Do Startups Need To ‘Follow The Rules’ To Succeed?

For every Facebook, there’s a Myspace; for every Google, there’s an AOL.

What we’re talking about here are successful and, arguably, innovative startups that either dived into or invaded a burgeoning or niche market space and “perfected” and outpaced the product that came before it, to the point that AOL and Myspace were rendered completely irrelevant by Google and Facebook.

That’s not the only story to a successful startup — really, that’s like .0001 percent of any existing product in any existing market that achieves that level of saturation, brand name recognition and dominance — but there’s a reason that nine out of 10 startups fail before they can ever achieve anything close to stability or profitability.

Micah Rosenbloom, a venture partner at Founder Collective, argued recently in an opinion piece for TechCrunch that the main thing holding startups back is the ridiculous (and untenable) success of a few small brands in very idiosyncratic markets.

Basically, Rosenbloom is saying that every new startup off the block thinks it can disrupt and then take control of its given market the same way Facebook or Uber or Warby Parker did.

Also, let’s pause for a minute here to remember that there is a reason that nine out of every 10 startups fail.

Rosenbloom’s argument is as follows:

“I see many founders negotiating huge funding rounds at eye-popping valuations without taking the time to ask what that valuation entails. Many founders are signing term sheets that will implicitly require them to become the leader in their industry, often by a wide margin, to justify the price. Smart founders are very cognizant of this reality, price themselves conservatively and raise capital consistent with the most likely exits.”

“This is a key reality founders need to internalize. The buyers in old-line (consumer packaged goods) markets tend not to make splashy acquisitions — you don’t hear about Coach buying a new handbag line for $2 billion. The stock market doesn’t reward big acquisitions in these categories as they often do with Silicon Valley giants, and they’re expected to justify these purchases, at least partially, on financials. This massively constrains the realm of possible outcomes.”

Rosenbloom expanded on his thesis, saying that these new kids on the block “need to respect certain set irrefutable laws of retail physics,” notably exit caps, slowing growth and competition and modest multiples.

But not all VCs and entrepreneurs agree with Rosenbloom’s argument.

In fact, some say that the reason Warby Parker or Uber or Airbnb or Blue Apron are (mostly) recognizable household names at this juncture and have exceeded the typical startup expectations is because they did not adhere to those rules and instead found a way to defy them.

Remember, Facebook and Twitter created markets before there was even a revenue stream to justify them.

In a Ted Talk about a year ago, Bill Gross, the renowned entrepreneur, ranked the five main reasons why startups succeed and fail.

He ranked timing as the number one reason and funding as the fifth and bottom of his list as to why startups failed to succeed.

Gross stressed that “timing was everything.”

As an example, business models similar to Airbnb have been attempted several times before with little to no success, but Airbnb was able to succeed this time around due to the global recession that made people desperate to make extra money or save as much money as possible while traveling.

I.e., people needed some extra money and figured that renting out their homes or spare rooms was an optimal way to do so. In contrast, people still wanted to travel but had less money to spend while doing so.

Thus, the Airbnb model as we know it today was born.

You can almost make the same argument for Uber, which rose around the same timeframe.

But Neil Patel, an entrepreneur writing for Forbes, takes it one step further and argues that the fastest-growing startups are the ones able to stay ahead of — and outpace — the curve precisely because they are able to grow so fast.

Think of it as the old adage that the fastest gazelle just needs to be faster than the fastest lion that day to stay alive.

“Growth leads to more growth, which leads to even more growth,” Patel said. “A startup should not be satisfied with marginal single-digit growth rates after many months of operating. If the growth doesn’t happen after a certain amount of time, then the growth will not happen. A company that is not growing is shrinking.”

Maybe we’ll never know what exactly that magic formula is until that next disruptor company comes along and captures lightning in a bottle in a market we never even foresaw, but the argument as to what makes a successful startup seems to be just as decisive as whether the chicken or the egg came first.