Setting people up to fail - why I am afraid of the "bubble"

Having set up my own business, edgeofmyseat.com, in 2001, in the wake of the dot com meltdown, I am feeling slightly unsettled at the current technology startup landscape. Not unsettled for my own company but for for those who are thinking about starting a business right now. They will be hearing the loud voices talking about VC money, and the exciting and glamorous world of “being a startup”. I was chatting to someone recently, who is involved in helping young people get new businesses off the ground. One of the biggest problems they have is young people thinking that the whole aim of business is to come up with an idea people will invest in, rather than having a product or service that can bring in cash itself.

I may well be old-fashioned but it seems that setting up a business with the aim of an exit by way of a sale to a bigger company is unlikely to work out. Investors throw a lot of money at projects because they know that perhaps 1 in 20, 1 in 50 will pay out in a massive way. It’s a lottery – you might win, you’ll probably lose and have nothing to show for it in the end. For the investors it doesn’t matter – they win in the end when one of their 50 lottery tickets turns out to be a winner – however every person in every one of the failed companies loses. From the founders to the employees.

Making a thing and selling copies of it at a profit may not make you a billionaire overnight, however it can make you a nice income, may very well allow you to employ people and provide them with stable employment. You can own 100% of your company, and be truly independent. No investors pushing for an exit, no worries about where the next round of money is coming from. You make your thing, you sell it and with the money you make more things or improve on your thing. It’s slow and steady, but it works.

While this post has been sat in my drafts, I discovered that I’m not the only person who is concerned about this. Amy Hoy writes on her blog Unicorn Free,

I’m angry that it’s become an assumption that “success” means getting a big fat investment, not turning a profit. That success means founding your own company in order to determine your own destiny, then happily become an employee again when some megacorp snatches you up.


- The Truth about Success – Brick by Brick

Gary Vaynerchuk also recently posed the question, “Why is raising money celebrated more than making money?

I don’t think companies funded by venture capital are always a bad thing. If you have a great idea, with a real roadmap to profitability, that needs a chunk of cash up front in order to put plans into action, then it can be really helpful. Many investments also come with valuable business help and input – which can be worth as much as the money for an early stage company with founders who have little business experience. However I am afraid that people with a business idea are heading straight down the investment track without considering if they can be profitable from the outset, bootstrapped by founders who then can own their entire company. When the bubble bursts, a lot of small, potentially excellent companies will go under with it, as they will be unable to survive without further investment which will be in short supply. The bootstrappers will probably survive, as they are growing within their profits and know how to live within their means as a business.

I don’t know a lot about the world of venture capital and investment. I know quite a bit about running a profitable business though, and while I love the fact that running a business is being seen to be a good thing, and something for young people to aspire to, I think we should be careful that we are not setting people up to fail. I’d like to see the bootstrappers celebrated, and seen as role models for young people. I’d like to see more resources and information for people who want to do that, more stories from those of us who have done that and are currently still engaged in the process of growing these businesses in a sustainable way. The big investment stories are far more newsworthy than, “small business launches new product built during evenings and weekends, while founders do other work during the day to pay for it”, however I’d like to read more stories like that. I’d like young people to see that they may have options rather than just assuming they need a big cash injection to pay for all the trappings of business, before they even get started.

Mamading Ceesay on the 01 Nov 2011:

Great article. Totally in favour of providing more resources & info for bootstrappers, as we will be advocating it in our Social Startup Incubator. Would love to discuss specific ways to get more stuff about bootstrapping out there.

Please drop me an email.

Gordon McLachlan on the 14 Nov 2011:

We started our company almost 6 months ago using our own savings and absolutely zero investment. So far it’s been great fun and has been very rewarding, especially knowing that we own 100% of everything we do.

In regards to your comments on VC funding, I couldn’t agree more and, in fact, I think the whole thing is sometimes even more distasteful than you describe. There seems to be a trend in the modern market to pump money into companies to inflate them just so they can go public within a short period of time and the investors can reap profitable payouts. They are manufacturing their own artificial boom and, often, being a bit dubious in their activities in the process.

Groupon is a great example of this. A good idea pumped full of cash incredibly quickly with the whole idea being to raise a ridiculous IPO before going destroying itself. The strategy is unmaintainable and the investors know this so they want to get their cash and bail. It came as now surprise to me when, under scrutiny, their initial IPO projection was complete and utter fiction, inflated 100% over its ‘real’ worth. It’s a dangerous game.

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