Startup for startup's sake

How does the market for new projects in Russia resemble the dot-com boom in the 2000s?

Nikolay Dobrovolsky, Forbes, 14.06.2017

In April, the media, investors and developers watched with interest the story of Bloomberg debunking the idea of the American innovative Juicero juicer. The cold-pressed machine for $ 400 guaranteed its happy owners the freshness of vegetable and fruit juices from special packages. The founders of the project managed to collect $ 120 million from investors for their idea. So it turned out that the main function of this "smart juicer" is to press the contents from the bag into the glass. No magic and celebration of innovation. Journalists have shown and proved that anyone can do this manually without any wonderful machine. After that, clouds gathered over the guys from Juicero.

In this regard, I find myself thinking more and more often that our life is filled with countless startups for the sake of startups. For example, as of March 2017, more than six thousand startups were registered in SPARK in Russia. Of these, only a quarter show signs of life: the project has a website, there is a description of the activity, etc. Information is regularly updated and only 17% of companies registered in the system have it at all. At the same time, the flow of all kinds of events for startups is simply off the scale. Presentations, startup shows, pitching, speeddating, networking and a host of other definitions borrowed from the West fill the lives of millions of people in the country.

Wake up

Personally, all this reminds me of the dot-com boom in the 2000s. Similarly, on the wave of interest in the Internet, investors invested millions of dollars in the growth of the nascent industry. Someone really won, but after the unheard-of rise of the market came its stunning fall, which provoked a crisis of confidence. Thousands of people were left with nothing. The soap bubble burst. I don't want to exaggerate, but it seems to me that something similar is waiting for us in the near future. The market is overheated. A lot of startups burn the money of venture capitalists and all kinds of business angels, without revealing anything to the world. And the investors themselves, it seems to me, are gradually starting to slow down, closing the access of novice entrepreneurs to the "golden rain".

If you look at the statistics, in 2016, the financing of technology startups in the United States fell by 30%. And this is on the market, where the best of the best from all over the world are gathered.

There was also an obvious decline in Russia in 2016. The total amount of capital in the venture ecosystem has decreased almost fivefold and amounted to about $ 400 million. At the same time, the volume of venture transactions in dollar terms decreased by 29% and amounted to $165.2 million. At the end of the year, not a single transaction worth more than $100 million was concluded, 90% of the volume of transactions still falls on the information technology segment, which attracts the largest number of investors, the biotechnology and industrial technology segments account for only 10% in total.

It seems to me that this state of affairs is due to a number of factors. Firstly, some aspiring entrepreneurs do not consider their project from a commercial point of view. And if they do, it's very abstract. Business planning often uses arbitrary data on the principle of "finger in the sky". At the output, everything is beautiful in the presentation, but in fact it does not work. The second aspect I would call "craving for a beautiful life." Having received the long-awaited financing, startups begin to equip their life, expand their staff, hire expensive specialists from the market, instead of focusing on their product. As a result, the money runs out and it's time to search for the next seed round. All this leads to the fact that there are fewer and fewer people willing to invest in projects at early stages from year to year. As a result, many startups are dying.

Another factor that scares investors is the avalanche–like growth of operating expenses for promising startups, which significantly exceeds the inflow of money they earn. Of course, you can remember about Uber, which annually generates multibillion-dollar losses. For example, in 2015 the company's loss amounted to $2 billion, in 2016 about $3 billion. At the same time, Uber accumulated about $11 billion. free cash, and the company's market capitalization at its peak exceeded $60 billion. But, nevertheless, if you are not an Uber, investors will finance you very carefully.

Another example closer to me from the IT world concerns Nutanix. Software solutions of this American developer are used all over the world. Since 2009, the company has attracted a total of more than $300 million of investor funds. Its capitalization after the public offering in September 2016 was about $ 5 billion. So, after the publication of the first public profit and loss report in March of this year, the company immediately fell in price by 20%. This happened because the management announced annual planned losses at the level of $ 400 million. This means that all investors involved with Nutanix have lost and will continue to lose their money. As a result, in the six months after the initial public offering, the company's shares fell by 52%. I am sure that there are no fewer similar examples in Russia.

Superstitions

Business is a risk. You are at risk, the people who invest money in the project are at risk. At the same time, aspiring entrepreneurs are often afraid that ideas will be stolen. The idea itself is worthless. Value in a team and a working business model. It makes no sense for an investor to steal and wring his hands at the seed round. Choosing an investor is similar to finding a wife. Consider it a marriage of convenience. You will have to live happily ever after, but a divorce will bleed both of them. Therefore, look for people who are close in spirit. Often, respectable investors have a series of working projects and a well-established reputation behind them. Specialization is equally important. If a potential partner has succeeded in a similar niche, there is a greater chance that the "did not get along" column will not overtake you.

Bright thoughts

Against the background of the above, the question arises, how is it right to invest in new projects and how is "here and now" different from the conditions of the past two or three years? In fact, it's a question of intuition and attitude to risk. And before Facebook there were social networks, before WhatsApp messengers. The same Telegram is trying to change the market, having a zoo of competitors on the horizon. The one who is able to separate the wheat from the chaff first, ultimately wins.

As for young entrepreneurs, there is no suitable time to start a business. Start at the moment when you are able to give yourself 100% to the cause. This means that you will have to devote your free time only to this. We have been developing Parallels Desktop (the company's main product is Forbes) for six years. There was a time when the team did not receive a salary for months. Second, do not try to burn through investment money. Don't spray yourself. Focus on the product.

Venture business is like a lottery. Few are lucky. At these moments, I often think of the most popular Norwegian biathlete, who was periodically asked at press conferences about the reasons for his phenomenal luck and numerous victories at various competitions. So, without disputing the fact of luck, he noted that the more he trains, the more lucky he is. Good luck!

Portal "Eternal youth" http://vechnayamolodost.ru  14.06.2017