‘Start-upitis’ is ruining real capitalism
The trend of prioritising start-ups over solid business is putting our economies at risk, writes Karim Bishay, and we need to get back to focusing on businesses that provide real value and outcomes, not just possibilities.
Every new business today wants to change the world. However, a growing number of smart, young tech founders and investors are diving into start-ups that drain vast amounts of talent, money, and people into their vortex, without producing anything of real value in return.
We shouldn't be encouraging the next generation of smart, ambitious entrepreneurs to 'move fast and break things'. Today, the British economy needs sustainable businesses that provide sustainable jobs. Perhaps it's time for founders to 'move slow and actually make things' instead.
Start-up owners are the new rock stars. As a culture, we've become obsessed with the promise of tech start-ups – and for good reason. On the surface, they seem to be what capitalism is all about. You can start one at university (Zuckerberg) or your garage (Wosniak/Jobs) and go on to make so much money that, in Apple's case, only four countries make more than it. The fact that this can happen has inspired more and more smart people to pour time, effort, money and massive amounts of talent into replicating the magic. In essence, hope has become a tradeable commodity.
This has created a form of 'start-upitis'; the urge to start, own or invest in a new technology venture because it could do something, rather than because it will. With so much competition, many of these businesses inevitably fail to push boundaries, or just fail because they're too preoccupied chasing the tail of the companies that came before them.
Investors meanwhile, similarly addicted to the dream of owning a piece of the next Facebook or PayPal, perpetuate the cycle further by scatter-gunning 100 start-ups with their money, knowing that even if 90 go bust and eight discover that they can't follow through, two still might.
To be clear, I am not and never would, advise someone not to pursue a dream – especially if that dream solves a real problem and creates real jobs. The reality is that most start-ups don't do this. All too often a grand idea is enough and the rules of capitalism – supply and demand and a proof of concept – quickly vanish in favour of blind optimism.
Having operated in start-up land in my former years, I know the game all too well. As a tech start-up, I could probably raise a fortune with the mission of turning light into quinoa. With some good marketing and well-worded promises, I'd get investment and wouldn't have to worry too much about hard proof for a while at least – all things that would be demanded upfront by any company outside of the protective start-up bubble.
Start ups looking for seed capital also tend to live too long on the fumes of fundraising. They raise money to raise more money, spend it on research and development and raising more money until the next wave of funds comes in or they collapse under their own weight.
Imagine if you had a friend who lived permanently off a GoFundMe page, with the promise they would pay you back 'someday'. How comfortable would you be donating to it? The willingness to accept this has helped propagate a series of high-profile fails caused by their own potential running dry, or outright fraud. Co-working giant WeWork promised much, but lost more than $2 billion (£1.48 billion) in the first quarter of 2021 alone. Before this, despite massive amounts of investment, it shelved its first attempt at an IPO in 2019 due to questions about its finances and governance. In October 2021 it finally went public, but at less than 20 per cent of its 2019 valuation of $47 billion (£36.8 billion).
Theranos, as another example, touted themselves as a breakthrough without the substance to back it up. Despite this, they raised more than $700 million, much of it from investors like Rupert Murdoch and Henry Kissinger, and reached a value of $10 billion despite promises they couldn't keep and tech that didn't work.
This is an example of what happens when a good idea can't be moved into the real world, or indeed, what happens when you make a house out of wet cards.
And that's just the high-profile cases. In the UK, 60 per cent of small businesses fail in the first five years. Indeed, London has the lowest start-up survival rate, at just 50 per cent. A gambling man would be wary of those odds, yet the frenzied dream of the rockstar entrepreneurs leads many to bet significant amounts of their life and savings.
Much of this is down to them being firmly planted in showing potential rather than actually having it. And that's not including the start-ups founded solely with the intention of being bought out by a big tech firm just to make them go away – a particularly pointless corner of the economy.
By accepting a desire to build, rather than construct, combined with a willingness to overlook results in favour of possibilities, we're breeding an economy of wait rather than weight, hope rather than act and possible rather than proof.
If Britain is going to rebuild its finances after the pandemic, we need to draw a distinction between businesses that have real value and ones that only hope they do. Start-up founders shouldn't just shoot for the moon, they need to prove their vision is actually attainable. Ultimately, what Britain needs right now are stable businesses that provide real value, real products, and real jobs.
Tech start-ups in particular can only do this if they root their hype in market reality. Otherwise, British money and skill will always remain in the waiting room and never be in the room itself.
