Running a startup is a constant struggle against the business establishment and the human factor
Many traditional entrepreneurs get frustrated with the word “startup.” “They just burn money and have never run a real business. It’s just a lifestyle.” A startup is not about lifestyle. It’s only a mask worn by the founder community. So what is a startup?
When we look at the fundamentals, at the sources – the most developed economies – a startup is a group of crazy people – visionaries who want to break the status quo, dismantle existing structures, and change the world. They are obsessed with disruption.
Rebels created the 21st century for us.
“We desire to change the Universe. We create a new consciousness, like an artist or poet. We rewrite the history of human thought,” said Noah Wyle, portraying Steve Jobs in the movie “Pirates of Silicon Valley,” which brought the vision and mission of Silicon Valley into popular culture in the 90s.
The stories of Steve Jobs, Steve Wozniak, Bill Gates, Larry Page, Sergey Brin, Peter Thiel, Jeff Bezos, Travis Kalanick, Matt Keezer, Mark Zuckerberg, Elon Musk, and even Elizabeth Holmes are now cultural tales of heroes who create a new form of the world in the magical valley. They themselves are icons, archetypes of founders. It has been this way from the beginning, and it is the same now. New heroes keep coming.
At the very beginning, Silicon Valley benefited from the proximity to Stanford University, government policies that, during World War II, decided to move critical industries to the West Coast, and funds from the Department of Defense. Lockheed Martin played a huge role in this movement. There were state subsidies, access to talent, cheap land, and buildings in what were then the agricultural areas around Palo Alto.
The technological development, abundance of talent, and cultural change that occurred in the 60s in the USA created a rebellious environment open to change. It was the rebellion against tech giants and the belief that technology could change the world of the ordinary person – the consumer – that underpinned the creation of companies that today we can call the first startups. They changed the world order and profoundly reshaped the present reality.
Their creators aimed to change the status quo through technological or process advantages. Look at Apple, which fought against the big machines of IBM; or Google, which used technological superiority to battle existing search engines – advertising directories or websites like Yahoo.
Large corporations are not interested in rapid changes. Tesla would not exist if large companies like Audi or BMW had embraced the concept of changing the world. However, they did not want to do this. They introduced changes slowly because they were already established in the market, and implementing changes would take a long time and be expensive.
Four years have passed since electric cars gained popularity. Today, when you buy a new BMW or Audi, they are not much different from Tesla in terms of driving experience, automatic driving, and so on. Corporations had to adapt, but it was the startup that forced these changes.
Despite the reluctance to change, corporations have always created innovations that helped them outcompete their rivals. This is how normal businesses operate, where someone makes a strategic decision, invests resources, and expects a specific return. In the case of electric cars, it turned out that large automotive companies could keep up with the changes. Nevertheless, they are not startups.
Founders are the Vikings of technological change – their ships must be fast and agile.
The key for a startup is the ability to fight the status quo with relatively small financial resources. With fewer resources, they operate much faster than corporations. They don’t need hundreds of approvals and procedures; they can take bigger risks. At the same time, they try to prove to the giant that with their advantages – faster processors, better algorithms, technology, process – they can completely overturn the world.
External funding is not a defining feature of a startup. First, there must be this group of crazy people, and funding will come later with the belief that changing the world is possible and that the market size is sufficient. Then they can get financing – that’s how it works in a healthy economy.
Then begins the constant chase for funding. Innovation costs money, burns through a lot of cash. This is shown by the example of WeWork, well depicted in the documentary about its failure.
A founder does not chase sales, although this is the other important side of the investment. They focus on developing the established business model. That’s exactly what Airly, which we invested in, is doing. Having an innovation, it started selling, but the profits from sales, along with the funds raised from investments, are continually reinvested in improving its model, things that work and things that don’t.
However, they must show sales results because after a certain round of financing, people from the funds start evaluating the startup solely based on them. Despite this, Airly is constantly looking for ways to solidify its model and improve its position relative to competitors.
A startup doesn’t have to be first, it has to be exceptional.
Can we talk about any startups in Poland when the common practice is copying ideas from the West? When instead of vision, there is imitation?
This issue is not exclusive to the Polish market. It might seem that only the first one to enter the market changes the world. Subsequent entrants are just followers. These will be ordinary businesses copying a certain model and trying to implement it.
