by Sergio Barbosa (CIO) Global Kinetic Software Engineers
After our recent trip to the Bay Area to attend TechCrunch Disrupt and connect with our customers and partners in the area, I got a fresh new perspective on the startup scene in Silicon Valley. There are close parallels to Hollywood, except the aspiring actors and directors are nerdy programmers and co-founders chasing similar sized carrots and seeking out the chance to become overnight celebrities with their unique offering. Instead of a blockbuster movie success, these wired, dialled-in and caffeine infused geeks from all over the world are gathering here in the valley chasing the billion dollar app that’s going to buy them the rooftop apartment in the meat packing district in NYC that they’ve always wanted.
I’ve always been a bit cynical about the startup scene having come from a background of building Global Kinetic with Martin and our core group of co-founders from the ground up with no funding. We did it by creating value, revenues and profit from day dot and growing the business organically over the past 10 years. On the surface, the startup scene in Silicon Valley (and as mimicked in our home town Cape Town and other copycat startup hubs around the world) seems to encourage a very different type of behaviour which is more focused on creating the illusion of success as opposed to actually creating success. The vast majority of startups we’ve met are only a couple of months old with a great pitch deck and amazing invision prototype visuals, but little in the way of working software/hardware or paying customers.
When you peel back the layers though, you start uncovering a very different scene here in the Bay Area. It’s a highly collaborative environment where people are not afraid to put themselves out there and are ready as anything to fail, get up and try again – determined to add value on a global scale. In fact, this is instilled in entrepreneurs from college level where the natural progression of your average Stanford graduate is to have already built and failed at a couple of startups before leaving college – all part of the learning experience, preparing them much like their actual lectures did for the realities of running a multi-million dollar company should they be one of the lucky few that makes it through the gates. Some get there with their first startup and end up dropping out before completing their education because they have to go run their company. It’s not the illusion of success that we see on the surface – it’s the overwhelming belief in their eventual success that’s apparent. And here’s why:
For those that don’t know, the “Unicorn” is the term used for the billion dollar startup. The Ubers and Airbnbs of the world. Just when you think it’s not possible for there to be another one and the bubble is over, pop, another flies out of the gates. The “Unicorn” is so real and thriving that CVCs (Corporate Venture Capitalists) spend billions trying to get in early on the next one, providing seed, A, B and C round funding to a widespread net of potentials. You only need to look at how automated CVC’s behaviour and processes are to realise how real the Unicorn is. Companies like HP, IBM, Intel, Cisco, etc. setup their CVCs like HP Ventures and the like and pump millions of dollars into them annually because they know that they can’t move as fast or as nimble as a disruptive garage startup from the outskirts of San Jose and they know that at some point the startup is going to need the cash injection to take them global and survive the harsh months where their burn rate is killing their cash flow. These CVCs see dozens of pitches a day and fund hundreds of companies a year and currently there is one Unicorn coming out of the valley every month. Most of them unheard of because they are not in the public face like Uber or Airbnb, they are an IoT startup that gets acquired by Huwawei and pushed into the Chinese marketplace. The Unicorn is real and the Silicon Valley carrot exists.
I’ve spoken to so many startups or seen talks by founders at startup events who waltz on stage to a round of applause after the MC introduces them as the person who successfully raised $20 million dollars for their 3 startups. I would much rather applaud the founder who is introduced as the person generated $20 million in revenues for their 3 startups. Funding puts you in debt, and debt is not a good thing. But what’s worse is the notion that funding is the end goal, and the reason this is a problem is because it creates the mind set in founders that their work is done and that their future ideas are worth the $20 million they have raised. This idea is so perverse that I have to sometimes pause for a breath before continuing on the train of thought…breath… ok. Better. Where was I… Right, the $20 million you got in funding is NOT the money paid to you as the founder for your future ideas. It is the debt you have incurred and need to repay with interest to the investor through execution of your ideas. And until you have paid back every cent of that investment, that funding is not a sign of success in any way shape or form. Most startups do not get this. However, raising funding is a necessary evil that you have to explore because at some point your business will not stand a chance against the competition presented by big corporates and copycats once your idea is out and your cash flow will not survive the demands of global expansion for your product. So it’s important to understand exactly what raising funds is all about and how to go about it. The book Masters of Venture Capital by Andrew Romans is a great starting point.
A lot of founders think their ideas are unique and that they are the only ones on pitch day in front of a VC or angel investor which leads to unrealistic expectations. Almost every engineering student in college in the Bay Area or other startup hub around the world is working on their startup, so if you do the numbers you’ll quickly realize that you are one of hundreds of startups coming out of the woodwork on a daily basis. Startups are consumed on a daily basis by the startup machine like any other commodity out there. Apples for example. There are tons of farms producing varying grades of apples for export and consumption, and just like some farms produce triple A grade apples and others don’t, some universities produce triple A grade founders and startups while others, not so much. There are bad apples in a good bunch, and sometimes there’s an apple tree just off the farm that’s not part of the herd producing the most deliciously sweet apples. What are the things that make your startup unique and how does it stand above the rest – focus hard on those and your core values and make them central to your startup. Once you have this place, no matter how difficult the situation and how commoditized the startup scene is, you can rely on your core values to help you rise above the rest and pull you through the most difficult situations.
Following on from point 2 above, no idea is worth $20 million – only the execution of that idea can be worth that. Of all the startups we’ve seen over the past couple of weeks, the ones that are doing the best are the ones that have worked hard and smart, but more importantly focused on execution through collaboration. Every co-founder will tell you how hard it is to run a startup. The stresses of cash flow while dealing with operations and then at the same time holding up your chin and being positive in front of a new customer or potential investor. There is no getting around the hard part or the smart part. But the difference in the Bay Area (and something I wish would see more of in other startup hubs around the world like Cape Town where we are from) is that there is an incredibly high level of collaboration between co-founders where everyone is more than willing to assist another without any expectation of reciprocity – everyone is focused on the execution, which is why there is such a high startup success rate here. Time spent hiding from the startup around the corner is time lost working on your own startup or collaboratively with the startup around the corner.
This one seems obvious, but sometimes enthusiasm or the allure of a billion dollars can be mistaken for belief in your product. Really believing in your product means that your product is solving something that is actually personal to you or directly related to something in your life’s experience. The Unicorns we see out there like FaceBook, Airbnb and so on were born out of their founders’ total belief in their product and that it is going to make the world a better place. They themselves would be the number one user of their product, and by this very fact, be the best product owners a product could possibly hope to have and ultimately ensure the product’s success. No one is a better example of this to me over the past couple of weeks than Dea Wilson of LifoGraph – watch this space!
In short, the startup scene in Silicon Valley is actually more than it's hyped up to be. There is a real economy around it with real processes, good practice and most of all a ton of energy. I’m hoping to bring some of this back to our burgeoning startup scene in Cape Town and create some good connections between startups in Cape Town and some of the great people we have met in the Bay Area over the past couple of weeks.
Written by Sergio Barbosa (CIO) Global Kinetic Software Engineers
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