring business. 

You can see it here:

Sometimes, startups make the right decisions and take off.  Most of the time, they make the wrong decisions.

You can see how it happens, right? 

Everything changes as a startup scales. The customers, the product, the team, the competitors.

The Google of 2000 is not the same as the Google of 2002, 2004 or any year since. But, startups do not have time to pontificate about each change. They know there are accelerators pumping out startups to steal their market. 

And, on the other side, they know they must face off with tech giants that make billions of dollars and wield massive network effects. Startups are forced to operate with limited information while they burn tremendous amounts of cash to spur growth — all the while with other startups chasing right behind them and tech giants ready to clobber them.

That’s the startup killer.

Why bother? 

Why work with a startup when so many fail? It sucks when startups fail. I had one that flopped and it felt awful. But, we do it because there are problems that need to be solved.

We know the chance that we can help bring a solution into the world outweighs the likelihood that the startup will fall apart.

I do it because, no matter the numbers, I believe the right people, with the right commitment, working on the right problem can solve anything.

Jeremy Webb Blog | Startup Grind https://www.startupgrind.com/blog/the-startup-killer-no-one-talks-about/

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Jeremy Webb

Chief technologi.st & Adventurer about.me/jeremy.webb

Jeremy WebbThe Startup Killer No One Talks About

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