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Startups Are Becoming Dumb And Hard

Startups Are Becoming Dumb And Hard
By Alex Barrera • Issue #40 • View online
Good morning everyone! Welcome to all the new followers! I’m planning some light articles for the final weeks of December, as Christmas is around the corner. So expect one more next week and I’ll probably resume writing after New Year’s Eve.
This week I bring some musings I'be been having during these past months. Too often I feel a complete lack of strategy in many of the startups I see in the market. Is it just me? Check the article and let me know what you think.
PS: I’m obviously very biased as my job is to be strategic ;)
5 minutes read.

Startups Are Becoming Dumb And Hard
Photo by Kuo-Chiao Lin on Unsplash
Photo by Kuo-Chiao Lin on Unsplash
I always struggle to explain why strategy is essential. Since a very young age, I’ve been a long-term thinker. For me, it’s as natural as breathing. My failure to show others the importance of sitting down to think things through is frustrating. I know I’m going against a fundamental attribute of human nature, maximum entropy. And it’s aggravating because now more than ever, we (startups) are in need of some long-term scheming.
During the past decade, startups have risen from the ashes of indifference, all the way to the altar of epicness. What started as an obscure, trial-and-error, weekend hobby for corporate drones, has turned into a job-status for a whole generation. 
From Slugs to Hares
Three decades ago, things where different. There was no Venture Capital, and the risks were immense. Entrepreneurs (which wasn’t even a word at that point) would think each step carefully. They planned and worked and dreamt. Soon, the community realized that so much planning was incompatible with disruptive innovation. Or moving fast and breaking things. 
And so, entrepreneurs embraced an evolution called Customer Development. The methodology would later give birth to what’s now known as the Lean Startup way. 
The shift to a customer-centric approach allowed for quicker and more precise development cycles. The change had consequences though. Entrepreneurs started to disdain any prior-thinking of their ideas. Too much planning was bad; Plenty of testing was good. Rinse and repeat. 
As with many things in life, when you oversimplify a complicated procedure and turn it into a moralistic game, the outcome tends to suffer. And so it happened that, gradually, entrepreneurs began to skip the planning and strategic process. 
The only reason why founders could skip that stage was that, for once, money was aplenty. If you got it wrong, you could always try again and again and again and. 
US VC Deals and Investment in Q2 2018. Source: CBInsights & PWC
US VC Deals and Investment in Q2 2018. Source: CBInsights & PWC
Source: Crunchbase news
Source: Crunchbase news
That most industries weren’t digitalized also helped entrepreneurs deliver on the low hanging fruit. Disruption started happening with unnervingly simple applications. The market was ripe, and the startup ‘job’ was being democratized. 
Nevertheless, nothing lasts forever.
Say Hello To Mr. Complexity
The world has changed since then. More people than ever before are turning to startups as their life choice. On top of that, the world is better connected than ever, turning Friedman’s flat world into paper-thin-ultra-flatness. The speed, funding and global aggressiveness of startup players is unprecedented.
Where before you had myriad startups attempting to dominate a vertical, now you have an oligopoly at best. The problems left to solve aren’t trivial anymore. A lousy app built on top of a common mobile framework won’t cut it today. The digitalization of society is rising, not decreasing, the complexity of the issues we face. Scale and speed are transforming conventional pains into massive headaches. The age of spray-and-pray is over. 
“In a thread attached to his tweet about start-ups, Krisiloff, the former Y Combinator executive, added that the opportunities “to start compelling start-ups,” for college students without industry-specific knowledge, “has vastly shrunk.””
Start-Ups Aren’t Cool Anymore. Stephen Harrison. Dec. 2018. The Atlantic.
As complexity rises, the habit of not thinking concepts through is collapsing. Maybe, the most prominent poster boy of this phenomena is Uber. 
“Uber is a taxi company with an app attached. It bears almost no resemblance to internet superstars it claims to emulate. The app is not technically daunting and does not create a competitive barrier, as witnessed by the fact that many other players have copied it. Apps have been introduced for airlines, pizza delivery, and hundreds of other consumer services but have never generated market-share gains, much less tens of billions in corporate value. They do not create network effects. Unlike Facebook or eBay, having more Uber users does not improve the service.”
