On the 8th of January 2018, the US government attempted to launch a satellite, USA-280, through SpaceX using a Falcon 9 rocket.
The rocket managed to just make it to orbit before disaster struck. The payload never separated from the rocket because the payload adapter didn’t work. This meant that the payload was stuck to the second stage of the rocket, and fell back into the atmosphere right along with it.
All of this happened after a perfect launch by SpaceX.
A startup is a business (the payload) strapped to a rocket. Sometimes the rocket malfunctions before the payload is secure, and the business dies. But usually, the rocket is reliable; except the payload (business), often turns out to be a dud and dead on arrival. Causing the rocket’s expedition to be effectively deemed useless.
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“a rising tide lifts all boats..only when the tide goes out do you learn who has been swimming naked.”
—Warren Buffet
The tide is receding now. No surprises as naked bodies have begun to litter the startup scene. Many founders were fortunate to catch generous windfalls during the last few years of rosy, fairy tale outcomes. The bar was so low that many got away with doing the barest minimum and came away thinking they were geniuses.
When conditions are exceptionally great, even bad businesses make money; when the storm shows up, many are exposed. The inverse is also true: successful long-term businesses record their biggest wins during low tides as they snatch market share from the naked swimmers.
This essay was originally conceived as a response to a conversation with my wife about young founders and the startup craze; why they struggle to build sustainable startups, despite mostly starting out with a bang and lots of fanfare. Also about how founders with little interest in thoroughly understanding business (because it’s boring), are jumping into building startups, only to crash and burn months later.
I am sure that, outside of my observations, there are tons of other possible reasons, ranging from great idea + poor timing, to bad idea + poor execution, to bad team + poor decision, and many more.
On closer look, I notice a much more insidious pattern hiding in plain sight: founder-business-expertise gap. More specifically, that most founders do not understand the fundamental science (and art) of doing business.
Building a business is not very sexy. It is hard and it is gruesome. It is not the photo ops and glowing press coverages. Raising funding isn’t even the hard part. But yaay! You’re a founder now.
After the party dies, the hard part truly begins. You realize that optics do not keep the lights on. Sooner or later, you have to learn how to run a proper business and turn a profit.
New founders are better served by first building real interest in thoroughly understanding business strategy, filling their business understanding gaps, before jumping in to build startups —which are really just supercharged businesses.
Understanding business teaches you to solve the most profitable problems you’re uniquely positioned to succeed at, and then scale up from there: either deeper (new verticals), wider (adjacent markets), or even both.
Driven by the simplistic idea that a great product sells itself (which is partially true, by the way), many founders have jumped on the startup train to “solve x problems for y” without a clear, thorough business path to boot.
Extreme startup culture —especially VC— has deluded founders into thinking they are exempt from the boring rules that apply to building a business. An example is the ambiguous idea of “growth at any cost”, which is both an accelerant —to good or bad outcomes— and a filter to differentiate good business men from the bad.
Because, at the end of the day, rapid growth is intended to fast-track profits at scale. It is not a game. A good businessman can successfully accelerate to profitable outcomes using “growth at any cost”; a bad businessman will not.
All fancy lingo aside; starting a startup is, at its core, starting a business to undertake risks in various forms, in order to derive a profit. A lot of founders think of startups first as unique opportunities to present their ideas to the world. They consider almost every other thing an afterthought. Hence, the culture of “fail and fail fast”.
I hold the opinion that, in evaluating startups, the fundamentals must include the following questions: what is the true business opportunity here? How much (and what) is the value that can be ultimately extracted from the value created?
This can lead us to agree that the following is true for startups: a poor business makes for a bad startup, and a great business makes a good startup.
A business model is only a first step toward building a real business. Imagine if founders learned about business from first principles, versus just relying on default assumptions and sentiments.
This is demonstrated by the hubris of many founders who assume a great product must implicitly mean a great business. Sometimes, however, they overlap, thereby fooling founders into thinking they are one and the same.
Being a good business person teaches you how to really see what people need, not simply running off to offer what they said they wanted —like most founders do.
Most do not realize that the chances of successfully building a profitable venture is largely predicated on first being a great business person. Being a good businessman helps you build products that make customers beat a path to your door, begging you to take their money.
I observe that many new founders are taken in by the allure of fancy turtlenecks, saving the world, and becoming the next Steve Jobs and Zuck. they forget that behind the technical genius were incredible business savviness. The Silicon Valley hype culture sells people the idea that they too could be hip founders; building cool shit, all without a solid grasp of business fundamentals. “Just be an innovative genius like Steve Jobs and code a great product like Zuck from your mom’s basement, and the stars will align.”
I have a radical theory: that if startup founders first think about startups as businesses —not fun games—and consequently sought to be better businessmen, the outcomes for most startups would be positively different from what it is now.
Anecdotally (with very few exceptions), all great startup founders tend to be fundamentally great business men, with a keen understanding of business. Conversely, most founders are bad businessmen. Which is why I maintain that founders are better off learning what makes a good business before ever building a product.
Being a founder is mostly an adventure to create value, and to profitably capture said value created. My definition of business is simple: choosing what problems to solve, and, figuring out how to effectively solve them, while minimizing risks and creating profit.
A simple filter for most founders would be: are you building a startup for the hype, high status and prestige, or do you want to actually make money?
Of course, there’s no such thing as “making money”. True. Only solving a problem; which is then rewarded by money, in proportion to the severity or importance of the solution provided. Also true.
It is therefore the ability to know what profit-weighted problems to solve, and how to solve them that constitutes a great sense of business.
Otherwise, a founder could solve just any problem and bitterly learn that merely solving problems, or —worse still— pretending to solve problems, isn’t entirely how money is made
The goal of every founder —after identifying an important, lucrative problem— should be to build a viable business from day one. Optimizing for vanity metrics and is not a business strategy.
