Jim Duffy comment: Dodging pitfalls on the path to start-up success

As the start-up industry has mushroomed, so the investors have started to run it, says Duffy. Picture: Ian Howarth.

It is now a legal entity going out into the big wide world. But the term has taken on so many meanings over the last ten years that what I want to reference as the ‘authenticity’ of start-up has been lost. For many reasons…

Firstly, start-up has become an industry. There was a time when an individual or a couple of potential business partners would simply get together and start a business. It could be a simple affair like a shop on the local high street. It could be a new plumbing business where the newly-qualified plumber has bought a van, stuck some graphics on it and popped a few flyers through local doors. All totally viable and acceptable business formats. But not in the industry of start-up.

The individual has become a ‘founder’, in the start-up parlance. His or her business partner is a ‘co-founder’. The format is now a business model. As for manufacturing, owning a shop or van, that is so yesterday in the land of start-up. Acceleration, equity funding, cap tables, pitches and ten times value are all the bread and butter of the start-up industry. Of course, the ‘entrepreneur’ badge of honour is commonplace in this industry. But the big game-changer in all of this industry has been tech. One has to be in some form of tech from food tech to agri tech, to law tech to fintech to travel tech and so on. This realm is where the term start-up manifests itself the most. In short, it is the start-up industry.

Then we have business accelerators, incubators etc. Places and spaces where start-ups can learn, grow, get funded and meet great mentors. Having been involved in these spaces, I know how well they can work, although they are not for everyone.

These spaces boost start-ups and many of today’s start-up investors swarm around them looking for little start-up gems to invest in. Ah, yes – the investor. Start-up ecosystems, to use an overused and misleading term, need investors. Investors from small angel syndicates to larger venture firms fuel rapid growth in start-ups.

Many have great mentors, experts, potential board members and so on. But, as the start-up industry has mushroomed globally, so the investors have started to run it and not the entrepreneurs who start up. The investors want eye-watering returns. Or should I say the big venture investors. These folks want to create “unicorns”. Ostensibly, a unicorn has been created to ram as much value into a start-up as quickly and as aggressively as possible. The quicker it can be groomed for an initial public offering (IPO) the better. And to hell with the consequences. It’s mind-blowing and bamboozling to think that 11 of the highest-profile unicorns looking to IPO this year in the USA are profitless and have built up losses of $47 billion (£34bn)!

These companies, and I use the term loosely, will need to increase their sales by a compound annual rate of 49 per cent over the next ten years to generate a return on current valuations. In short, they are not profitable, but have made their investors megabucks.

The Silicon Valley doctrine of “blitzscaling” in order to conquer “winner-takes-all” markets has left many scratching their heads as how these new superstars of the stock market will pay their bills in the next decade. While everyone at IPO stage is in the money, the start-up, as was, is now left to live up to its valuation. One only needs to look at Lyft, the taxi hailing app, which is now being sued for overstating its claims on value.

Start-up as a term has now come of age with crazy valuations and unicorns that are, in effect, worthless for generating revenue. The industry is overheating and the next five years may see some interesting fallout. I hope anyone starting a business now keeps it real and doesn’t get too sucked into a potential black hole.

Jim Duffy MBE, Create Special.