Will Startup Frenzy Lead to New Economic Crisis?
What is the difference between a startup and an entrepreneur? Has the startup philosophy changed traditional financial and economic models? What is the relationship between the horse's butt and the rocket shape? Why the Silicone Valley pumps up enormous amounts of money into startups?
Startups are, by definition, the companies established by individuals, natural persons. Similar to entrepreneurship, but with an important difference.
The main purpose of a startup is to scale the business along with quick growth of revenues and customers, thus enabling an exponential growth of the enterprise, employment of new staff and at one point an exit strategy which often involves a stock exchange entry through the initial public offer (IPO) whereby the startup becomes a publicly listed company with traded stocks. Growth is a must for startups, and it requires customers, revenues and influx of capital.
American dream and self-made billionaires
Owing to its nature, the startup constitutes one of the riskiest, but potentially most remunerative business enterprises. Its origin is in the USA, of course, predominantly in tech industry, more precisely the Silicone Valley. We are pretty familiar with the stories about the American dream, self-made millionaires, the garages that grew into the largest multinational companies, such as Apple and Amazon.
These are success stories for sure (not without their downsides, of course) that serve as role models to many young people just starting out. It's also a double-edged sword. There are many who tried but failed. To be precise, almost 99%! But let's stick to the successful ones.
Rare are those startups who can be so easily transformed from garages to successful companies. Usually, they need a strong injection of capital from the very onset.
That's where venture capital through investment and private equity funds comes into play, or crowdfunding (Kickstarter) or angel investors who invest their capital in exchange for an equity share in the newly founded company - startup.
Their task is to recognize talent and potential and to invest in the early stage in a good idea and a good team, that will eventually bring a return on their investments. At least that's what it should look like in theory.
But still, is it always like that? What goes on in the background?
There is an interesting book I'd suggest for your reading list - Disrupted by Dan Lyons.
Dan is a 52-year old journalist who is forced to look for a new job after being fired from Newsweek. As a journalist with an extensive experience in writing articles about IT and tech industry, he decided to make a career shift and applied for the marketing expert job post at a tech startup - Hubspot.
He narrated his experience and work in that company in a funny way, with brisk humour and sarcasm. At the same time, he dispersed a lot of common myths and delusions about this type of companies.
To understand the Silicone Valley philosophy and startups respectively, you need to be familiar with two things: disruption and a dot-com bubble.
Disruption, or how are the horse's butt and the rocket width related?
Disruption from a business perspective implies the introduction of a new technology or service that drastically changes the standard concept and the philosophy of business and life in general.
Just think for a moment about the wheel, gunpowder, steam engine, TV, computers, cell phones. These are all disruptive inventions that introduced huge changes in human lives. What is typical for humans is that they never settle for the existing status and they always seek for more and better.
The evolution and the wheel of progress impose it as imperative. The devil never sleeps. In that sense, disruptions are completely natural for a curious and imaginative being such as human.
To get back to the question above - horse's buttocks and the rocket width???
As it appears, there is no link whatsoever...
However, if we get back in time, we will see it is not really so.
Namely, before engines were invented, horses had been the chief industrial power and logistics means. Even now we use horse power to measure the engine's strength. Horses towed carts which were slightly wider than the horse itself.
Then the horses were harnessed in mines to draw ore-loaded wagons. These wagons were drawn along the tracks that also fitted the width of horse's arse.
The steam engine was invented soon after and the poor horses were probably the happiest to hail its arrival.
Locomotives replaced horses in drawing carriages along the same tracks. The narrow tracks were slightly extended afterwards, but its bond with horse's ass remained intact.
The 20th century brought a galloping development of science and technology, people managed to build rockets inspired by their dreams to fly to space, as the human appetite for new breakthroughs is insatiable.
When those rockets had to be transported to the launching pad in Cape Canaveral, guess which type of transport they opted for - trains, of course.
So the width and partly the size of a rocket have been directly conditioned by the width of wagons and tracks, and indirectly - by the size of horse's ass.
