Startups perform an increasingly important role in global and local economies by driving technological developments and shaping the modern world. A comparison between startups and fully grown companies reveals that startups are not only seen to be more agile, but they also continue to remain frontrunners in breakthrough innovation, are willing to take on more risks, venture to unknown territories, and create new business or market paths.
There is no gainsaying the fact that the startup investing landscape has been dominated by venture capitalists (VCs) who invest heavily in promising startups with the hope of reaping huge returns.
The above analogy may be the reason many startups believe that their sustenance lies in external funding — which is the money needed to launch their up-and-coming business. Although this funding can come from a variety of sources and can be used for any purpose that helps the startup launch from idea to actual business, the spotlight, even for startups, is more on VCs and angel investors. This has influenced many startups to build their business models around the convenience of these investors.
The downside of this type of business model is that many techprenuers and startup founders are distracted from focusing on the product, its market penetration, and business sustainability because they are either justifying the investment in their firms or redefining their processes to suit investor expectations or attract investment; when this happens, the product suffers.
This is not to say that investments in startups are unnecessary or unimportant, but rather to expose the need for a balance and a mindset reconfiguration where the product and the market are the focus, and the ability of the product to “keep the lights on” through market penetration is above average.
Recent happenstance in the ecosystem has shown how startups with very little potential for growth and viable products have failed because they relied impulsively on investment funding.
I believe it is better to encourage startups to focus on building sustainable business models and a strong product, rather than solely seeking out VC investment. For ease of analysis, this view is predicated on the following grounds:
- Venture capital (VC) funding does not guarantee business success: While VC funding may provide a startup with a significant boost in terms of resources and exposure, it does not necessarily guarantee success. In fact, many startups that receive significant VC funding still fail. Therefore, it will be an error to rely solely on VC funding as a measure of success, the focus should be on building a strong product and sustainable business model that can generate revenue and attract customers, only using investment funding where it is entirely necessary as an early-stage buffer.
- Sustainability is pivotal: An industrywide analysis will show that startups that prioritise sustainability and a strong product in their growth trajectory are more likely to have long-term success. The reason is not far-fetched. Building a business that can generate consistent revenue and growth, rather than relying on one-time injections of capital from VC funding rounds, is the only way to build a sustainable and authentic business. One thing that sustainability does, is that it helps startups build a strong foundation for growth and provides a blanket for navigating the challenges that come at the early and mid stages of growth.
- There are always strings attached: As the saying goes, “There’s no free lunch even in Freetown” so it would be unwise not to understand that VC funding often comes with expectations from investors and from experience, one of the most dangerous forms of this is the pressure to show or focus on rapid growth at the expense of profitability or reliable market presence, or in more dire situations, an exit strategy that prioritises a quick sale rather than long-term success. These expectations can be very dangerous and often clash with the startup's vision and long-term projection. At the end of the day, product sustainability and a strong business model are jeopardised, startups end up finding it difficult to maintain greater control over their own destiny and make decisions that align with their values and vision, they are compelled by circumstances to pander to the people whose hands are on the nuzzle.
- Pressure to raise more money never ends: Investments are not gifts or low-hanging fruits, from the moment of investment, the demand for raising more money begins. Often, the incentives for the players are different; for the VCs, raising capital yields substantial management fees which are more lucrative than the returns from investment and, thus, the most important thing for the VCs may just be the ability to generate more fees by raising more capital, while the startups are pushed to seek additional investments to scale operations. In all this, the pressure diverts the attention from the product and market to funding the operations of the startup and keeping it hooked on investor financing.
Here's what I think
Startups must begin prioritising building sustainable business models by paying more attention to product and market presence. The product should keep the business in shape or show a firm potential for the startup’s sustainability. There should be less reliance on investment funding, and these investments should be seen as buffers for early-stage growth and not as a means of business sustenance. It should definitely not be the sole focus of a startup's strategy.
At the end of the day, a product-driven startup has a better chance at long-term growth because it places value on the product and puts in efforts to regularly improve it to meet market expectations. This is the focus that every startup that values sustainability must have — a drive to ensure that the product sells itself, thus, becoming the startup’s lifeline.
It is also important for startups to enable a system that relies strongly on a sales-driven approach, one that pushes them to focus on how the innovative product can meet the needs of more customers in a manner that makes their daily living easier. This sort of system enables user reliance, which, in turn, creates the necessary customer base that keeps the business afloat.
It is time to go back to the basics — a realisation that products and customers are the only sustainable lifeline a startup can have. Hence products and sales are very important and should not be ignored. Investment should only be a temporary buffer and not a means of sustenance. At the end of the day, irrespective of why the startup exists, sales and customer satisfaction, not investment, are the lifeblood of the company. In them lie the key to long-term success and impactful growth.