I have had the special opportunity to meet with a significant number of startup companies over the last few years. I call this a “special” opportunity because, pretty much universally, the representatives from these companies have been highly motivated and very intelligent people who really wanted to create something unique in addition to succeeding financially. Money is not evil. It is a tremendous means to an end. And for the startups I have met, it has almost always been first about the idea and secondly about the financial windfall.
One caveat – my experience is limited to medically oriented startups. It may have been a device startup, or a biotechnology for cancer treatment. But the startup people I have met have been in the health and medical fields. So, please consider this when reading my comments below.
Oftentimes, a startup company is small. It may only be 2 or 3 people, who have come together for any number of reasons. It may be one person who has a “moment” and then shares the idea with 2 close friends. Hopefully, the group of friends have a technical background so that they can evaluate the practicality and financial market for their idea.
Unfortunately, far too many startups end up failing because the most basic questions were not asked, such as
- who is the target audience
- is there an equivalent product on the market
- do people feel a need for this new idea/product
- how much are people willing to pay for it
- do I plan to offer the idea/service for free and hope that a big company will buy me out, and many more
Sometimes, these questions are asked but it is the startup group itself that answers them, all without doing any research or asking outside opinions. It is amazing how obviously valuable an idea may be to the ones who came up with it, but effectively worthless when you try to sell it. So, a startup company must get some type of validation of their idea/product/service from an outside, unconnected source.
What happens when 2 or 3 people, who are not within the inner circle of the startup group, listen to the “pitch”, nod supportively but then answer “no” when asked if they would use the product. Needless to say, if they would not use it, they also would not pay for it. From my experience, this negative feedback can be very difficult to swallow. Some of the startup group may react by quitting. Some may ignore the feedback arguing that “until the service is fully up and running” it will not be possible to appreciate the product. And some, hopefully, will take a step back and really consider if the idea has real potential, or if it must be seriously reworked (or even changed) in order to succeed.
There is another major factor that many startups fail to appreciate. An idea is a wonderful thing. It can spread like lightning, it can influence people, it can even change the world. But for an idea to make money for the one who conceived of it, there is often the need for an initial investment of hard cold cash. And this initial investment may be millions of dollars due to the complexity of the idea.
I have met a number of startup members who have this sense that investment groups are overflowing with money that is effectively available for “play”. In other words, the investors have so much money that it is no big deal for them to invest a million dollars in the startup’s idea. And more so, the startup’s idea is clearly so brilliant – so earth shattering – that the investors are lucky that they are getting to put money into the startup.
The next shock comes when the investors offer far less than a million dollars and want in return a BIG percentage of the company. So, the startup (with its 3 people) has come up with a new device for tracking air quality. Of course, every parent will buy this device because who would allow their child to go outside when the air quality is poor. And of course, 200 dollars for such a device is a steal. And then of course, there is the yearly subscription fee of 10 dollars a month for updates to the system. Now, the investor comes along and tells the startup team that the idea has a very low chance of success (for reasons you probably can imagine on your own) but still, the investor is willing to put in 100,000 dollars for 30% of the company.
The startup team doesn’t know if they should scream or cry. $100,000? That is nothing. What can you develop for $100,000? Who will pay the rent for their offices while they develop the idea? Who will pay their salaries? One of the team left a solid programming job to wholly devote his time to this project, and now, it sounds as if this product may never make a penny. The startup team fakes a smile, gets up and walks out of the meeting. The team meets with 2 more investors over the next couple of weeks and does not even get an offer for $100,000. And so ends the dream.
Now, if you are lucky, you find out that your idea will fail, very early on. There are many startups that have been running for years, making a living between some income from their product, and more money from investors. It could easily get to a point where the creators of the product are left with a small percentage of the company due to all of the shares that had to be sold off, to get more investors. And even after all of this, it may be that the company will fail. There are startup members who lose their homes because they invested their personal fortunes in their startup. This is one of the saddest possible outcomes.
If all of this sounds scary and make you wonder if beginning a startup is worthwhile, then good, I did my job. You SHOULD be very wary of betting time and money you do not have on a startup. I have still left out a lot about the technical aspects of running a business and finding a proper CEO and dealing with FDA approval and getting insurance and dealing with employees. For every Google, there are countless startups that fail. It takes vision, skill, humility and lots of luck to succeed. It definitely happens. Sometimes to a small extent. Sometimes big time and it is these cases that usually are displayed on the front page of the newspaper. But one thing is for sure – startups are from the hardest work around. If after reading what I have written as well as many other sources on startups, you still believe that you can make it, then I wish you the best of luck. It is people like you that may very well change the world.
Thanks for listening.