Startups // January 14, 20145 Truths About Tech Startups That Many Entrepreneurs Ignore
Posted by Fuze
The overnight success of people like Instagram’s Kevin Systrom and Snapchat’s Evan Spiegel have spawned yet another generation of wanna-be internet entrepreneurs, with dreams of wealth, fame and Silicon Valley stardom dancing in their heads.
Launching a startup is not for the faint of heart. For every Facebook or Pinterest, there are tens of thousands of “disruptive ideas” the tech world has chewed up and spit out, leaving a wake of dismayed venture capitalists, useless iphone apps and failed wunderkinds in its wake.
While we are believers that entrepreneurialism drives the American spirit, we have seen too many overly ambitious people waste obscene amounts of time and (other people’s) money on pipe dreams that, from the beginning, had zero chances of taking flight. This article is by no means intended to discourage or preach. Instead, we hope it will guide at least one person from making any of the fatal mistakes we know can destroy their chances of success.
Are you in the game for the right reasons? Is your idea rooted in reality, or is it a temporary distraction that will eventually lose its charm?
Before you even begin thinking about quitting your day job or squeezing money out of your friends and family to fund your next big idea, take some time to ponder the real motives behind your ambitious and risky behavior.
Here are 5 tech startup facts that every entrepreneurs should pay close attention to.
1. There is a 90% chance you’ll fail
A February 2013 article on Mashable.com pointed to research showing that 90% of all tech startups fail. The web and app-based tech market is as over saturated as ever and it’s getting increasingly more difficult to gain even moderate exposure without a truly unique idea, a thorough marketing strategy and a few strokes of luck.
It takes a considerable amount of time and money to plan, build, market and sustain a website or application. Sadly, many startup ventures never even recuperate the initial investment, let alone become money making machines. The most common reasons for failure are lack of consumer interest and money running out before the concept had a chance to take flight. There are very few second chances in the startup world, which is why those who fold early on rarely make a comeback.
2. You most likely won’t turn a profit for years, if ever.
Most startups raise money from investors to fund their operating costs and grow their businesses. Once you borrow money from a Venture Capitalist, you won’t be rewarded monetarily until A) you return their investment and B) the company turns a profit.
Another downside of borrowing substantial amounts of capital is that your lenders will demand majority ownership of your company, leaving you indebted to them and lacking control of your destiny. Exit strategies put in place by your VC will dictate what happens should the company fail or be acquired. If you are acquired your VC will be paid first, often leaving little in the pot for you or your employees. In the case of a buyout, you may be offered company stock, which will only increase in value if the new company does well. It may take years for the stock to be worth anything comparable to the stress, long hours and volatility.
3. Your idea is probably not original or disruptive
It’s (mostly) all been done. I didn’t say it’s ALL been done; however, coming up with a revolutionary and disruptive concept that will rocket you to wealth and stardom are about as probable as being struck by an asteroid while walking the dog. Just because you are passionate about business and want to fly solo doesn’t mean you’ve captured lightning in a bottle, so don’t try to convince yourself that you have done so.
From my experience, the biggest downfall of young and overly enthusiastic entrepreneurs is their inability to realize when their vision is off base. Blinded by passion and enamored of the Silicon Valley fantasy, they ignore all of the warning signs and plow forward aimlessly. A truly great idea solves a widespread problem that is in dire need of a fix, or provides a service that does not yet exist. As much as your dreams tell you to chase them pragmatism and logic must be present in your quest for tech stardom.
4. You may not offer enough value to make yourself indispensable
One close look at the most successful tech startups reveals that the majority of founders are either web developers or ingenious marketers who personally contributed to the success of their product. It’s important to consider that potential investors will want to know why they should keep you on the payroll. Can you code? Perhaps you’re a marketing and PR mastermind? The best case scenario is that you’ve done this before, successfully. In this case, VCs will give you a right of passage and you’ll have much more negotiating power and “skin in the game”, as they like to call it.
The more you bring to the table the more equity you’ll be allowed to keep and the more your investors will see you as an asset.
5. You may not have the personality to run a startup
Investors are not only looking for good ideas, they are looking for people they believe in. They want to invest in passionate and hard-working people who they can trust. Most reputable investors hear dozens of pitches per week, and as previously mentioned, you need to offer experience and character that makes you stand out from last twenty people who walked through their door.
If you happen to strike a deal, another set of mission critical personality traits will be required. If you are tasked with running the daily business operations, you will be expected to demonstrate proficiency in management of projects, personnel and finances. This means pressure will be high and stakes even higher. Can you cut it in this type of environment? Startups face pressures that typical companies do not. There often are no cash reserves, no second chances and no cushy hours with a set schedule that allows you to lead a normal life.