It’s the pandemic, we are all stuck at home twiddling our thumbs, and everyone is anxiously looking for ways to make the best of their money — anything but holding it in cash — and fuelling massive expectations for hot new stocks.
For the fintech and startup world, all eyes turned to Ant Group, the most anticipated stock debut in a decade. Many believed it would have made them instant millionaires, and so many scrambled to borrow to get a place in the incredibly oversubscribed IPO.
Now, their hopes are gone. Instead, Ant joins an increasing list of highly anticipated startup exits that have had spectacular implosions, most notably WeWork.
But many others have simply seen a big pick-up after a much-hyped debut, then what follows is a pathetic fizzling out of investor interest, a subsequent decline in valuation, or an undiscovered incongruence with regulator requirements.
The philosophy in the startup world is often very “short-termy” with players prioritising huge glitzy exits within a few years, and not the long-term longevity of the firm.
This entire model depends on insiders hyping up the massive growth potential of the startup, and inculcating a fear of missive out (FOMO) mentality to outsiders — the belief that this IPO is the last chance to get in on a meteoric fortune making scheme.
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But this belief is propped up by key myths in the startup world. These myths are like shiny hollow marble pillars that can end up holding up unstable business models and rotting insides.
Myth 1: Growth is all that matters
This is by far the most pernicious myth that fuels startup mania. Grow or die. Grow at any cost. Grow even if it means being in the red for months, or even years.
Of course, the chief guru that demonstrated the efficacy of this model was Amazon, which did not report profits for years, preferring to pour money back into R&D as well as focusing on market share. This has paid off in dividends, and now Amazon is the undisputed master of the e-commerce world in the US.
But we have to remember that Amazon required massive reserves of capital to pull this off, operates in an industry that has significant network/economies of scale effects, and also enjoyed relative freedom from anti-trust actions/few viable competitors. This is not a game everyone can play, and not every industry can exist with one dominant player.
In the meantime, the core business model still matters. Margins matter. The problem of too many startups is that while they can pour money into trying to gain market share, too often they come in when other players are doing the very same thing.
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One only needs to look at the state of the e-wallet industry today. Massive subsidies to gain market share and customer eyeballs only to be supplanted in the following year by yet another player coming in with big pockets. It becomes a race to zero, a price war where what is won isn’t customer loyalty, but creates a consumer mentality of constant discount seeking.
We have to remember that growth is ultimately serviceable only if the business model itself is viable and can have long term sustainability.
Myth 2: It is all about the tech
In the startup industry, we tend to fetishise technological innovation over humbler innovations of a different business model or relationship with customers.
Undoubtedly, tech often enables new models or dynamics, but we must balance that with a broader view of innovation that takes into account talent, management, business models and partnerships.
In my experience, many firms may start out with a technological advantage, but due to an inability to retain talent, lack of foresight by management, or short-term views, they tend to lose out to firms with inferior tech but build gradually and catch up over time.
My advice when looking at these startups is to look beyond the tech. The tech is often the face of the company; look into its heart and mind.
Myth 3: Disruption is the name of the game
Run fast, break things, and mend them later. That’s the modus operandi of many startups who openly flaunt regulations, tempt the ire of the law, stick their nose up to traditional players, and are explicitly antagonistic to the “old way” of doing things.
Along with this is an emphasis on speed. Uber did this when it operated in multiple jurisdictions illegally (and then later in a grey area) and prioritised frictionless on-boarding of customers without requiring any know your customer (KYC).
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It has now been revealed that such policies in Brazil led to multiple murders of drivers where criminals posing as customers with fake registration details robbed them of cash. The US Department of Justice also previously pursued multiple investigations over Uber’s alleged bribery across Southeast Asia.
The truth is that being bull in a china shop only works when you don’t later have to come back to that very same shop and settle there. This is what has happened to many fintech and blockchain firms which have snubbed banks along the way, only to find that as they grow, banks often end up being the biggest potential customers for their services.
The key is not disrupting for the sake of disrupting — solving problems in a stagnant industry is important — but so is building a sustainable ecosystem of partners for the long term.
At the end of the day, startups often have lacklustre post-exit options because of these myths that create a culture that ends up justifying short term plans and myopic views.
While those who make a quick buck off the exit may still profit, it ultimately hurts consumers and those genuinely interested in building the next big business.
As entrepreneurs and business leaders, we have to begin dismantling some of these myths and demand a more clear-eyed view of the realities. Then, maybe, instead of stumbling headfirst onto the platform, we can have graceful entrances onto the stage.
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