By this logic, the only startup would be the first of any innovative system. The first personal computer Altair 8800 – yes. The commonly regarded first personal computer Apple – no. Some forgotten voice communicator – yes, but Skype – no.
However, it’s not about being first, but being better. “Better” here means technological, process, or business model advantage. Skype was the first to declare war on telecom operators. What is such an operator? Nothing more than a network of endpoints. So the model of delivering endpoints had to be changed.
It overturned the business model by building a community of people connecting globally – cheaply. And that built its scale. It then devised a way to make money on additional services. It introduced many technological, business, and process innovations.
Most Polish companies that call themselves startups are not. It’s worth asking if among the “startups” that have gained real prominence, there are any that introduced a real process innovation. It seems that Znany Lekarz (Doctor on Demand) has achieved this status. It has now become the default place to check doctors’ reviews.
Comparing it with similar apps (ZocDoc, DocPlanner, or Doctolib) worldwide, it had quite a few of its own ideas and improvements that built its advantage. It is also a good example of continuously seeking innovation. Even when acquiring competitive entities, there’s nothing wrong with that. It is also an art: recognizing players in a given market and somehow making them dependent on you.
A founder must sweep away everyone unnecessary.
There is one more thing that must characterize a startup and distinguish it from a regular business. It’s the question of whether growth can be accelerated without the human factor. In a startup, growth cannot depend on the number of people additionally hired or the equipment purchased.
For example, Żabka is not a startup. A very nice store that introduces a lot of innovations, but it is not a startup. It is a normal business that grows depending on how many people it employs (or how many franchisees it acquires).
However, the new idea of unmanned Żabka Nano stores has emerged. Perhaps this way the company will enter the startup path by eliminating the human factor. But there is still the issue of the equipment that needs to be invested in to develop this concept.
Startups and the innovation industry are accelerators of change. This directly leads to less human involvement – the human factor. Indirectly, it forces even deeper transformation. A worker is no longer needed for operations reduced by the startup, they can focus on something else, more valuable, or change jobs. A similar change was the result of the industrial revolution. In the first step, people lost jobs because automation came in, but later many new professions emerged.
There is a great lecture by Vitaly Golomb, a well-known investor and mentor, where he shows on a bar chart why McDonald’s (and broadly – franchise chains) will never be a startup. Golomb takes the annual revenue and divides it by the number of employees. He shows on the example of Google, Amazon, and Facebook which companies can be startups and which never will be. It turned out that at McDonald’s, for example, the annual revenue per employee is $20,000. On the other hand, you have Google with $300,000.
Google today is no longer a startup, although it still meets Golomb’s condition. It is a large corporation. Like many similar corporations, it still invests in innovation because an important parameter for it is the speed of growth. It must maintain a certain pace and certain parameters that define it as something that grew out of a startup, even if it is now a global corporation.
A startup must define its growth parameters at the very beginning.
The growth parameter does not have to be revenue. It can be the number of users, the number of returning users, or the number of visits. By adopting one of them, the startup must remain consistent. However, if revenue will eventually be the parameter, there is no better indicator than the ratio of revenue to the number of employees.
A startup is defined by:
- a sufficiently large market
- technological or process advantage allowing for rapid growth in that market
- decreasing share of the human factor
Hence, the most common risks that startups face:
- the market is not large enough – this is where marketplaces often falter or fail to achieve the expected results despite intensive funding
- ideas that are out of touch, which will never have the required market impact. Therefore, they won’t be attractive to funds, although they can still be attractive to investors as bootstrap companies
- insufficient growth speed, resulting from a lack of significant technological or process advantage
A startup must burn a lot to grow quickly. Can it burn a little and still grow quickly? Perhaps one in a hundred million. Google at the beginning. This only works if it has something absolutely exceptional in terms of technology that does not require significant financial investment. Such a startup then gains unlimited access to money, especially if it proves its advantage with another parameter: the ratio of employee costs to revenue or other defined growth indicators.
Before Google became a giant, its development was measured by the number of users and the adoption rate of the solution (the number of users who come and stay – loyalty to the tool). The same was true for Znany Lekarz (Docplanner). It wasn’t a business yet, but it grew very quickly because people felt the need to use it.
Apple or Google, although now symbols of the Big Brother they once fought against, like IBM or portals like Yahoo, still adhere to parameters derived from the startup economy – scalability, the relationship between revenue and the number of employees, or the rate of user growth per employee. This allows them to continue developing without significant investments in the human factor.