Too Many Startups: We Need the Solution to These 2 Problems

To begin, I have nothing against someone trying to start a company. And I love the fact that people are doing whatever it takes to make a living, or go for the gold, or both. But I won’t stop saying there are too many startups out there – so what’s the problem with too many startups? In fact, I don’t have an overall problem with that – again, I love the fact that many people are looking towards entrepreneurism to support themselves rather than finding a job (or the lack of finding a job in today’s jobs environment). I may talk about investors having too many to choose from, or the growth of competition stifling the ability for anyone to get big, but in general, I don’t have any issues with there being as many startups as there wants or needs to be.
My issue with the proliferation of startups boils down to 2 problems in dire need of solutions. Here they are:
Entrepreneurs are to the rest of the workforce, as Navy Seals are to the rest of the sailors in the Navy
In meeting with many entrepreneurs, I find that many lack a lot of the crucial characteristics of really making it as an entrepeneur. Everybody wants the good outcomes, but they are unwilling or lack the ability to gut through the bad parts. They lack the essential personality traits, like adaptability, able to deal with chaos, a never quit attitude, the ability to keep going no matter what even if it means their lifestyle is threatened. Or they have some notion of what it takes to build a company from scratch – maybe they took a seminar or read some books – but they did not actually take the time to work in a startup or build a business from scratch with someone more experienced to see what it is like and learn (by the way, one of those things they may learn is that they are not cut out to be entrepreneurs!). They all want to be entrepreneurs, but for some reason do not have the right characteristics or training.
This where I liken entrepreneurs to Navy Seals. We’ve probably all read about the crazy training that Navy Seals go through. According to Wikipedia’s Navy Seal page, the drop out rate is over 90%. And that’s after being selected from the normal soldier ranks for having the *potential* for becoming a Navy Seal. Not everyone can become a Navy Seal and their training is designed to weed out those who lack the essential traits that every Navy Seal must exhibit or else they put their mission and their lives in danger.
Entrepreneurs experience of their job is exponentially more intense than that of someone who has a normal day to day job. Like Navy Seals, not everyone is cut out to be an entrepeneur. But yet we set 1000s of people each year off thinking that they can become entrepreneurs.
We desperately need some better training systems and systems to help people determine whether they have the right personality make-up to be great entrepreneurs. What we have today is not enough. Book learning at college is not enough, and neither is a day long seminar.
Perhaps there are those of us who would say that setting them off into the real world building companies is the right way to go. Yes that may be true, but I would love to find a way to do it that does not require investors to put up their hard earned capital just so people can learn how to do it better, or learn that they weren’t cut out to be entrepreneurs in the first place.
We desperately need a way to fund startups that become small to medium sized businesses
Suppose you find a way to become a Navy Seal like entrepeneur or something close, and you work on an idea that seemed awesome at the start, but resulted in something less so. Instead of generating 10os of millions of dollars a year, it only generates a few 100K/year, or maybe millions.
At that level of progress and revenue, the company is doing great. It is generating money, paying real people to work for them so that they can support their families, and outputting useful products and services to others who need them.
For the record, I LOVE THIS. Our economy is in shambles and we need more businesses that simply employ more people. If you walk down the streets of Palo Alto, you see so many small shops that are now closed; so many For Lease signs even in a place like Palo Alto. Our country needs to fix this. The banks aren’t helping and new business creation requires other avenues for funding.
These companies don’t need to IPO, they don’t need to be acquired. They have great reasons to exist in their current state forever and generate enough money to support all their workers and the products and services they provide.
The problem is that we are funding startups like they all are going to IPO or get acquired for tons of money. We are not accounting for the case where the business levels out at a much lower place where IPO is not possible, and the likelihood of M&A is also very low. If a startup reaches a much lower place, we investors’ money is essentially trapped within the company; the company has no real way of repaying the investors unless they are making a lot of cash.
We often meet startups which are really cool and interesting, but when we look at the team, product, vision, and the macro factors, we sometimes can tell pretty early that this company is heading towards small business status. Sometimes the startup is cool enough for us to really want to put money in but cannot simply because we do not know how to get our money back, or make money when the deal is structured like a traditional startup financing and we are trying to make money from equity ownership. So if something smells like it won’t get big, often we won’t invest simply because of that.
Having said that, and despite the fact that we investors think we know everything (HA!), we really sometimes don’t know if a startup will end up as a small business or grow to IPO or M&A greatness. But I would argue that the immense proliferation of startups makes it highly unlikely probability wise that someone you meet will get huge; on the other hand, the probability that they will make it to some smaller state of revenue generation is much much higher.
Thus, it is my belief that our ecosystem desperately needs some way of financing startups that takes into account success at IPO/M&A greatness or success as a sustainable, smaller, revenue generating business. If we have this, then we should be more comfortable investing in more startups since we have greater comfort that we can get our money back or even make some money on our investment, versus seeing it essentially static within a company where we can never extract it.