The Model for a Successful Startup is Broken

If you’ve ever watched Shark Tank, then you’ve seen Mr. Wonderful beat up a startup because they will kill his money, Daymond’s questioning to determine whether a product has retail and branding potential, Robert’s uncertainty over whether a product can be successful online, Lori’s probing about whether a company has something that can be patented or Barbara’s reservations about whether a company has a viable long-term business model. I am a huge fan of Shark Tank. And I’m honestly speechless and so proud of Jason Falls, who recently spoke on a panel with Barbara Corcoran at Entrepreneur Magazine’s GrowthCon. Being such a fan of Shark Tank and of Barbara in particular, it spurred some thinking for me about what is happening in the startup community.

As a business owner myself, the reason I love Shark Tank is because it serves as a constant reminder that it’s critical to focus on the bottom line, to ensure that I’m growing a healthy and sustainable business and that we are building something that is “special” and “unique”. Frankly, we are building Social Media Explorer | SME Digital to be more than a top marketing blog and “agency”. We’re building a company that helps to make innovation safe. We’re building a path to help more marketers land CEO positions. I want to help break the pattern that most CEO’s come from finance. And yes, we rock some serious awesome at showing companies how to leverage the digital channel and social media in ways that even risk-adverse companies get excited about.  But is that enough? I went through and did some searches around what defines a successful startup and was seriously disappointed at what I found. The problem is we are using the WRONG measures of success.

The Ability to Raise Venture Capital is Not a Measure of Success

How about we start celebrating start ups who don’t need venture capital?

Almost every headline on TechCrunch about a startup starts with how much funding they’ve raised. Seriously? Is that really the measure of business success that we are using today? Let’s start by understanding that if a company needs venture capital, it is likely because they’ve burned through their own cash, miscalculated the cash they would need when they started the business or aren’t generating enough revenue to support the expenses of the business. At the core, isn’t the need for venture capital a sign that a business isn’t cash flow positive or that the founders don’t have the capital to continue to grow the business and run the business? We’ve essentially replaced getting a business loan to solve short-term cash flow issues with taking other people’s money so we don’t have to “pay” it back in a loan payment. No, instead, we give up part of our “equity”, something that feels intangible.

How about we start celebrating start ups who don’t need venture capital because they built a cash flow positive business and know how to manage growth within their means? How about we celebrate founders who maintain the ownership of their company and create profitable businesses?

Users Are Not the End All Measure of Success

Do Free Platforms Really Have a Business Model?

We can’t have a conversation about startups without talking about the social media start up and the quest for users. Instagram, Pinterest, SocialCam and the plethora of other “companies” who tout users as proof of their success are creating a whole new investment bubble that is going to burst. It’s great that there are a “crap ton” of people using these platforms. I’m an avid user of many of them and there’s nothing I love more than a free app that makes my online experience better. But where’s the revenue? It seems that monetization has become a secondary focus because startups know they can get venture capital if they can get into the millions of users. This is one of the reason’s I love Shark Tank. That crap won’t fly there. It’s not that the number of users isn’t interesting, but it certainly isn’t more interesting than the bottom line. I would argue that these startups are not “companies” until they have a monetization model that is generating revenue. Personally, I have a hard time getting behind the “advertising” monetization strategy because it just feels like you’re selling out on your users. One of Social Media Explorer’s former business partners, Aaron Marshall was smart with his startup. While everyone was building free mobile apps, he understood the quickest way to real success was to combine the quest for users with the quest for revenue. He took the road less traveled when he launched Over, an iPhone app that allows you to quickly place text over photos and share them on your social networks. And guess what, it’s not free, but he was still able to make it into the top 15 photo apps in the app store. I think he was able to do it because it is seriously one of the best designed apps I’ve ever seen. When you use it, you can’t help but tell all of your friends about it. It’s simple, smart, elegant and it forever changes the way you share photos. And totally worth the $1.99 I paid for it. That’s a business model.

An Acquisition is Not a Measure of Success

What Happened to Succession Planning as a Respectful Exit Strategy?

The other thing I found in my searches is a list of stories of companies being acquired by Google, Facebook, or some other “big” technology company only to suffer through a painful, drawn out death. What happened to companies that were acquired and actually continued to exist, thrive and get bigger? The companies whose employees still had jobs 5 years after the acquisition? The companies who built a culture and sold to a company that actually believed and helped that culture flourish? The minute we started celebrating founders who planned their “exit” strategy while leaving their employees to deal with the demise, we created a pretty disgusting business model. One that personally, is really hard to celebrate if you actually care about people. Personally, I still have a ton of respect for companies who actually focus on “succession planning” as an exit strategy.  The founders who actually want to build sustainable businesses that give back to society, build careers, and create legacies that become a Harvard Business Review Case Study are the ones we should be celebrating. I study and learn from the successes and mistakes of leaders like Tony Hseih, Steve Jobs, Bill Gates, Jack Welch, Sam Walton, and Charles Coffin. Personally, I have a hard time getting excited about the founder looking for the quick payout.

What do you think? Are we celebrating the right kind of startups? Are we creating a dangerous view of business success that is hurting society? If you own a startup, what legacy do you want to leave? If you are an investor, do you think you are investing in the right type of businesses for long term sustainability? Let’s have a healthy debate on the right success measures for a successful start up. Leave a comment and join the discussion.