Articles
The idea of starting a business from the garage of your home and having that business blow up into a multi-million unicorn was popularized by the success of Microsoft and Google in the 1980s and 1990s. With those two names achieving enormous success and moving their owners from struggling young people status to millionaires and billionaires, more young people students and fresh grads alike started heading in the same direction that they thought would definitely lead them to the same unicorn status destination. However, only a handful of startups and small business ideas had the luck of becoming a unicorn, like Facebook and Netflix. Many others crashed and fell facing the hard reality that no matter how good you think your business idea is, achieving success as a startup does not only depend on having a good idea.
After nearly 20 years of the startup era, the fast-growing startup concept is starting to fail not only for beginners but also for big names who have been in the market for years such as Uber and SWVL.
In this article, I’m taking a deep look into the startup world and why multi-million startups are falling apart in 2022. So, whether you’re an entrepreneur who has a brilliant new business idea or an owner of a startup who needs to start generating profit, keep reading to find out what can, and will, go wrong with your startup if you don’t change your strategy and what you should do to save your startup.
To Save a Startup, We Must Define the Startup!
Perhaps one of the reasons so many startups end up failing is that not many people understand what a startup is and what the purpose of a startup is supposed to be.
Because many people fall in love with the idea of the startup itself, they forget or don’t plan for the step of turning the startup into a self-sustaining business.
What is a Startup?
A startup was an early-stage company that wants to scale up quickly. Still, now a startup is an early-stage company that turns profitable steadily and operates innovatively with minimal resources and assets.
The most famous thing about startups is that they have groundbreaking paradigm-shifting ideas that will change the world in a certain aspect. With a perfect startup idea, an entrepreneur aspires to present the market with a product/service that is completely new, never existed before, and solves a fundamental problem for the users. At this point, it’s easy to understand how difficult it is to come up with a startup idea. While you can have a startup without the “never existed before” part, the idea of your startup must be attractive and promising enough to be able to get investors behind your new business.
According to Forbes the concept of a startup depends mainly on innovation as the young company presents the market with a new and irresistible way of solving a problem or replacing an existing solution. This sets a startup apart from regular businesses like restaurants or bookstores. For example, opening a new restaurant is a traditional form of business even when you’re still beginning a young enterprise. To start an online food service like Hello Fresh, on the other hand, is what’s considered a startup as it presents an innovative and new way of cooking restaurant-like meals at home in a short time.
Another example is to open a regular bookstore where customers can come in and buy books to take home vs. starting an audiobook service like Audible which allows a new way of purchasing and consuming the contents of books.
With innovative and new ideas, startup entrepreneurs were allowed what any other business owner could not have: To start a business without any money!
Because startups depend on great new ideas, they appeal to investors willing to support the new company and its owner with the necessary funds to get the business started. When the idea catches on and more people get interested in downloading the startup’s app or using its service, more investors get interested and more money is coming into the business, not through customers in the form of an income or a profit, but rather, in the form of more investments from stockholders and new partners.
With all this money, startups usually aim at one thing and one thing only: Grow fast at any cost.
This strategy made entrepreneurs build startups to attract investors instead of attracting customers who would pay for their services, which is the shortcut to getting easy money since customers are harder to be acquired and retained.
As a result, we saw many startup brands grow, opening new branches, and becoming international before the company is able to break even and be able to cover its costs.
Everything That Can Go Wrong in a Startup
One of the main reasons for a startup to fail is the lack of funds that are necessary for the startup’s most essential goal of growing. The lack of funds can occur right away if the startup idea does not succeed in sparking the interest of investors. However, the lack of funds can happen later in the life of a startup when the market is hit by a recession such as the one we’re going through right now due to the Russian war on Ukraine in February 2022.
I will detail the effects of this recession on startups in the next section. Now, let’s take a look at a few other reasons that can lead a startup to fail:
- The founder is not passionate enough about the idea
- The founder does not have enough expertise in the field
- The market is not ready for the product/service idea
The Current Goals of Startups Must Change, Here’s Why
In the past two years, the world has witnessed drastic changes that affected everyone and everything including different markets and your chances of getting investors for your startup. Due to the worldwide pandemic followed by a major war in Europe, the entire world is going through a recession that may extend to be comparable to the great depression of the 1920s-1930s.
As a result, it is safe to say that the era of unicorn startups has come to an end in the period 2020-2022.
Due to the recession, investors are refraining from throwing money at startup ideas that are promising to start turning a profit after ten years. This is not the only or the most serious issue that startups are facing because of the recession.
Well-established startup companies that have been in the market for years are also facing the same danger on a greater scale. Big names like Uber, Careem, and SWVL are now facing the possibility of laying off 10-15% of their employees despite being present stably in the market for several years.
The reason for this crisis is that these companies stayed in the startup early-stage phase where they depend on incoming funds from investors rather than profit for too long. In the previous decade, startups used to use the (Grow at any cost) concept by getting millions from investors and using that money to grow the size of the business without yielding a justifiable profit.
This concept worked for many known brands until the Ukraine war came and investors changed their interest and strategies to be only willing to invest in businesses that will get considerable profit within a short period, a few years instead of a decade.
As a result, many of the most famous startups are no longer getting the massive investments that they depended on. Given the fact that these businesses are not making a profit, many brands are laying off a huge percentage of their employees to cut back on their expenses and losses.
