The Start-up Money Mentality

In the Tampa Bay start-up community, the most popular complaint is that there are enough investors. In the nine months of 2013, $318 million was invested in Florida businesses. That number is up from 2012. “Nationally, venture capital investments declined by 1 percent to $27.5 billion,” according to the Miami Herald. Hmmm… why is that? Probably because there are other places to put money to get bigger and quicker returns (like with a pal on Wall Street who will do some shady stuff to get you a 25% return).

Y Combinator’s Paul Graham shared some numbers this week. “Harvard researcher Shikhar Ghosh revealed in 2012 that at least 95 percent of startups fail to meet a projected return on investment.” That means start-ups should focus on building a sustainable business.

My experience lately has been that founders have this idea that their start-up will launch after a 54-hour startup weekend, pitch a couple of times, land mad money, and the rest is easy street. This couldn’t be further from the truth.

My experience is that most founders think their idea is gold — without much though into a go-to-market plan. And sometimes without much thought into how do I build this plan either.

I was surprised at Wearable Tech Expo by the number of companies that were funded by Kickstarter. That’s right, prototypes and everything funded lean by a kickstarter campaign. Then these companies did market research and went to market. How novel is that?

Just think about the Apple app store. How many apps actually make money? Start-ups are like that.

Another example is music. You have probably seen the story of the poverty of royalties paid out to musicians by Pandora and other online music sites. Albums don’t sell the same volume they once did. It’s like cloud services. The income starts very small after a large capital expenditure.

Look at Dell, Intel, AMD and other hardware companies that are gyrating to stay afloat as the industry shifts to mobile and cloud (in place of desktops and premise). I understand how start-ups hear about billion dollar valuations of Instagram, snapchat and twitter and think that can be them. The reality is: that’s hitting lotto. The majority of startups fail (or at best pivot a few times to stay afloat). A minority make it a sustainable business.

If you are dropping the w-2 job to found a start-up on your savings in the hopes of grabbing some fast cash from VCs and then cashing out big in 3 years, you are misinformed. My I suggest that you drop by Startup Camp at ITEXPO in Miami at the end of January to speak with start-ups. Reality is very different from “The Social Network“.

Don’t take this as discouragement. Most start-ups are a fierce plodding along, slowing building a business every single day. You will trade in your w-2 for a commitment as big as a baby.

I think everyone thinks they have great ideas, but the tires meet the gravel in sales. Just look at the anemic sales most VoIP companies have. Money doesn’t grow on trees and very few folks actually hit the lottery.

Tags: advice, sales, startup, vc
Related tags: sustainable business, start, money, think, companies, business