When you invest in ten different startups, six of them will fail, three of them will do well and only one, if you are lucky, will have an impact. Investing is all about betting in people and ideas. However in the last years, people have started liking numbers and user interactions with the product. The more users startups have, the more the valuation goes up. They don’t care about how much you are making or how much you’ll make, they just want to see how many users you have.
The game is all about people. If you have got 50 million users per month, but are not making a single cent, you are doing extremely well. I disagree with this. I think Entrepreneurship is about innovating and creating sustainable businesses. If you think that an acquisition can solve your problem, you haven’t got the point of the game. Why would you be acquired? You are building something that should be able to stand on its own two feet. An acquisition is the last thing startups should consider if they are really struggling.
Money doesn’t play a huge role, but it’s important to focus on it from the start. I’m not saying that you should write twenty pages of business plan, but it would be interesting to have an idea before actually shipping. The app market is overcrowded with startups that don’t have a clue how to make money and yet they get billionaire valuations. Think about Instagram and Snapchat; Instagram has started its ads program after Facebook’s acquisition, before that, they were just relying on investors’ money. In a similar way, Snapchat doesn’t have a clue how they’re going to make their money and I don’t even think they are actually planning to do something about it.
These are the so called “trends”. How long is Snapchat going to be “the hot” thing? It’s a two years old startup that has raised $73 million in funding. The question is not how long they are going to live, but we should wonder when the next trend will overwhelm Snapchat, which is probably waiting for an acquisition. Trends are not businesses, they are simple ideas with million of users that can easily get acquired. Within these trends, we are actually able to see the ashes of the past tech bubble.
Twitter is playing a similar game, even though it doesn’t fit in the trend category, because they have, at least, tried to make some money. However, after more than seven years, they are not still profitable. There was a lack of planning in the early days, which reflects the difficulty for internet companies to make money from ads, which keep costumers away.
What we think you should build in the end is a sustainable business. Even if you don’t want to introduce a way of making money from the beginning, start thinking ahead. The worst thing you could do is to plan it, when your last chance is to go for another round. Do you really need $73 million? No, you don’t. What you need is to become a sustainable business and stop being a trend. Trends don’t stop, people like them for a couple of years, then they move to another thing.
Snapchat is doing really well with more than 400 million photos shared daily, but a $4 billion valuation is too much for something that is not making any money. Investors have fun speculating on the number of users, but in the end what you earn makes the difference between being alive or going for another round (or an IPO) because you are dying.
In the past months, we have seen remarkable startups, such as Path cutting their stuff because they are not making money. Being hired in a start-up is a risk, but why would you fire someone that you have chosen to hire? Plan these things, look at the big picture and if it makes sense, start shipping now.