We can now safely say that all expansion plans, which are based on burning more cash, are on hold, and this strategy won’t be successful again in the market.
Time to Move Startups from Grow at Any Cost to Results at Any Cost
If you think that a startup is a lost cause due to the current economic circumstances, you’d be wrong. My purpose of this article is not to make you lose hope, but to present you with an alternative solution to make your startup survive these hard times.
Since drastic times call for drastic measures, we have to admit that it’s time to change the way we approach startup projects. If we keep the startup goal to grow at any cost, failure is going to be the inevitable result. The age of unicorn startup companies has ended, and we must come to terms with that fact.
The most reasonable suggestion is to move from the “Grow at Any Cost” model to a “Get Result at Any Cost”, in other words, let go of the unicorn and start aiming for the camel. Unicorns don’t actually exist in real life which is more reason to let go of pursuing them! Camels on the other hand can take long trips in the dry heat of the desert on very little supplies of food and water, and this is how your startup should be.
A new generation of entrepreneurs who manage startups as if it is camel must emerge; camels do not burn energy fast, can sustain themselves longer without food or water, can run very fast, and survive in a very barren environment.
I mean that every startup founder must change the goal to grow and replace it with the goal of achieving success through generating income to break even and then generate profit to justify your business for investors to pour money into your venture.
As such, you must avoid expanding and opening new branches before your business is able to sustain itself in the first location. You must also avoid hiring more employees than you can support from your company’s income. In general, you must minimize the costs of your startup as much as possible until the business is able to bring enough income for it to be successful.
New Startup Glossary: 10 Keywords to Replace in the 2022 Startup Dictionary
Language controls our way of thinking. This is why it’s of utmost importance to start changing the language and words and terms we use in the business of creating and developing startups to get into the new suggested mindset.
*This table turned into a carousel
| What is it? | Before 2022 | After 2022 | Why does it need to be changed? |
| Startup aspiration | Unicorn | Camel | A unicorn is an imaginary creature that does not exist. Camels are known for persistence and endurance to achieve results and reach their destinations. |
| Incoming money | Fund | Cash flow | Shift the focus from getting funds from investors to managing the cash flow from earnings to cover the business expenses. |
| Whom to convince | Investors | Customers | Stop trying to convince investors with your business’s ability to turn a profit and focus on convincing customers with your product/service to actually turn a profit. |
| How to get money | Raising funds | Customer acquisition | Stop raising funds to grow and pay attention to building your customer base to generate a sustainable income. |
| Outgoing money | Cash burn | Operating expenses | Stop burning cash to open new branches and just grow the business fast and spend money on operating expenses to offer your product/service to paying customers and slowly, but surely grow. |
| Goal | Growth | Sustainability | Replace your goal to open your business in new locations with getting enough income for the business to sustain its place in the market.* |
| Approach | Work hard | Work smart | Replace the hard work that aims to open new branches with working smart to automate your operations and achieve the maximum result with minimum resources. Utilize your existing assets to sustain the business. |
| What to achieve | Traffic | monetization | No matter how much traffic or attention your brand is getting, you should focus on turning this traffic into money. |
| Focus | Revenue | Breakeven | Revenue can still result in losses if your business expenses are higher than your income. Instead, focus on breaking even to keep your company in business.** |
| Where the money goes | Dividends and shares | Working capital cycle | Dividends and shares are good for a well-established company. A startup should focus on keeping the money in the business as a working capital cycle till it converts net current assets and current liabilities into cash to help its sustainability and growth. |
* Multiple startup companies went under during the latest crisis due to focusing on expansion rather than sustainability like Fast, the E-commerce software solution that got funds over $124 million from 11 investors. Modsy failed and closed in 2022 despite its $72.2 million investments and Clickatell went under in 2022 after burning through $109 million from investors.
** When Steve Jobs started Apple, he did start with a loan, but his goal was not to grow and open more profitless branches. When Jobs went for the loan, the reason was that he saw an opportunity that will generate a huge profit, and that profit will not only pay for the loan and pay back the investors but will also support and sustain his company at the same time.
This was how the successful businessmen and entrepreneurs of the 1970s and 1980s operated their businesses and that’s why these businesses were maintained and grew into multi-billion-dollar businesses over decades.
Because for a business to last, it has to break even before looking at the numbers of the revenue and be happy about it. A business owner can be proud that their business has achieved over $1 million in its first year, but the thing that we really look at is the business’s expenses. Did that business burn over $2 million in the same year? Then, it’s nothing to be happy about or proud of. In other words, a business that broke even and achieved $0 in its first year is much better than getting a meaningless number in the revenue that can only mean a loss when it’s compared to the operating expenses.
Conclusion
Lower Costs & Put Backup Plans!
Rolling with the current circumstances is the right thing to do for any business to survive.
As such, startups should begin to find the most innovative ways to work at the lowest costs.
With that in mind, startups should also always have one or more backup plans to face changes or problems that may arise.
For example, while the Arab Spring was not expected, once the uprisings started in the first country, backup plans should have been put in place in all of the Arab countries to avoid any potential negative economic repercussions of these events.
On the other hand, with the 2020 pandemic, the losses cannot be blamed on bad management or bad planning as this crisis hit the entire world and no planning or backup could have helped any business avoid its impacts.
So, it’s important to plan for unexpected circumstances by being prepared to be flexible enough to allow your business to pivot and suit the new circumstances if these circumstances reach a point that affects everything and everyone in the entire world.
