As a person who has been on the periphery of the start up scene and has read a lot of books on start-ups, the tech bubble and 2008 financial bubble, and actually building stuff, I feel extremely qualified to have my own opinion on the state of the start-up sector of the economy and how massively it is screwed up.
I just watched a documentary on the failed Fyre Festival - a 2017 failed music festival turned Ponzi scheme that serves as an indictment of millennials/start-ups/Instagram culture/gay dudes/(insert your favorite punching bag here). This event is the epitome of everything wrong with the venture/start-up world and shows how badly things can go wrong when passionate people get a lot of money together without a lot of due diligence.
Let's back up a bit: what is a "start-up" and how does it differ from a traditional "small business"?
A traditional small business is generally funded by the founder, loans, or family and friends. They tend to be slow to scale due to price, location, materials, audience, or something other limiting factor. After the loans are paid off, they exist to profit the owner and the community.
In general, start-ups are small "lean" organizations less than five years old looking to scale massively in a short amount of time. They are generally funded by venture capital and/or angel investors with the goal of either (a) getting bought by a bigger company (e.g. Instagram) or (b) going public by getting an Initial Public Offering of stock (an IPO) (e.g. Facebook) in a relatively short period of time in order to recoup the initial investments.
Start-ups are extremely risky investments, but carry the possibility of some of the highest possible return on investment. For every Facebook where the initial stock options turn into millions, there are hundreds of Pets.com's that go completely bust. There's also a sort of panache that comes with being able to say that you were there at the beginning. Because of the massive potential ROI and the chance to be the next Mark Cuban, there is a lot of money flowing into these kind of ventures, which is great because it allows a lot of people to try a lot of crazy things.
From my own experience and not-insubstantial research, the main problem with the current approach to start-up investment is that, despite the experience of the Dot-Com Bubble and thousands of catastrophically failed ventures, the main criterion for what gets funded is how well the founders can pitch. Not money, not the idea, not the actual skills of the people working on it, but how well the person talking can sell the idea.
I participated in a Start-Up Weekend at the U of A, which led to the creation of Athlima, the app that connects you to local pick-up games, with three other people who had no idea what to do at the beginning of the weekend. We had the best pitch that weekend, which led to thousands of dollars of resources being thrown at people with no product and no experience at building a product beyond the thirty minutes it took to build a wire-frame of the app. Some people at that weekend had actual products and services that they were looking to grow.
But we talked the prettiest and could BS the answers to all the questions we were asked, so we got access to the resources.
We broke up a few months later.
Over the course of that weekend and the accelerator course we went through afterward, we were told explicitly that having a product doesn't matter, to make up the financials, and to fudge our market research to make it look better. This was all from the supposedly experienced start-up owners/sellers and venture capitalists (VCs) that were brought in as guest speakers. If that is the attitude in a backwater like Tucson, then it is just as bad in Silicon Valley, if not worse. (We were also told not to pay attention to anything that got funded in California because the VCs there will fund anything).
Fyre is an example of what happens when the system inevitably breaks. The founder had already founded one obviously quickly failing business (a sort of credit card club) and was trying to break into a field that he knew very little about. He was also explicit about being a high roller. This guy was handed millions when the slightest bit of due diligence into what he was trying to do would have shown that he could not follow up on what he promised - you can't turn an island with almost no infrastructure into a glamping resort in three months, let alone have a Coachella-like concert there.
And yet, because he was a passionate salesman with a fantastic marketing team, people literally threw money at him.
And because he had no product, Fyre festival turned into the latest iteration of a Ponzi scheme - taking from Peter (festival goers) to pay Paul (loans and investors) - which, along with the founder's subsequent fraudulent venture, led to lawsuits and jail.
Because of the promise of the "next big thing", there is still a lot of money floating around in the start-up scene. I don't think it's enough to burst another bubble, but the precedent for getting massively rich off just one idea has been set and given everyone permission to dream. Without grounding in the real world, kids will keep getting stupidly rich then stupidly poor when they figure out that actually running a business is a lot different than selling it.
How does this change?
Currently, when someone funds a start-up, they often insist on putting themselves or a representative on their board. This is great when the person with the money is funding a limited number of ventures, but falls apart at scale - when someone funds hundreds of start-ups in various stages of development, it is impossible to give the guidance and oversight that each needs.
Due diligence in determining the background of the founders, their financials, and market demand is essential. Also, some kind of proof of concept should be necessary. VCs should Pawn Star it and call in an expert to verify that the start-up actually knows what they are doing.
Overall, with companies like Google and Facebook, and people like Peter Thiel and Kevin O'Leary looking for somewhere to spend their money, there will still be money available for crazy ideas, even with a little more accountability. That said, all parties would do well to remember that at the end of the line, the consumer is a real person with real problems and real needs who needs more than just a good idea to solve them.
All the money in the world is not going to change that.
*Some books I've read: Zero to One, Peter Thiel; The Upstarts, Brad Stone; The Four, Scott Galloway; The Circle, Dave Eggers (fiction); Start with Why, Simon Sinek, Too Big to Fail, by Andrew Sorkin; and all the Michael Lewis books
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