The overhyped startups with multibillion-dollar valuations are setting a bad example.
I'm getting worried about the effect the unicorn phenomenon in Silicon Valley is having on entrepreneurs around the country. I keep running into young people who have everything they need to launch a successful business but are blowing the opportunity by following the example of companies like Airbnb, Stripe, and Snapchat. They believe that, like those celebrated companies, they can build a business by coming up with a cool idea, raising a ton of money, and generating excitement through the media--all the while focusing only on increasing sales and acquiring users. As for profit, they figure they can worry about it later. How will they do it? "Volume."
That works for a tiny percentage of startups, but it's a recipe for failure for the vast majority of entrepreneurs who--no matter how cool their idea--will never have access to the amount of outside capital needed to keep a company going for years if it's not earning a profit.
I'll give you the example of a couple of bright and idealistic young people who came to see me a few months ago. Their company sold biodegradable household goods made from renewable materials.
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Co-founders of Birchbox, Hayley Barna and Katia Beauchamp attend the opening of the Birchbox flagship store on July 10, 2014 in New York City. (Photo by Cindy Ord/Getty Images for Birchbox)
Rent the Runway co-founders Jennifer Fleiss and Jennifer Hyman attend the 4th Annual Fashion 2.0 Awards at SVA Theater on March 13, 2013 in New York City. (Photo by Astrid Stawiarz/Getty Images)
Stewart Butterfield, co-founder and chief executive officer of Slack Technologies Inc., smiles during a Bloomberg West television interview at the Vanity Fair 2015 New Establishment Summit in San Francisco, California, U.S., on Tuesday, Oct. 6, 2015. (Photographer: David Paul Morris/Bloomberg via Getty Images)
Snapchat CEO Evan Spiegel speaks onstage during 'Disrupting Information and Communication' at the Vanity Fair New Establishment Summit at Yerba Buena Center for the Arts on October 8, 2014 in San Francisco, California. (Photo by Michael Kovac/Getty Images for Vanity Fair)
Nic Jammet, Jonathan Neman and Nathaniel Ru are the Co-Founders of SweetGreen in Washington, D.C. on October 17, 2011. Jane Black's November column is about SweetGreen and its efforts to stay true to its roots as it grows to be a regional and national chain. Nic Jammet, the young, charismatic co-founder, who is working hard to make sure that they still feature local products from small farms, even in wintertime. They have gone from 1 store in 2007 to 10 today, including several in the Philadelphia area. (Photo by Marvin Joseph/The Washington Post via Getty Images)
Soylent CEO Rob Rhinehart holds a bag of finished product inside a warehouse in Oakland, California where the company runs its business on September 09, 2013. The 24-year-old software engineer developed Soylent, a homemade nutrient concoction, designed as part meal-replacement drink, part thought experiment, providing every necessary nutrient while challenging societys current perception of nutrition. (Photo credit should read Josh Edelson/AFP/Getty Images)
(L-R) Casper Co-Founders & Chief Executive Officers T. Luke Sherwin, Jeff Chapin, Neil Parikh, and Philip Krim attend Casper's LA celebration at Blind Dragon on July 9, 2015 in West Hollywood, California. (Photo by Rachel Murray/Getty Images for Casper Sleep Inc.)
These founders had a wonderful story to tell and had succeeded in raising several hundred thousand dollars, including a loan from the SBA and another from a major national retailer. They'd even turned down one loan of $250,000 because the would-be investor demanded a substantial ownership stake in exchange. They'd also been very successful at getting publicity. Subsequently, they sold 8 percent of the business for $500,000--putting its valuation at $6.25 million.
