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Startup Fever: Are “Wonder Solutions” Causing More Harm than Good?

Written by on March 21, 2016

Every year, 100 million businesses are “started up”. That’s 11,000 businesses an hour, or just over 3 businesses a second. These businesses attract an astounding $48.3bn in venture capital a year, which figures out to $1,532 a second. It’s long been said that necessity is the mother of invention, which garners the question- are all of these startups, and the enormous amounts of money they’re sapping, really necessary?

The Venture Capital Dilemma

Attracting venture capital and investments

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Attracting venture capital has become something of a sport to entrepreneurs, a past time in and of itself. Each series of funding is compared among investors and competing startups and used as a metric to gauge how successful the startup will be.

Which is completely wrong, of course, according to a report by the Kauffman Foundation which shows that a measly 4.4% of all new firms get their seed funding from venture capital. The vast majority of companies do things the way they’ve always been done – taking out loans from banks (~35%), tapping into personal savings (30%), and asking friends and family to invest (6.3%).

The pickle for startups is that these latter options have come to be viewed as inferior to venture capital and angel funding, the argument there being that if these hot-shot money hedgers don’t think you can make it, you probably can’t.

A report by Inc. Magazine on the funding source of the US’s 500 fastest growing companies quotes that only 6.5% of funding for these movers and shakers came from venture capital.

How did this erroneous point of view come to be so commonplace? Simple – it sells.

Consider the major entrepreneurial success stories from the past 5 years- chances are, you’ve heard a lot more headlines starting with “20-Year-Old College Student Raises $2.7 Million for [Insert Startup Here]” than “Dedicated business bootstrapper grows business from nothing”.

Stories of young success and large sums of money just sell better, and are consequently a lot more likely to be heard again and again until they’re mistaken as the norm.

Startups and False Needs

Value of startups?

The vast majority of innovative inventions came out of need and not want. “Creating a need” is an overrated sentiment; needs present themselves due to circumstances. “But social media wasn’t a need!” some people like to counter-argue.

Granted, social media itself, wasn’t a need, but the underlying function it served, communication, was. Social media was thus a solution to the need for communication.

Nuclear reactors, modern antibiotics, you name it, all of those inventions that are the hallmark of modern day living were born from a not-so-flowery past of anxiety, stress, and frantic necessity.

Consider this the next time you hear people touting a new startup as the “next-big-thing” in this or that. Ask yourself – Is it really catering to a tangible need?

That said, even seemingly pointless and trivial startups have something to offer. For every Airbnb and Uber there will be a hundred Facebook clones with a tiny spin on the interface or posting dynamics. But according to the top-dogs at Silicon Valley, that’s something to be celebrated and not quashed.

Not every startup has to solve a major global issue. A culture of creative chaos and experimentation is guaranteed to produce more duds than successes, but those successes couldn’t have been achieved without the duds.

The bottom line – Even seemingly pointless startups have value, be it in the experience they impart to founders, or as cautionary tales from others veering down the same fruitless path in the future.

Startups and Volatility

Failed startups and massive debts

Encouraging entrepreneurship could encourage boom and bust cycles, periods of high perception of opportunity, followed by periods of saturation and market decline, according to financial analyst Todd Medema.

The argument he makes isn’t against entrepreneurship in general, but against the looming threat of fad entrepreneurship – unregulated doling of handouts encouraging people to pursue ideas without thorough forethought and planning.

He predicts that if more youth take to entrepreneurship as an alternative to conventional corporate jobs and accrue massive debt in the process of their upstarting and failing, there’s going to be a marked increase in debt-laden millennials, not just from the costs of college education, but also from these failed attempts at entrepreneurship.

The Coolness FactorIt's cool to own a startup

Perhaps as a result of confirmation bias, the overwhelming majority of startups for 2016 according to CIO will pertain to artificial intelligence, virtual reality, or some other IT-oriented field.

The problem is that it’s a self-reinforcing model that encourages further saturation and more vicious competition in these sectors at the expense of less sexy sectors that are just as important such as semiconductors or data storage.

The infrastructural elements of technology are being forgotten because today’s business pioneers look to the biggest successes and see a vista in which IT represents the overwhelming majority.

In a New York Times interview with Meraki spokeswoman, Sanjit Biswas, Biswas complained about isolation. People are far more likely to have heard of social networks such as Pinterest or Instagram as opposed to an IT infrastructure company like Meraki.

The problem lies in talent sourcing. Top talent is flocking towards these sexier industries in droves, making it more difficult for the just as pressing infrastructural companies to hire talented techies and replenish their workforces.

Unrealism in Startup Culture

Startup bubble

Startup culture has grown into a hotbed of number inflation, exaggeration and denial. Companies plow on far past their prime, because few entrepreneurs are able to call a time of death on their business venture.

Instead, they continue to draw funding and resources, incessantly tweaking business ideas further past their original intention in a desperate attempt to keep the funding rolling in.

One of the biggest problems with entrepreneurship today is an inability to fail with grace. They are unaccustomed to indicators of the need to move on, and if they are, they are wont to oblige them.

A Fortune article on the topic of letting go elaborates – startups need to raise realistically proportional capital to their business endeavours – if they can’t, it’s either because the idea isn’t compelling or isn’t mature.

If they’ve knocked on all the doors after a seed round of funding and can’t keep the cash rolling in, it might be time for business owners to move on.

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