The story itself is interesting, and it is often used by motivational speakers and life coaches when they are trying to convince us that we have to change all the time, to keep re-evaluating our surroundings and to bust common myths. Otherwise, we will be walking over horse shit although we could levitate in magnetic field like a Maglev train.
Young people, naturally, have the highest level of energy and they are driven the most to change cliches and established values. Therefore, they are normally the ones who initiate innovation and change owing to which most of us live in unprecedented comfort in recent history, whatever you may think of it.
Rise and fall of Dotcom
Dotcom has become synonymous with the financial fiasco that took place in late 90's during a boom of online companies. That's why it is called .com, which was the extension of majority of then-current websites.
Like startups, .com companies attracted commensurate attention of investors and the entire financing community. Large funds were brought into this companies overnight, without assessing their solvency, prospects, business plans, sustainability.
It was fairly unusual even for notoriously risk-prone US investors. Soon it transpired that a number of .com companies were on thin ice and the house of cards collapsed in no time. The whole bubble burst overnight which plummeted the stock prices and brought many investors to bankruptcy.
It is said that the stupid learn on their own mistakes, and the clever ones on the mistakes of others. And the corrupt one exploits his own and other people's mistakes to become even more corrupt.
That is exactly what happens to present day investors and VC funds who bring bucketfuls of money into tech startups, but with a backup plan this time. Being aware that sustainability of such companies is diabolical, they build up an exit strategy in advance.
First they fund them profusely, investing predominantly in marketing and sale to boost revenues and customers. Once it is time for a startup to go public, they are among the first to leave the ship, by selling their stakes in the company and transferring the risk to new stock owners - common people, employees, small-scale investors.
Some of these companies, even though making little or no profits, reach over 1b-euro market valuation which brings them into the company of so-called unicorns. Needless to mention, there are quite few of them.
Anyhow, after the IPO, the equity owners are slurping the cash and sharing hefty profits with startup owners, while new stock owners are left in stupor once the stock value goes south.
The wolves are fed and the sheep kept safe. It's just that the sheep end up empty-handed.
When we look at it that way, we quickly realize why there's such a hype about launching startups and why every college freshman dreams of starting one. Who gets the lion's share in the end?
The investors, of course. They are like the betting house, the house always wins. Particularly when investments are made in different ideas and the risk diversified accordingly.
In a nutshell, that is the model, according to Dan Lyons who spent a year in one of such startups which helped him better understand both good and bad sides of the startup industry.
Why should I care?
Some of you may think "why should we be concerned with it?". Well, you should actually.
Just recall the onset of the latest financial crisis, back in 2008. We had nothing to do then with the real estate bubble in the US which soon exploded causing a worldwide domino effect.
Similar to the story when a butterfly flap its wings in Africa, it causes a cyclone in Asia. In a globalized world, a stock exchange crash, in such a mighty economy as the US one, creates a tsunami wave that lands hard on each country's shore.
This startup bubble threatens to have similar effect. And we still fantasize to be pioneers and founders of a new Uber or AirBnB.
While speculators and usurers are raking in cash, and the Silicone Valley's daily turnover equals a cumulative GDP of the African continent, the thought leaders - initiators and innovators as they like to call themselves, are trying to convince us that it is necessary to catch up with progress as soon as possible and to embrace innovation and adapt to changes.
To constantly develop, learn, re-qualify and to be ready for changes, challenges and risks.
Otherwise, it is all our fault... We have not sufficiently adapted to the market. We are not flexible and open for new things, served by them of course.
What a brainwash! They actually want to turn us into obedient consumers, trying at the same time to control us by our pang of conscience and by invoking negative motivational drives.
Do we really have to change everything? Is the disruption a new inquisition? Should you fail to adapt, the success is just a fiction.
What if there are still some of us who don't mind wallowing in horse shit. And to push manually that wheel of progress.
Do they ever wonder how many people are made redundant due to their innovations? How much the nature and wildlife suffer due to unchecked exploitation of natural resources and environment? Will our grandchildren have a chance to see a horse's butt, except on the picture?