In the iconic 2015 movie Steve Jobs, the legendary CEO compares his company “NeXT” to an unmanned satellite called Skylab. NASA sent the satellite believing that by the time it entered back into the atmosphere they would have a plan to ensure it crashed safely, but they failed. Luckily it crashed in the sea without an issue, but it could have been catastrophic.
Similarly, Steve started NeXT without a functioning product, hoping that by the time his product came to launch the technology would catch up with his ideas. It didn’t, but NeXT was acquired by Apple and therefore was a success (despite its only product launch being a flop).
This is similar to how many startups are operating in 2020; recklessly launching their services or products with no clue how to make them profitable, hoping that they somehow figure out how to land on their feet.
The focus is rapid growth, usually with the following plan:
- Create a free product/service, or if it’s not free make it as cheap as possible.
- Receive funding from a venture capital firm or angel investor.
- Use the majority of this funding to grow a user base with a vague plan to introduce a profitable service/product to these users later (making the company theoretically worth more than any other non-profitable business).
Also, for good measure, add spending unnecessary money on office space and employees to create the illusion of a successfully growing brand.
Then, after you’ve drawn out this process as long as possible, the fourth step is to introduce your magic service/product. Usually, though, this service/product is not received by the user base particularly well (because the majority of users only got the service/product because it was cheap or free, not because they intend to spend actual money on it). By this point, the running costs of the startup have bloated so much that even if some of their users do adopt the profitable service/product, it’s not enough to sustain the company into the future.
This is one of the key reasons I hate the “user growth” business model, as it never provides a real reflection of a company’s success, and is usually just a way for a businesses or marketing agencies to create the illusion of positive growth.
I recently saw a YouTube video by a successful startup creator explaining how the startup industry is becoming a pyramid or ponzi scheme. In his opinion, the growth focused business model is pushed by the early investors to create the illusion of a prospering company for them to sell shares to other investors to make a return on their initial investment.
This makes sense, and as we see more big startups fall it begins to become more apparent.
In 2019, 553 startups failed with a total funding of $1.9 billion going down the toilet. Many of the biggest names in that figure were focused on the initial growth of their brand.
Is the growth model really working? Or is it just about creating false valuations?