I read a good post yesterday from Chris Dixon on his blog about why there aren’t more “Meaningful Startups.” In the article and comments, the discussion had to do with why tech companies, more specifically, internet startups get the majority of funding instead of companies that seem to solve a bigger societal problem, such as curing a disease. He argues that the other what some might call “more meaningful startups” don’t get off the ground because they have a hard time getting funded and this is due to time to exit and amount of capital required.
I tend to see that funding and society are major reasons for the tech funding boom.
From the entrepreneur’s point of view, they see a rise in what some would argue may be another dot-com bubble with internet related companies getting funding, growing rapidly, and seeing relatively quick liquidity events (e.g. Facebook multi-billion dollar IPO, Instagram billion dollar acquisition). They don’t think about all the work and failures that led those companies to success or, for the majority of startups, to failure. The growth in society of smart phone technology and tablets has created a new boom in not only internet services, but apps and all kinds of new SaaE (software as an everything you could ever need) businesses. I am not saying they aren’t passionate about their ideas, but the fact that they can more easily get funding, face high unemployment rates for full time jobs, and get societal support these days tends to help convince someone to jump into the startup market with the next greatest app or cloud computing platform.
One of the biggest problems I see with many entrepreneurs is that they don’t know how to commercialize and execute. Many people have had great ideas for hundreds and thousands of years, so you first have to find a product or service that fulfills a need of society (or creates that need) to go beyond being just a great idea. The next steps are to execute on that idea and commercialize it, i.e. you need to be able to make a profit. Traditional business models are changing and evolving over time; however, you can’t ignore the bottom line and the almighty dollar, peso, pound, or euro. If you don’t make money, it doesn’t matter how good your idea is; you need to have a business model and planning to achieve profitability.
From the investor’s point of view, they want to see good returns in a relatively short period of time. Most of the startups are dealing with internet or similarly related technologies which often don’t require tons of capital investment. You don’t have to build a pilot plant for proof of concept, you can simply have a few programmers, a co-working space, and good servers and run a beta test to prove your concept. You can launch on the web and the simple addition of users can have value before you even launch any revenue generating operations. There is no need to wait months until a manufacturer in China produces and ships your first product and hope they don’t steal or reverse engineer your designs, then re-tool and re-design for flaws, incurring tons of R&D costs.
Investors see what is hot and is giving a relatively quick exit for them with scalable growth and lower capital requirements than bricks and mortal business or more traditional business models. There will be many startup failures, but as long as a percentage hit with huge returns, those will stay hot in terms of who gets funding. Unfortunately, curing cancer or developing a better way to recycle may help people in their daily lives and be good for the planet, they are not sexy and not quickly profitable these days.