Uber is Heading for a Crash. Yves Smith. Dec. 2018. Intelligencer. New York Magazine.
I can’t, but echo’s Smith’s arguments. While Uber is an excellent app, it’s not life-changing. Much less a multi-billion dollar company. Their initial market traction was extraordinary. This became their Achilles heel, blinding the company to reality. The truth is, the product worked well in cities with cab supply inefficiencies. This supply and demand unbalance don’t exist everywhere though, drastically capping Uber’s market. Experts in the space knew this fact. Nevertheless, no one implemented it into the strategy. Arrogance got the best of it. 
Time To Think
It all comes down to having time to think. Strategy is the byproduct of thoughtful thinking. Overthinking is seen by startup intelligentsia as a sign of stalling, of inefficiency. The key is to measure what is ‘too much.’ For years, many interpreted ‘too much’ as no thinking at all. And got away with it. Until now. Too many startups operate under very simplistic models. Or no models at all for that matter. And the tide is catching up with them.
Many forces affect society, and it’s important to see where the startup fits in all this. As I wrote before, the age of unregulated startups is coming to an end. The time for startups operating in a vacuum has passed. The immediate consequence is that a narrow and simplistic analysis won’t yield a successful startup
And this takes me to my last point. Too many people keep focusing on what’s happening now. Few people ask themselves what will happen in the future. All their analysis are based on current trends (current as in last month), and not on behavior evolution in the future. 
The current scooter fever is a perfect reflection of this. Before the summer all investors rushed to invest in the so-called next big wave of smart mobility. 
“Investors rushed in after seeing rapid adoption in several California cities. Some companies reported revenue of more than $20 a day for each scooter, suggesting significant profit potential given they cost about $500 apiece.”
Investor Frenzy for Scooter Startups Cools. Eliot Brown, Greg Bensinger, and Katie Roof. Dec. 2018. The Wall Street Journal.
Lure by a pipe dream, they joined the merry wagon — an investment that’s resulting in a folly. Rapid adoption isn’t synonymous of success much less in just a few cities in California (San Francisco being one of them).
“The economics, though, have proved tougher than expected, people familiar with the companies said.
One issue is scooters not designed for heavy use are breaking down quickly. In some markets, scooters last about two months, investors said, often less time than it takes to recoup the purchase cost. ”
Investor Frenzy for Scooter Startups Cools. Eliot Brown, Greg Bensinger, and Katie Roof. Dec. 2018. The Wall Street Journal.
The most surprising aspect is the belief that because you’re making $20 a day, it will keep going like that once the fad is gone. Focusing on the short-term and projecting into the future is a bad indicator. One that shows rush behavior and lack of depth in the thought process. 
  • For the record, I am very intrigued by the micro-mobility space. I believe it’s here to stay. What I don’t buy is the ephemeral arguments many fling around. What matters is the usefulness of micro-mobility services within the long-term. Today’s standards won’t stand in six months. The question is, what behavior will it replace if any and why?
Too often, entrepreneurs and investor alike, fall prey to a lack of strategic thinking. The motto is to keep up with the wave, no matter what. FOMO (Fear Of Missing Out) and herd mentality are becoming the norm (ok, they were always there). The need to keep up is erasing any time for thinking things through. You’re either in or missing out, and your status falls within the technology upper caste.
Is it Time to Change?
Rising a big round isn’t a success indicator. Making quick money for a month isn’t an indicator either. The business game, the value generation aspect, happens in the mid-long term. 
It’s time we start acknowledging that the next wave of startups, those dabbling in the Deep Tech space, require better strategic thinking. Quick flips won’t make it anymore.
I believe in unfiltered naivety. Not having all the answers is the reason why we innovate. It’s healthy not to think about things too much. What people forget is that this fact doesn’t preclude some mid-long term reasoning. ‘Why’ and ‘What If’ are critical questions we have to ask again and again. 
We don’t ask them enough. We don’t invest enough time thinking about them either. The outcome is crappy, evanescent startups that increase social unrest while enriching the plutocracy
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Alex Barrera

The Aleph Report

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