The hidden risk in the startup economy

By: FAISAL KHAN

The startup economy of today is eerily similar to the banking sector of 2007 right before the financial crisis. In testimony to Congress about the causes of that crisis, Ben Bernanke said: “The propensity for excessive risk-taking by … interconnected firms must be greatly reduced.”

We’re seeing that kind of dangerous interconnectedness again — this time in the startup sector. Slack, WeWork, even giants like Amazon are seeking to make more money faster off of other startups that are rich with cash and known for profligate spending. Startups are encouraged to go after other startups as customers, thanks to a cocktail of strategies like Lean and land-and-expand, making for an interconnected ecosystem where much of the risk is hidden.

New companies provide increasingly specialized services to each other, trying to become “monopolies” in a special niche, following the philosophy Peter Thiel laid out in Zero to One. Even more so, investment money that was once fearful of business models built selling to “SMBs” (small and medium sized businesses) — in saner times referred to as “The startup death zone” — now chases those dollars as the land of endlessly promised “growth.”

Like banking in 2007, easy money has bloated the technology sector, leading to riskier investments. Startups provide services to each other, rather than the larger market, as banks once generated massive sums on trading by swapping new financial derivatives back and forth. And the B2B market, once the darling of venture investing, has become an “S2S” model with much more limited possibilities, and perhaps larger ramifications for the economy at large..

The tyranny of small numbers

Part of the growth of the startups-chasing-startups has come from the new strategies of selling software, primarily based on the Lean methodology, which came into vogue in the early 2010s. Lean coined the acronym MVP, “Minimum Viable Product,” based on the idea that a new company should find its first customer as quickly as possible rather than waiting to build the best possible product it can.

The pursuit of a quick sale, however, often results in building for the first customer to arrive. In the enterprise space that typically means newer, smaller companies that can make purchase decisions quickly thanks to the lack of bureaucracy or controls. Selling to a Fortune 500 is a long and painful process, requiring proposals and vendor approvals. To avoid that path, companies now start catering specifically to startups from the beginning. This mentality has transformed the whole B2B model (once seen by investors as safer, and therefore more valuable, than retail) into an S2S model obsessed with Lean, MVP, and customer count. Instead of changing the world, entrepreneurs seek to make a sale to their neighbors at the local WeWork.

Read More >> https://venturebeat.com/2018/12/09/the-hidden-risk-in-the-startup-economy/