A Promising approach.
Shafaat Hashmi, Chairman Stalliongates Capital and CEO Brandbeat Global.
I just wonder when it all changed and brought the world once again to a system which is built to fail. Earlier, people trusted banks and specialized financial institutions for financial and business advice. Then the banks created products which were the core reason for the 2007/8 recession. Both financial and education regulators continue to keep their focus on strictly regulating financial products and all the pre-requisites out there for universities to issue degrees, but they have failed to address and regulate the challenges in the real economy of the startup world, where everyone is giving advice, perhaps ill advice, including business and financial, to startup founders, which has been one of the core reasons for 90% of startups to fail. Who holds the key to this continually crumbling startup eco-system?
Let’s get straight to facts to bring everything into perspective before creating an opinion after analyzing basic data. There are currently more than 600 Unicorn companies around the world. However, the majority of them are located in China or the United States. Currently, the USA is the leading country with over 75,000 startups, which is a leap of 3X from the second in position, which is India, followed by the UK at third.
The unicorns, which are valued at over USD 1 Billion are usually involved in the global sharing economy. With over 150 million startups in the world today, a simple ratio shows that less than 0.00004% of startups have become unicorns, whereas 90% is the failure rate. Yet Startups are attracting significant investment, with global venture capital funding reaching over $540 billion during 2022. The question is, how come VCs are betting money on a success rate of less than 0.0005 percent?
Is it going to a simple fact that Only 40% of startups are profitable, and 1/3rd of Startups continue to lose money, whereas 60% plus simply fail, or is it creating another fact that more than 70% of investors’ money in VC funds are never returned to the investors? Although the risk is getting higher in the startup economy, more investment is being poured into the system. Perhaps it is because Founders continue to claim that lack of funding is probably the only reason startups fail, which unfortunately is only one of the many reasons.
Funding alone is nothing but a recipe to kill an already sick system faster at the cost of someone else’s hard-earned money and simply getting away with it due to fine prints. Founders continue to fail, investors continue to lose money, but no one is out there to fix it and address it with authority. Again, who holds the key and which parties are responsible for the suffering it causes to families, children, youth and communities?
We come across businesses which have been in business for decades, but in the startup world the story is very different. 20% of startups fall apart post the 1-year mark, whereas 30% of startups fall apart within the 2-year mark and 50% do so within 5 years. 70% of the leftover close within a decade. On the contrary, the typical Private Equity (PE) placements are made with a 5 to 7 years business model, having an average of 10 years payback period in industries which are well established and have a history of posting profits for the last many decades – a significantly reduced risk factor compared to startups whose total life span is usually less than 10 years. Where are we all going wrong and where is the structure inherently flawed?
The reason I have picked up this topic is that millions of entrepreneurs spend years working on a startup, with approximately 15% investing their own savings. On an average, the range of this investment is from 10,000 to 25,000 USD. In most cases, this amount is raised through initial family and friends rounds either on equity or debt basis, only to bet that his/her business idea may be one of those 0.5% of the ideas who will get additional funding to offer us an exit during a period unknown to everyone – and all this idea needs is a pitch deck, a presentation and that phenomenal speech leading to the “Voila” moment when someone will invest and everyone’s life will change. Over one third of entrepreneurs simply create a startup which has absolutely no demand and they fail.
Another 30% startups fail because they run out of money, which essentially means that their core business model has fundamental flaws which have been overlooked due to multiple layers of “fluff” added on top. The focus is not to monetize and scale or create a winning strategy with existing resources to bootstrap, but it is focused on raising external capital or hitting reality TV show or try to become this underdog in the startup casino showing a good-for-nothing valuation or to become a cool founder on social media, which everyone follows who is looking for an exit or funding to fund their lifestyle or dream which has no practical implication on profitability.
It is true that deals happen and many of us have taken exits, but they happen with real businesses with real revenues and profitability. However, this notion and misperception of social validation created by media has diverted the focus of entrepreneurs misleading them to focus on being more of a public speaker and win pitch competitions than to build businesses which actually perform on capital through achieving the right product market fit.
Despite having thousands of incubators, hundreds of accelerators, a variety of venture studios and millions of random coaches offering trainings out there, startups continue to fail and investors continue to lose money. Let’s step back and think deeper to solve this riddle where investors continue to fund in startups knowing that the facts showcase an extreme risk, not just high risk.
The problem is actually much more deeply rooted than simply the facts articulated above. The keyholders include regulators, VC firms, investors, business leaders, educators and the founders themselves.
Let’s consider the education system and those providing education. I fail to understand that majority of professors teaching entrepreneurship are actually on a payroll in that university doing a 9 to 5. The majority of the authors writing books on leadership and entrepreneurship have never built a single successful business or haven’t even been in a leadership position, but they believe they are the best to sell a course online. I call this dangerously irresponsible. Having zero guidance is actually better than ill advice. the integrity of people when they give advice claiming themselves to be coaches and trainers, while they know that their advice is unprofessional. They have no experience or education to give that advice, no track record, yet they throw it out in the air and naïve people fall into the trap which has been devastating the lives of many people, not to forget many motivational speakers who are claiming to teach people how to do business without capital.
The regulators of the education system have long lists of compliance when issuing licenses to universities where less than 10% of the population go, but there is nothing to stop this menace of random certifications, skill development courses and fake coaches selling online courses and posting randomness on social media, which misguides people and has become one of the core reasons for many entrepreneurs to fail.