By the time they came to see me, however, they had already met with a bankruptcy attorney. In addition to having to pay back the loans they'd secured, they owed a lot of money to vendors, and the company simply wasn't generating anywhere near enough cash to cover its bills, let alone settle its debts. It was dependent on continuing infusions of outside capital to keep going. The partners had identified some potential new investors and were optimistic about raising more money from angels, family, and friends. I asked why they would waste their time with the angels. No savvy investor, I assured them, would put money into their company after taking a look at its balance sheet, which showed massive current liabilities against a small fraction of that amount in current assets. As for family and friends, they were almost certain to lose whatever money they put in.
It was obvious to me what the partners had done wrong. They'd read too many glowing articles about startups with multibillion-dollar valuations. Following the example of those unicorns, they had failed to focus on what should be the first goal of almost every new business: getting as fast as possible to what I call viability--that is, the point at which a company can sustain itself on its own internally generated cash flow. Their company's gross margins weren't large enough. Competition set a limit on the prices they could charge, and their costs were higher than they should have been, partly because they were using outside vendors to handle their packing and shipping operations. The company is now out of business.
RELATED: Inspirational movies for young entrepreneurs
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The Social Network
Based on the true story of Facebook genius Mark Zuckerberg and his Harvard classmates and co-founders, this movie shows us how one idea can go from a thought in casual conversation to a world-dominating platform.
This film also brings to light the drama and behind-the-scenes tensions that arise when setting out to begin a new business or venture. We learn through Zuckerberg's faults in the movie that you must stay cognizant of your actions and the way that you treat people, or you may damage relationships with those closest to you.
In a classic awakening of the conscience, sports agent Jerry McGuire decides to write a letter to his entire company about how the hunger for deals and a profit are making it easy for everyone to lose sight of who they are.
This gets McGuire fired, and he must start his own business. With only one star football player under his management, McGuire learns what it really means to love what you do while still being able to sustain an income and sense of morality.
This classic has so much to teach us about believing in ourselves, believing in others, and how there is literally no one who can tell you what you're capable of doing other than yourself.
As someone who's mentally disadvantaged, Forrest lives a life that's anything but limited and does it all with a smile. His determination is admirable, and at the very least, this movie will remind you to never give up on the things you want the most. Mental fortitude is the most important thing.
Elle Woods is the girl you can't help but root for, right from the opening scene at the start of this movie. After getting her heart broken by her long-term boyfriend (whom she thought would soon be her fiancé), she learns that he'll be attending Harvard Law school in the fall.
Determined to both get him back and prove to him she's more than just a dumb blonde, Elle works harder than she's ever worked before (with the help of everyone she knows and loves), gets accepted to Harvard and finds herself on the defendant side of a high profile court case that forever changes her life and career.
Elle teaches us how to pool our resources and connections to get to our goals. The film also reminds us about how important friends and family are to have as a support system when you're taking on an endeavor that most people expect you to fail at.
Plus, she shows us that the seemingly impossible can become possible if you're willing to smile through it (and maybe if you put on a little pink!)
A classic tale of friendship and trust, Charlotte's Web will always inevitably give you all the feels. It reminds us all that by being kind and by simply being someone's friend, you can make all the difference.
The people who find the most success and get to where they need to be are the people who care deeply for others and expect nothing in return.
The film, as does the novel, can make anyone see that the relationships we build along the way become the best investments that we make.
This 2015 movie starring Robert DiNero and Anne Hathaway is feel-good film about a 70-year-old retiree named Ben Whittaker who, recently widowed, is looking to come out of retirement for something fun to do. When he sees a posting for am"senior internship", Ben believes he's the perfect fit.
Ben works under the owner of a fashion website (played by Hathaway) and the two form an incredible, honest bond. Their friendship shows that the most successful partnerships and ventures come from the most unexpected places.
It's a nice reminder that hard work, positive mentality and kindness will always be in style, no matter how old or young you are.
Understand, these are very smart and ambitious entrepreneurs. I have no doubt they will have a successful business eventually--though not this one, and perhaps not together. I just hope that they, and anyone reading this, will see their failure as an example of the dangers of believing the unicorn hype and applying what has worked for a small number of companies to your own.