Last night I went to start-up event in Sydney. It’s something I don’t go to very often, but I did enjoy it, as I met some really interesting people and listened to a fantastic and fascinating presenter. However, at the same time, it highlighted some of the systemic problems of the start-up world itself. It was the issue of funding. It’s one of the hardest things for Entrepreneurs to both rationalise and manage effectively. As many founders’ heads are continuously swirling with the competing needs of business development, time, financing, staffing, marketing and resourcing, it’s one of those issues which can unnaturally dominate the thought processes and conversations around business. The promise of wealth for an idea, distorts the reality of effective business development. The conversation can become so unbalanced, people forget there is an underlying need to develop a real business, rather than just endlessly fund a novel idea which can be given away for free to build a database of users.
One business discussed was in its third round of funding and based upon rough revenues thrown up and the commission structure. The business is running at a loss. This is not unusual for an early stage startup, but how long do you run at loss for before you decide perhaps this is just an expensive hobby and not a real business? The startup world will tempt people with more cash and promises of riches and ideas that you don’t need to worry about being revenue positive or have any revenue at all, just keep with your passion and it will happen! Unfortunately, 96% of this ends in tears.
As I was driving home, I was listening to an audiobook which essentially covered the same topic and gave a number of examples of companies which never made a single dollar and yet sold for billions of dollars. It should be stressed though that these are the exceptions to the rule. Taking a product to market without a real sustainable business model is just delaying the inevitable disastrous result for everyone. Whilst people might jump up and down and say, haven’t you heard of Instagram and Tumblr? Well, yes, I have, but they’re rare exceptions to the rule. The danger is that people become so focused on the exception to the rule, they forget about the rule. That rule is, that a business only survives by producing sales and generating more income than expense. Added to this, if you deliver great customer service, you ensure you have repeat business. Failure to get this right, means it doesn’t matter how much money you inject into a business, it’s never going to work, no matter how cool it is.
Whilst I’m not totally against external investment, it has to be the right external investment, as the wrong sort can push a business away from its goals and create a munted wreck that collapses under the pressure to deliver a 10X+ return. As a business owner, who has run a café as well as a tech business, I know how important delivering a real product and service is. It’s so important to get this right from the start and then, with a good revenue model in place, you’re well on the way to a sustainable business.
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