Everybody can be working while nobody makes money
// November 30th, 2011 // Other news
Meeting with someone this week who wants to leave their job and build a tech startup, he hit me with this argument: “There are already three other startups doing something similar in Australia, they’re all growing really fast, so there’s clearly money to be made”.
Sorry, but no.
I remember when I was co-founder of a particular startup that was in a very ‘hot’ space — we knew this because there were six other startups in Australia doing something similar, we all appeared to be growing fast, and similar businesses in the US were getting press coverage every week about how quickly they were growing.
Yet none of these startups was making money. In fact, we were all losing money — some more rapidly than others. We were all betting on the market growing, betting that our cost of customer acquisition would come down as we learned more about the best marketing channels and tested different forms of conversion.
Some of us were backed by large corporations, some of us by venture capitalists and some of us by angel investors. You’d see our brands everywhere, in banner ads, newspapers, on the backs of buses and even in television commercials. You read about us in the technology press at least monthly. To the outsider, we all looked like successful businesses.
But we all had one thing in common: we had a certain amount of money and time in which to create a profitable business.
We were test pilots, given a plane loaded with debt and a runway from which to make it fly. We could throw out things and people to make it lighter, we could add more marketing or tech engines to make it accelerate faster, but the weight, speed and runway length were all connected variables. We knew some of our planes wouldn’t get into the air, but it wasn’t going to be us, so we and our competitors kept heading down the runway.
Don’t make the mistake of thinking a hot startup you see mentioned everywhere is evidence of a successful business, or that a crowded space in the tech startup sector is evidence of a successful business model.
Where are they today? The majority of our competitor’s planes crashed or exploded while still on the runway. We sold our passengers and their luggage to a competitor — our ejector seats worked, and we got to keep all our arms and legs and most of the airframe. In the US (which despite all the similarities, is a very different business environment) only one plane really got off the ground. None of the Australian startups in that space survive in their original form. Personally, I don’t regret pressing the ejector button.
I see evidence of similar market conditions today in smartphone app frameworks, social analytics, CMS and especially in daily deals.
It’s very possible to be working and not making any money, so don’t be fooled by a popular startup or business model. It’s not possible to keep making a loss indefinitely, because every runway has an end.