Many people’s entire lives and savings have been crushed by these mega marketing machines, which aggressively upsell their coaching programs and retreats, yet there is no one to regulate them. The same money which could have been the seed funding for their businesses is actually invested in the so called “invest in yourself” promotions, where founders come out holding nothing but a notebook with someone’s personal theory and story.
Interestingly, the same is true for incubators who actually provide nothing more than a co-working space. Again, I fail to understand why a founder regularly goes into that incubator for months and attends all the random seminars and webinars. After investing all this time and money comes the D-Day when they present in front of investors and within 10 minutes, a bunch of smart investors and entrepreneurs just rip their business model apart. Why were these investors or successful CEOs not there during the process to make it more efficient and to extend help to that founder during the ideation stage? Why is it that they only like to be the judge? Who in this eco-system takes responsibility for the mental health conditions that continue to occur in the founders’ community as they continue getting judged on stages? One of the main reasons for stress and the development of a mental health condition is related to financial problems.
Established business leaders, serial entrepreneurs, angel investors and VCs have to step up and become part of the founders’ journey at a much earlier stage rather than be just a judge. We are the people who must teach practical entrepreneurship. We are the people who must challenge both the financial and education regulators to ensure the quality of those allowed to give business or financial advice. A lot of random self-proclaimed business consultants, startup advisors and coaches should be brought to justice for giving bad advice.
Startups have contributed in creating over 3 million jobs globally according to one estimate. Within the USA alone, 190,000 jobs were posted by startups, which is an average of 25 jobs per startup. However, one of the leading factors which contribute 30% as a reason for failure is the wrong team. This means we need to start with one basic change: EDUCATION.
Entrepreneurial education must be part of the curriculum at the school level where children are taught financial management, brand marketing, sales and entrepreneurship. At a higher level, it must be mandatory for all universities and education institutes that only successful business leaders with a proven track record of successful entrepreneurship should be allowed to teach this subject. It is time for the business community and serial entrepreneurs to step up and give back to our future generation the wisdom and practical knowledge of launching and operating a business.
This is one of the reasons why last year I personally stepped up, along with my partner Amna Razzaq, to provide formal education through our “Winning Entrepreneur Workshop” wherein the faculty is comprised of C-Suite Executives who are currently serving and leading their firms or business functions to impart practical knowledge with a “consult-teach” methodology. I aim to create the world’s number one business school with a venture studio backed up with a regulated fund to foster real entrepreneurship, where the numbers are switched from its current state to achieving 90% success rate instead of failure rate.
Similarly, VC firms must extend their scope beyond simply investing money in young startups who have no market validation or founders who have no prior business experience. They must handhold these startups and guide them through at every step to ensure their success. There should not be an easy escape for VCs where they are unable to return the investment 70% of the time to their investors. More must be done to stop these losses and increase investor confidence to fund real innovative ideas and practical businesses, which are somehow lost in all the chaos and never get a chance in the market. Inclusiveness is a real issue when it comes to VC funding.
This is one of the core reasons why our firm not only invests in but also nurtures startups in our venture studio, hand holding them to progress and grow with a laser focus on profitability and ROI. Stalliongates Capital today is one of the handful of investment firms who have continued to post superior ROI for their investors and stakeholders for over a decade.
Our model is successful in that we work closely with our founders during the ideation stage, then lead the brand marketing and GTM function along with investing in their businesses to provide enough fuel for growth and innovation. We spend more on researching that the existing demand and ensuring the timing is right, which is one of the core reasons why startups fail.
Moreover, starting a business should not be expensive. It is time for governments and the banking sector to understand that their success does not lie in charging money from founders who are already strapped for cash, but in facilitating them to become successful. Minimum deposit requirements by banks should now be eliminated and digital banking must be fostered to reduce the overheads of banks. It is time for the financial industry to embrace the change and give the benefit and value of those operational efficiencies to entrepreneurs.
Lastly, it is not only the keyholders who are responsible, but also the hinges of the door must also operate for the doors of success to open. Here, I am referring to the “Founders and Entrepreneurs”. Over the last decade, I have met thousands of founders. I have observed that their criteria for choosing the right mentor, partner investor, or guide are completely out of place. They innocently follow people based on their social validation rather than their business success validation.
I have observed that most founders are not flexible and are not ready to receive or embrace advice. Their mindsets are stubborn and stuck with beliefs leading to arguments which have absolutely no logic. They give examples of funding, getting funded, business strategies or case studies which are only relevant 0.00004 percent of the time. Their focus is not profitability but getting funding based on a ridiculously over valued dream, not even a proper business idea. It is the founders who do not calculate the risk and return for themselves when they sign up for the wrong education, wrong incubators or follow a wrong lead which has no path to profitability. Therefore, in my humble opinion, a lot has to be changed as we fix this eco-system for the best.
As much as I don’t want to paint everyone with the same brush, I must acknowledge that there are some VC firms, educators, business leaders, investors, regulatory bodies, financial institutions, and founders who have got it right and share our vision to do business with integrity. They have played a tremendous role in creating jobs, fostering innovation, and nurturing founders to become leaders of today and tomorrow. However, the facts and data show that there is more to be done and our efforts of like-minded people must continue to achieve our shared vision of a startup eco system which is built on integrity, responsibility, accountability, transparency, and professionalism.
It is time to step up and bring a change where we turn around the current numbers and facts in the startup eco-system, mitigate the risks and focus on the impact of creating jobs to build a better world for all.
#StartupEcosystem #VentureCapital #StartupFailure #BusinessInsights #FinancialRegulation
