Start-ups as an enemy of entrepreneurship?

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On July 27, The Telegraph published a column offering a blistering criticism of start-ups and what it’s calling a “start-up culture.” As the column author, Lucas Mikelionis, argues in the header, “Start-up culture is corrupting our youth and killing real entrepreneurship.” Mr. Mikelionis further claims that the start-up culture “has created a myth that has the power to ruin lives.”

For a rather short piece (fewer than 1,000 words), Mr. Mikelionis comes up with an impressive list of grievances he has with start-ups. First, he’s offended by the fact that start-ups go against “traditional business-making practice, where companies respond to the demand of consumers,” a strange claim, if you ask me, but that’s what Mr. Mikelionis says. Second, while admitting that some start-ups did deliver “revolutionary products,” he insists that this is not a rule, but rather an exception, arguing that most start-ups actually fail. Third, Mr. Mikelionis claims that start-ups don’t want to balance their books but prefer instead burning cash at high rate while ignoring market research, another strange claim, to say the very least.

Fourth, and this apparently is what brings Mr. Mikelionis’ blood completely to a boiling point, rare successful startups are not attempting “to create a business with a long-lasting plan,” but instead rapidly sell to “larger corporations…for a handful of cash.” As a result, there is a shift from company ownership to a “never ending game of start-up creation,” a deadly sin in Mr. Mikelionis’ eyes. A minor, but still a corrupting, factor is that inspired by Mark Zuckerberg and others like him, young people “rush out of university to start companies regardless of having no experience of working in the private sector.”

Mr. Mikelionis’ criticism is wrong in at least two fundamental aspects. First, he’s blaming start-ups for high levels of failure while apparently believing that “larger corporations” always do it right. This is absolutely not the case.  Let me quote Chapter 1 from Scott Anthony’s recent book “The First Mile”:

“…of eleven thousand consumer product launches in North America between 2008 and 2010, only six had first-year sales of more than $25 million, maintained at least 90 percent of sale volume the next year…and produced cumulative two-year sales that exceeded $200 million. Six. That’s 0.05 percent.”

So much for the efficiency of larger corporations! Large companies waste mountains of resources to launch products the vast majority of which spectacularly fail in the marketplace–and all that while keeping the balance books in perfect order (well, most of the time). Compared to that, the start-up world strikes me as El Dorado of Success and Efficiency. (Not to get too personal, but does Mr. Mikelionis really believe that all or even the majority of pieces published by The Telegraph, a large news corporation, are examples of journalistic excellence? I don’t think so.)

Sure, I strongly prefer young people graduating from colleges, at least eventually. And yet, it’s so tempting to recollect a number of failed companies, such as Kodak or Blockbuster, whose executive teams were packed with MBA graduates from the top business programs.

The second, and much more troubling, problem with Mr. Mikelionis’ piece is the fact that he doesn’t actually understand what a start-up is. He apparently believes that start-ups are smaller versions of larger corporations that can become such by creating “long-lasting plans” and nurturing the culture of ownership. To this end, Mr. Mikelionis could greatly enrich himself by reading Steve Blank with his famous “start-up is an organization formed to search for a repeatable and scalable business model.”

Naturally, not every idea can result in a repeatable and scalable business model. It takes experimentation and inevitable–and unavoidable!–failure to identify a winner. That’s why start-ups fail, and not because their founders are lazy, stupid or corrupted. And, yes, when a larger corporation sees a start-up with a worthy idea, it’s ready to shovel piles of cash at it. This is how big companies fill their product pipelines these days.

The ultimate winners in this game are we, the consumers; because start-ups help large companies innovate better and faster, bringing to the marketplace new and exciting products. That’s why in contrast to what The Telegraph and Mr. Mikelionis say, start-ups don’t kill “real entrepreneurship.” They are real entrepreneurship.

Image credit: http://www.forbes.com

About Eugene Ivanov

Eugene Ivanov is a PMI-certified Innovation Management Consultant who helps organizations increase the efficiency of their internal and external innovation programs.
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6 Responses to Start-ups as an enemy of entrepreneurship?

  1. Brendan DUNPHY says:

    I think he is right in one regard and that is that too many start-up’s are not interested in creating value in the long term, but rather selling a dream, whether to themselves, secondary investors or corporates.Long-term business value creation is a slog and way less attractive than a few years of very intense and potentially very lucrative work – dreams always sell better than reality!

    • Brendan

      Your argument is self-refuting.

      If a start-up is interested in selling itself to ‘secondary investors or corporates’, then it MUST be interested — in some sense — in long-term value creation.

      Assuming, of course, that secondary investors and corporates are not in the business of purchasing soon-to-be-valueless enterprises!

      Justin

      • Brendan DUNPHY says:

        Not necessarilly Justin. In my experience the long-term ‘story’ is too often a means to releasing short-term value i.e. the sale. Take a look at the research on M&A and see how they fail to create the promised value leading to often massive right-off’s and it’ll give an idea of the scale of the problem. The motivations for acquisition (and sale) are often not what is said or how they appear to be on the surface! Best, Brendan.

  2. Hi Brendan,

    Thanks for your comment. Honestly, I see no problem here. Why does value need to be necessarily created in the long term? What is wrong with a “short-term” value? As far as I’m concerned, if (and this is a big “IF”) startups create value–any value–I’m fine. I think that you and I know pretty well that the real problem is different: that large companies struggle to produce value in the long-term, reducing their efforts to short-term gains. So I’d focus my fire here.

    Best,
    Eugene

    • Brendan DUNPHY says:

      The problem is that ‘value’ means different things to start-up’s vs established firms and what counts as ‘value’ for one is of little value to the other. For example, most start-up’s fail or are sold-on before they make a proft. Profit is something valued by established firms but not essential to start-up’s who are focused on building assets & capabilities that if/when scaled may make a profit. Start-up’s can get away with things established firms cannott because their risk appetite is so much greater, their founders work for nothing and bet their home, they cream ‘greed capital’ from many places etc. This is good but the two are entirely different species and too many start-up’s are woefully un-innovative ( if I see another mobile social media venture I’ll cry…), poorly managed, have excessive expectations and only survive because of tax breaks that subsidise high-risk investment. Too many (not all) start-up’s now cynically exploit this distorted market and have no intention of creating real value, burn available capital and sell-on whatever assets they generate along with their inflated visions to the naive and fearful, if they can get away with it.

  3. Brendan,

    I agree with 90% of what you say, but, again, can’t see anything “wrong” in the start-up system. While I hate the term “ecosystem” (as I hate every biological term applied to social and economic things), we do have–or at least, are supposed to have–a system when different actors play their specific roles. And there is no reason to blame one group of actors for refusing to become another. Yes, we can grumble that startups are enjoying tax breaks. Other than that, if VCs are ready to give them money; and if large companies are ready to buy their…whatever they sell, why should we care? It’s a capitalist system after all!

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