By Janelle M. Lewis, Principal Attorney, The Law Office of Janelle M. Lewis
Startups differ from traditional business model in a number of ways. While traditional businesses – such as SMEs – tend to be risk averse, looking at the long-term for potential success, startups are risk-based and temporary in nature. Traditional businesses usually operate using a sustainable business model with known customer bases, while startups are always searching for unique, profitable business models and seek to create demand rather than rely on existing demand. If viewed on a spectrum, traditional businesses are seen to be on one end of the spectrum, while startups are on the other side.
With all the many differences between startups and traditional businesses, there is one major difference in the business models that would seem counterintuitive to most – profitability. While it is the primary goal of traditional businesses to make a profit, the same cannot be said for startups. In fact, profitability is not only less important to startups – many don’t make a profit and they do not care. But why? How could it be that a startup founder does not place high importance in turning a profit? And how could it be that startup unicorns, such as Uber, Lyft, Pinterest, and Snapchat have billion dollar valuations but operate at a profit loss – in other words, they are not profitable businesses.
With all the many differences between startups and traditional businesses, there is one major difference in the business models that would seem counterintuitive to most – profitability.
The answer: it’s all about growth and scaling. According to an article written by Kate Clark from TechCrunch, “In Silicon Valley, investors don’t expect their portfolio companies to be profitable…[and] as for Wall Street, it’s shown an affinity for stock in Jeff Bezos’ business, despite the many years it spent navigating a path to profitability, as well as other money-losing endeavors. Why? Because it too is far less concerned with profitability than market opportunity.” In a recent article by the Wall Street Journal, 2019 has seen tech unicorns with big (billion dollar) valuations, but little to no profits, for the same reason – because of, “…investor enthusiasm for established, high-growth tech businesses.
What does this mean for the average startup? The idea behind a unicorn is that it is rare – so how can every startup aspire to be rare? And what does this aspiration mean for making a successful business? And what will happen if the tech unicorn bubble should burst – like the dotcom bubble in the 2000?
Coming of age myself during the dotcom bubble (then burst), I am starting to wonder what will happen if the tech unicorn bubble does burst – but that is an article for another time. The purpose I have for writing this article is to challenge the 99.9% of startups that are not (and sorry to say will not be) unicorns to reconsider their business models.
It is estimated that 90% of startups fail, and many reasons such as lack of focus, experience and knowledge have been seen as the cause for the large rate of failure. The most salient cause of startup failure, however, is the lack of importance placed within the startup ecosystem to run a profitable business. In other words, a major reason why startups fail is because startups aspire to be the next unicorn instead of a profitable company.
The most salient cause of startup failure, however, is the lack of importance placed within the startup ecosystem to run a profitable business. In other words, a major reason why startups fail is because startups aspire to be the next unicorn instead of a profitable company.
The factors that make a startup a startup, such as risk & innovation, need to be paired with the factors that make a business successful, such as planning, strategy and profits. Startup founders that want a successful company – and not a unicorn – need to start seeing themselves as businesses and look to profits to sustain their company. Does this mean that startups can’t make millions without investor money and unbelievable valuations? Absolutely not, in fact, in his blog last year for startupgrind.com Daniel Ndukwu, speaking to this same phenomenon from the point of view of an entrepreneurs, references two companies that relied on sustainable business models with investor money – Buffer and Litmus.
The factors that make a startup a startup, such as risk & innovation, need to be paired with the factors that make a business successful, such as planning, strategy and profits.
Why can’t startups merge innovation, disruption, and creativity with sustainability? Why shouldn’t Buffer and Litmus be the role models for startup founders instead of Uber and Pinterest? To profit or not to profit – should it even be a question?
The views expressed in this article do not constitute legal advice and legal information provided in this post should not be relied upon as legal advice. Please contact an Attorney for advice on your specific matter.
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