The darker side of the startup nation

Mathieu Lemoine, May 6, 2020

I have worked for 5 startups in the last 7 years and have come to work with a lot of people among Paris’ startup scene. The so-called startup nation is looked at with both envy for its incredible successes, and suspicion for its ability to burn money. Let’s dive into this world and find out what really works, but also what can make it a somewhat inhospitable environment.

On the net, sky ain’t no limit

The tech scene worldwide is at the bleeding edge of progress, essentially because its immaterial nature frees it from many real world constraints that usually slow down the path from academics and labs to mainstream consumers. While prototyping and building a new product until it reaches mass market usually implies months, even years of work and millions of euros of investment, in IT you can get any business idea into a working product and deliver it to the world within weeks.

And there are literally millions of people out there believing that they have a great idea and that it just needs a little work to build, and that they just need to find a nice developer to code it.

But there’s a catch: contrary to popular belief, there’s not much money in the tech industry. Consumers actually see very little value in software, and they are not willing to pay for it, unless you have something really compelling to give them in return. But that “something really compelling” will often cost you as much or more than what consumers will pay for it. Only businesses will actually pay for your services, because businesses have a more pragmatic, value/cost perception of your products. My experience is in line with that: of the 5 startups I have worked for, only 2 made money from consumers, and only one of them was actually profitable. The 3 others were only profitable through B2B.

So if there’s not much money, how come the GAFA rule the world? Well for once, as I said before, it’s a very accessible market: a few people can bring a product to the world with very little resources… which makes it an extremely competitive free market, on a global scale. These market conditions can only end up in a few, very successful companies owning the market, and a plethora of wannabes dropping like flies. Most tech startups will never succeed, just like most football players will never get paid to play, yet people start to play because they want to be the next Messi, and they build startups because they want to be the next Google.

Basically, the startup nation is a handful of successful companies, among a sea of startups bound to fail. Having worked on both sides, I think there are lessons to learn from both.

Light from the brightest stars

Let’s turn our heads towards the light: these incredible companies, with 2 or 3 digit growth rates, raising tens, hundreds of millions every year, disrupting the world and being awesome doing it. They even have their official club now in France, called the Next40. They are the cool kids leading the revolution against the old fashioned CAC40. Probably not a coincidence that they are the same number: like all youth, they despise their elders, while aspiring to be at least as successful as them. So they end up trying to both disrupt and imitate.

Logo Next40

To be fair, there really are incredibly talented people working there, and they definitely had a key role to play in the success of these companies. I would say that the most valuable trait that they have in common is the belief that there is no such thing as “good enough”: when they achieve great things, they don’t stop and look back to contemplate, they ask themselves how they could do even better next time. They push further. There are great people out there, and they find the promise of a small, successful company where you can really have an impact, very appealing.

Yet these companies grow very fast, reaching hundreds of employees in a few years, and then reality catches up.

The logistic trap

Unless you work in AI or math, you may not be familiar with logistic functions. Exponential growth is when you keep growing, and the more you grow, the more you grow. That’s what businesses try to do, and at first, they often succeed at that. But an exponential growth is only theoretical: in reality, there’s always some kind of limit at some point. For example no business on earth can have 10 billion clients, that’s impossible. So at some point, your business will reach what’s called the midpoint: from there, growth will begin to slow down at an exponential rate, until you max out your market. So the actual growth curve of your company will be an S shaped curve, which corresponds to a logistic function.

Logistic vs exponential growth Don't get fooled by the blue curve, you are actually on the red one.

The trap here is that the first part of the curve looks totally like an exponential curve. So in successful startups, business plans are built on exponential expectations, and everyone is thrilled because the company’s achievements year after year are incredible. Until they get closer to the midpoint and growth starts slowing down out of nowhere. When this happens, the mood swings violently from general euphoria to doubt, worry, and in the worst cases, fear, panic and scapegoating. I’m talking about both employees and investors here. Incredible success leads to incredible expectations, and when you reach the midpoint, these expectations suddenly become unrealistic.

A nation of zerglings

So there are a handful of successful companies in the startup nation, and even if they all end up doing the same mistakes and quickly becoming uncool like the bigger companies they despised, they are still successful companies and working there is generally alright. But there is also a massive amount of startups at different stages, trying and failing to replicate the success of their models.

