The Startup Revolution: All that Glitters is not Gold.
Many regions across the world are embracing the pursuit and promotion of “startup” businesses as a marketable opportunity for investment, growth and development in their economies. From Toronto, to Bahrain, and even Singapore, the “Startup Revolution” seems here to stay. Many cities and countries attempt to attract growth through business incubators, which help to create a startup “conducive” environment. These “incubators” are basically corporate environments (such as office spaces), or avenues whereby potential investors and entrepreneurs can connect through various events and initiatives. It also gives small business people a chance to pitch to investors, who in turn, would hopefully invest some money into their business ideas. In the long run, the goal is to create a sustainable startup and business infrastructure, by fostering the success of and generation of startups into sustainable and profitable businesses.
In the modern era, there has been a huge emphasis on the development of tech startups as well. In the times of Google and Facebook, many similarly styled tech companies have been inspired to follow a similar path in the hope of achieving success. The Kingdom of Bahrain has also recently established Bahrain “Fintech” bay, and has created impressive PR machines and initiatives, such as Startup Bahrain, to help drive the small business sector.
However, despite all the bravado that accompanies the startup dialogue in the current marketplace, startup life is far from straightforward, and oftentimes, not nearly as glamorous or streamlined as it may seem in neatly prepared corporate presentations.
For the past two years, I have been working extensively with startups and small/medium sized businesses in the UAE and Bahrain, as a legal consultant, and can note a few trends prevalent in those businesses that have gone the distance and are still going.
Cities are not Built in a Day, and Bigger is not always Better
The current startup PR scene may project an image that there is a very generic formula for fostering success in the small business sector, when it comes to investing. I was at a recent talk conducted by the founder of a particularly large UAE tech company, who suggested that the reason silicon valley companies were successful, was because the billionaire class in California were so willing to “invest freely” and “generously” in tech startups and business ideas. The Middle East landscape, in comparison, was far more restrictive (in his opinion). He then highlighted how he was extremely proud of his company’s performance, as they had only made a -1% loss that year, compared to the -10% loss the previous year (as a percentage of costs). This came after years of heavy investment (into the millions of dollars) in what was a “promising venture” which would “change the landscape of the industry” in the Middle East. Big words and impressive concepts, which would sound appealing and potentially convincing to any investor. The company had been in operation for at least 5 years as well, and had never made a profit.
I have personally worked with a large number of business people who have achieved much higher rates of return, in a shorter period, and some over a consistently long period as well. The key difference, was that these individuals were willing to work on a much smaller scale. Big business is not a charity, and when operating at a loss for the sake of a “wonderful idea,” big investments do not achieve philanthropic ends by default. Most of the funding for such projects goes into the pockets of wealthy founders, who are thereafter using the funds to sustain their own lifestyles. Therefore, big ideas are not always profitable, efficient or effective, in converting a return on investment, and sometimes waiting for the investment to eventually become the next Google and Facebook, is not always wise. After all, there is only really one Google and one Facebook, and a million other aspirants who didn’t make it.
Achieving results can also be quite grueling. We have worked with many small businesses (including IT service providers) whose founders have spent days, hours and years building connections in the local market and establishing a reputation for reliability. A great deal of professional service firms, software developers and even legal service providers face the reality that they have to wake up, fight, and grind their brains into powder in order to come up with their next lead and opportunity. It is like being in a perpetual job search for the next customer and opportunity. At the end of it all, many clients and partners we work with will confess quietly that their “success” can be attributed to a form of “luck,” such as knowing the right person, or being in the right place, at the right time. All that time is spent, for so little control of the process driving the “success” of their venture.
Unfortunately, this reality does not make a very exciting “startup pitch.” It is far easier to control the “narrative” for business success, than to actually implement a successful strategy for achieving it. Unless you have connections, through family or otherwise, who will give you a leg up and some preferential treatment when awarding business (while perhaps not giving you too much pressure for delivery and quality due to the “relationship”…which does happen sometimes), you’re in for a fight!
