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The Mystique of Startups

| Swing Alpha on 7 Mar 2017 12:00 AM

What is the hype surrounding startups all about? Is there a particular criterion for a group or entity to be included in this select category? Before the term startup pointed to tech-based firms, a newly established company or legal entity wishing to operate a business is referred to as a startup company.

For the traditional newbie firm, there is a mission and vision at the onset, with financial forecasts and return on investments clearly established. Payback is within a reasonable period of time as outlined in a well-crafted business plan.

REDEFINING STARTUPS

Before the end of the millennium, the dotcom phenomenon gave rise to the new definition of a startup. Venture capitalists scrambled to fund this fresh breed of enterprises. The new label was then attached to a company that relies on or use technology to provide services. For the others not employing tech applications, even if they are new, are just companies.

There appears to be a premium nowadays on entities associated with technology. All the motives are present for capital to move and be channeled in that direction given the success of the so-called “unicorn” startups.

PITFALLS OF STARTUPS

When capital freely flowed in the late 1990s to support the internet startups, not all investors reaped the harvest. The lack of a coherent business plan and unsustainable revenues led to the downfall even before takeoff.

A number of pioneering startups cost investors huge losses although hard lessons were learned in the aftermath. Nonetheless, several startups continue to falter with a series of blunders.

Some major reasons for the write-offs are the following:

  • High ambitions, poor implementation
  • Sub-par, if not shoddy, business model
  • Did not generate enthusiasm among the intended target market
  • The biz model was going nowhere
  • Lacked focus moving forward, went into a freefall until it was too late
  • Too much time developing the product and was overrun by events
  • Someone else beat them to the draw
  • Did not achieve product and market fit
  • Inexperience in building product was exposed
  • Crack in security measures
  • Not competitive enough to engage the major players
  • Did not provide solution to the envisioned problem
  • Turtle pace to scale, not fast enough
  • Failed to scale to sustain business viability
  • Necessary scale not met

SCALING A STARTUP

The last three major reasons for the unsuccessful venture are critical for any startup. The hallmark of success lies in scaling. Scaling refers to the process during the growth stage. The pace by which a startup can scale will determine its economic viability.

What is does it mean to scale?

  1. The founder of a successful startup is not merely thinking about growing the business in terms of volume, customers, and manpower complement. An integral part of the strategy is to know when to plug in the innovations and add-ons as it progresses.
  2. Hiring people with the similar mindset as the founder and willing to accept accountability is a major factor. In order to scale successfully, you should be on the same wavelength with your team members every step of the way.
  3. Once the business is taking off in the right direction, making things better for the customers and users is top-of-mind. The pursuit of excellence is always the objective.
  4. The healthy growth of a startup is characterized by a fast-paced, exponential growth in client base accompanied by a controlled or incremental increase in operating costs.
  5. The originator sees the big picture in the horizon. Timelines and benchmarks are entrenched in the business model in preparation for colossal growth in the near future.

UNICORN STARTUPS

When a private company is valued at $1.0 Billion USD or more, it has reached ‘unicorn’ status. Technology startups are everywhere and dominating the scene.

The year 2014 saw the stampede of unicorns. These tech-based companies deserve a red carpet welcome to the billion dollar club. Following is a short list of some of the unicorn startups with famous name recalls:

  • Uber -  an app-based transportation company known to have hailed the richest direct investment ever
  • Airbnb – voted as INC’s company of the year in 2014 and currently valued at $10 billion
  • Dropbox – fortified by more than 25 million users for file storage, it is valued at a cool $10 billion too
  • Snapchat – similarly valued at $10 billion, this photo-sharing app turned down a Facebook buyout offer
  • Pinterest – imagine how a digital scrapbook service that commands a huge Web following be valued at $5.0 billion
  • Spotify – although its business model seem an unprofitable one, this $4.0 billion worth music streaming service claimed a spot in this elite club

THE STARTUP LABEL IS FIXED

Neil Blumenthal, co-founder of Warby Parker, capsulized the meaning of the modern day startup. He said, “A startup is a company working to solve a problem where the solution is not obvious and success in not guaranteed.”

Successful startups took different routes to scale the business. The common denominator is their universal reach. Founders believed in their product and service. They sold their ideas to like-minded visionary investors who saw the commercial potential of their dreams. Truly the pot of gold was found at the end of the rainbow.

Interestingly, even with the unicorn status, these companies retained the startup tag. It is a premium label that separates it from the ordinary. What then is next for these unicorns?

IPO CANDIDATES

After the successful IPO of Snapchat recently, the startups in our list are all potential stock market draws if and when the decision to go public is firmed up. Will their popularity translate to good performance in the U.S. bourse?

The answer is not crystal clear. However, the worth of these tech startups is staggering. Given their impressive revenue generating performance, these unicorns are definitely on the radar of the investing public.

If the startup culture is able to attract angel investors to get on board when the risks are higher, then success in the stock market for these IPO candidates is almost certain. The firms have cemented a foothold in their respective niches. Three cheers for the startups!

3 Mar 2017 4:38 PM | Anonymous

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