This is the combined effect of two cognitive biases: the survivorship bias and the fundamental attribution error. The survivorship bias is the fact that we tend to focus all our attention on the ones who succeed, while not really taking into consideration the ones who fail. The fundamental attribution error is the tendency we have to overestimate internal causes and underestimate external causes. This creates a false idea that all you need to succeed is to do things right, and all you need to do things right is to do exactly the same as the ones who succeed. Because we think they are solely responsible for their success, and because we overlook the ones who might have tried the same things with no success.

The result is that a lot of people try to build startups with too much confidence in their success (which may not necessarily be a bad thing if it is “reasonable overconfidence”), and they do so by constantly trying to understand and copy the companies that succeeded before them. Interestingly, I have never heard anyone from a top company explain that they got there by merely copying another top company… It’s always “we did this and that, and that’s the key to our success”. Maybe the first rule of building a startup is not to try to “do things right”, but to try to define what you are doing differently and why you think it will work?

The copy pest

Getting an original business idea is tough, though. You can scratch your head for weeks to find one. And when you do, it’s generally because you don’t know the market well enough. You don’t know that another company already did it before you and failed. Or you don’t know that every company in the sector has thought of it but didn’t do it because it is a bad idea. But don’t worry, you don’t need to reinvent the world to succeed, just being somehow innovative, bringing something somewhat new or different to the market can be enough.

So most startups are built on already existing markets, just trying to find their own, original take on it. And this is fine. The real problem is, most of the time, too much money and time is spent on trying to convince the consumers that they have a different approach and an original product, instead of actually building the product.

Marketing is useless when you have nothing worth being marketed, and I’ve seen too many startups struggle because they were too focused on acquisition and promotion and had a very low value proposition. Indeed, a vast majority of startups are founded by people with a marketing and sales background, while very few of them are led by technical or product people. This may be a French specificity, since worldwide, technical people are by far the most represented among CEOs. I’m not trying to discredit marketing and marketers: it’s definitely an important part of a business. It’s just that it’s not where you should start. You should always start with the product. And I know that historically, the product is considered to be part of marketing (one of the 4 Ps), but it has since grown much further than that to become its own thing. I’ll try to explain in later articles why it’s not a good idea to confine the product within your marketing team.

Uncontrolled damage

So within the French tech, you find top companies that thrive on this glossy image of an alternative silicon valley, but behind the official story, things are much more nuanced. And then you find a myriad of small startups trying, and mostly failing, to emerge as the next big thing. I suppose those are the rules of the game… but I’m a bit concerned about the consequences of this ecosystem.

There is a cultural expectation that it’s hard to work in a startup because there is so much to do and only a few people to do it, with so little money… The idea is that you have to sacrifice a lot to achieve success, and that the more you invest in the project, the more you will get in the end. This is another cognitive bias called the just-world fallacy: people tend to think that somehow we get what we deserve, thus the more we do, the more we get.

The result is companies that try to get as many hours of work worth for as little money as possible. This means a very high reliance on unpaid or barely paid interns, a lot of pressure to work overtime (unpaid) and be always available for work, and a lot of people ending up burnt out. And they shouldn’t expect to be fairly compensated for that, because very few of these companies are actually making money.

People shouldn’t accept these conditions: if they can’t build a profitable business by working 40 hours a week, working 60 hours a week won’t make much of a difference… except for their health, of course. Startups should always focus on the smartest way to use their time, even if it means throwing away an underwhelming business plan to try to figure out a better one.

The over-reliance on unqualified personnel is also a very bad idea: surely, interns and junior staff are very capable, but only if they are properly mentored by more senior staff. Having a heavily inexperienced team can lead to really poor results, as well as being detrimental to the team, because they won't progress as well on their own as they would have by working with more experienced people.

Conclusions

The tech industry is an incredible sandbox for new businesses to thrive, but it’s not easy to see the whole picture. There is a harsh natural selection, and most projects fail. It’s true that a lot of them fail because they do it wrong: either trying to build on the wrong idea, failing to adapt when they don’t achieve the expected outcome, or just failing to bring value to customers. Yet it’s important to also account for external factors: doing things right is not enough to guarantee success, and we have to accept that there will always be a chance of failure.

For those who succeed, it’s almost always because they found a way to satisfy their customers, not because they followed a specific method or lured them in with some dark manipulation techniques. Yet these successful startups get overconfident very fast, and often hit a wall at full speed a few years down the road.

The primary focus should always be the users, the product that you build for them, and how to most efficiently use the few resources of the company to bring the most value to these users.

Mathieu Lemoine
Founder @Kura