Therefore, the simplistic notion that startup success follows a simple formula: “throw money into exciting ideas…in the long run they will bear fruit” is incredibly flawed. As an investor, looking for a good ROI, it would definitely help to create a sustainable infrastructure for the business idea you are supporting. This could be by ensuring that your investment is used to cover staffing needs, office requirements and similar expenses. However, it is often favorable to limit investment and create agreements where more investment is made only if results are achieved. Rather than giving an entrepreneur a free hand (which few investors do), a structured, planned and well managed contractual approach, usually fosters the best results.
Not Every Good Idea Requires Complicated Technology
If we look back to the inventions which revolutionized the way we live today, a key factor in their success was simplicity and clarity. Their product was simple and easy to understand and use. Their service offering could also be quite bland as well. For example, Henry Ford is famous for remarking that his customers could have any color Model T Ford they liked “as long as its black.” The concept of the automobile, though genius in its invention, is incredibly simple in its concept. It is a mode of getting you from point A to point B in a short period of time.
Many long lasting professions and services, such as legal services, accounting and other business admin services, are purely knowledge and information based. However, because they deliver clarity and intellectual direction to a project, which then yields sustainable and profitable (physical) results, they are often sustainable business practices. These services, at their best, deliver understanding and solutions to problems. At their worst, they function as a hoax. When it comes to technology, service offerings can certainly be enhanced by its use. None of the professions or services mentioned in this paragraph would cease to exist without technology, however.
Oftentimes services can be made unnecessarily confusing because of technology. For example, with the advent of cloud computing and database management systems, government monitoring and control has protruded into almost every facet of life. Every living person requires a government identity, citizenship or nationality document, in order to acquire access to even basic services, in the modern era. Without such documentation, individuals can become pariahs, and lead very restricted and oftentimes difficult lives. To obtain status, there is a legal process involving complex areas of immigration laws, which are based on often contradictory, and many times, predatory government policy decisions. This has made “modern living,” essentially quite complicated and difficult for many. Have these developments actually made us safer, and our lives easier? Or are our lives more controlled, expensive and restricted?
It is open for debate, but, regardless of your viewpoint, the argument above highlights why technology is not always the solution. Service and product delivery, while fulfilling an economic need, should be the key driver of any business proposal, whether or not technology is involved.
The Bottom Line
Delivering profits and ultimately, sustainable economic success, is not easy to achieve. Many times, it is not always ethical either. The financial service sector is one of the wealthiest in terms of incomes and professional opportunities. However, the financial sector operates on the premise of borrowing consumer money, and extending it to various sources, with high interest charges. The financial sector, has in the past, rewarded high level executives for simply sitting on top of a large amount of deposit cash from investors and consumers, while gambling them away on poor investments (i.e. during the 2008 financial crisis). Yet, despite these mass losses incurred via the global financial system, it still remains extremely profitable, due to societies “dependence” on the system. It may be rigged, it may be unethical, it may cause catastrophic losses for its clientele, yet it is one of the most profitable industries in the world.
Therefore, when entering the startup or fin-tech world, founders and investors have a serious decision to make, regarding the ethical direction of their firm. What kind of firm do they wish to be? What kind of values do they want to embody? Making tough ethical decisions, do, in reality, cost money sometimes. They can mean that a business will sacrifice a quick buck to take the higher road. In theory, strong ethics can build “customer trust” and a good reputation. However, this is not guaranteed, and nor is it highly probable. When was the last time you heard of an investor or a bank extending capital to a company on the basis of “trust” and “high ethical standards” alone?
Therefore, a startup founder will face murky ethical waters from the outset, when the fight for survival begins. He or she will face questions which most people in a stable job (or without a big backer that doesn’t really care about the investment), will never have to think about.
It can be murky waters, and tough to swim through. However, there is a way out, and people do manage to make ethical startups work. Others, take less ethical routes, and make it work too, but the question an entrepreneur must ask themselves, is what kind of business do they want to create?
(We offer contractual compliance, contractual planning, startup feasibility, corporate structure management, liability management, and risk management for all small/medium sized businesses. We also can assist with legal representation and immigration assistance, for more info, email us at: info@borderlesscounsel.com)