Debunked: 5 Startup Myths
Even though there isn't a formula for success--otherwise there would be a lot more of it--you want every edge you can get. Knowing what works, and potentially more important, knowing the warning signs when things aren't working can make all the difference.
The Wall Street Journal's new tech blog offers five things startups do before crashing. Based on an interview with Gonzalo Martín-Villa, chief executive of the startup incubator owned by Telefonica, Spain's big telecommunications company, the list is useful enough, though predictable. For example, hire the wrong people, completely ignore the market, and ignore the need for revenue are three of the bad moves. Furthermore, these are problems long before a startup is about to crash.
However, the third one about ignoring the need for revenue reminds me of a host of business myths that are in need of debunking. There are patently ridiculous concepts that take hold periodically in business--too often from the high-tech camp--that can lead otherwise hardworking and intelligent businesspeople into a fantasy land that shatters at the first hard rap of reality. Here are some of the ones that seem to keep lingering.
Who needs revenue?
This is such a pernicious idea that it deserves a little extra attention. High-tech companies, urged on by venture capitalists, got this crazy idea that if you could amass enough users, you would be sure to find a way to make money from them. Instagram would seem to be a perfect example. For a while, it wasn't running ads or charging for use. Facebook bought the company last April and then, toward the end of 2013, Instagram announced its advertising plans.
Hardly a surprise. You can't keep doing business without making money. Someone has to pay for the salaries, the infrastructure, the office rent, and the utilities. It may be that advertising was always in the back of the minds of the VCs when they urged companies to scale up. But you run into some problems. Customers get used to free services and may resist the idea of paying or even looking at ads. Plus, when too many companies try this approach, the online ad market gets even more saturated than it has been, and making money becomes next to impossible.
If you don't have at least some idea of how to start making money, you're doing something wrong. Even if you have an idea that ultimately doesn't work but gives way to a more substantial approach, you're at least trying. And that's what you need to do constantly to succeed.
Companies are only about growth.
Again, utter nonsense. You might find a sustainable and profitable size that makes sense to maintain. Or you might want to expand your company. Your investors will like growth, but will also like stability. When growth is the only thing on your mind, you and the business can get a little crazy. Remember, unconstrained growth in a person is called a cancer.
Want an example? Look at the early days of Groupon. The company poured everything into growing and wound up in a fine mess, particularly as insiders pulled cash out of the company at a time when it needed all the capital it could find. It had to go public just to get more cash in the door. Now, its stock price is a third of what it was when it was first traded in 2011. The business model just wasn't one that could scale indefinitely, which some attention on more just fast growth might have suggested.
There are a lot of middle-market companies--ranging in size from about $10 million to just under $1 billion in annual revenue. Many of them have created viable businesses without the expectation of constant double-digit growth.
CEO personality is key.
No. No. No, no, no, no. Don't go there. Referring back to Groupon, think of the following phrase: former CEO Andrew Mason. Or think about clothing: How much trouble could American Apparel, Abercrombie & Fitch, and Lululemon have avoided without CEOs whose personalities included firmly and repeatedly placing their feet in their mouths?
Customers don't care about a CEO who keeps quiet. Investors appreciate a CEO who's smart in business dealings and otherwise stays out of the limelight. Really, what do you have to gain from being a media darling? If you wanted to go into showbiz, you should have taken an acting class.
Location, location, location.
Too many entrepreneurs get it into their heads that they can only be successful if they're in the right physical place. I don't mean having a good spot in retail; that makes complete sense. No, right place as in you need to have your office in this city, on this block. You've got to be part of the scene.
Unlike some of these other myths, this does have a starting point in reality. If there's a hotbed of activity in a given industry--like Internet companies in Silicon Valley--then there may be more talent available and more investor focus in a particular locale. But as things get hot, people focus on the giants and the stylish up-and-comers. There's talent everywhere in the country (you don't think all those people were born near San Francisco, do you?). And when you have less competition in your area, you may have an easier time attracting that talent. Though there is something to be said for a lack of snow.
No need for marketing, we have social media.
People who think this should step away from tweeting for a while. All of your competitors are on social media. All of everyone else's competitors are on social media. That's a lot of chatter. To get people's attention, you'll need to--oh yes, you will--market yourself. Not just on social media, though it's a great platform, but through PR, online ads, billboards, and whatever else works for your business. Testing will tell.
It would be nice if some of these myths were true. Wouldn't you like to drop your revenue concerns or know that posting something on Facebook was moving your business plan ahead? But work is, at the end, still work. Learn to enjoy its reality and you might find the success that can follow is very real.
ERIK SHERMAN | Columnist
Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.