The Startup Ecosystem Is Another Bubble Waiting To Burst

Posted by Ranjeet Menon in Business and Economy
October 19, 2017

This has been the decade of startups. With the advent of the cloud ecosystem, technology has had a huge makeover. Business strategies and models have had paradigm shifts and new business ideas do not want to work with legacy business models.

The hegemony of the big technology corporates has waned too quickly. They were never prepared for such drastic changes in such a short span of time. Central to these radical shifts is the concept of startups. Everyone aspires to own a startup now. The hype has grown so huge that there are companies that are ready to hire failed entrepreneurs to tap into their experience. There is a saying that even divine nectar in large quantities can become poison. Sometimes I wonder if the concept of startups is going that way.

I am mentoring a startup initiated by a group of electrical engineering students. Essentially, they are trying to unify and streamline an existing chaotic business model. This may be interesting for a bunch of business students but what are engineering students doing with such an idea? They got bit by the startup bug. I can’t blame them, everyone around them in campus are caught up in the same startup frenzy.

I met their head of department one day and had a very interesting conversation with him. He was complaining that many students are not even interested in completing their courses or writing exams because they are chasing their startup dreams. So, I asked what type of startups they were interested in. He said that all of them were IT-based.

Then, I wanted to know what his department was getting out of those startups. He looked lost. I asked him again, “What is the electrical engineering department getting from IT startups which have absolutely no connection to electrical engineering?” Nothing.

My next question was, “Where is the next innovation in electrical engineering happening?” The three people in the meeting gaped at me. I told them there is a simple solution. All engineering students have to do academic projects in their final year. Make those projects their startup ventures. By industry standards, it takes a minimum of three years for a startup to get the first level of funding. Kickstart the projects from the second year of engineering, set up a team of industry professionals and investors, arrange a bootcamp during the final year, do technical and business reviews of the projects and fund the ones that pass the reviews.

With their teaching mindset for the past two or more decades, this wasn’t something easy for them to digest. I do not know if they have taken up my idea because it will take a momentous change in the system and in the mindset of all involved people.

What is a startup anyway? Why is there so much hype around it? Every company in its infancy is or has been a startup. Uncertainty at every single breath, the Damocles’ sword of financial breakdown and company’s closure hanging over everyone’s necks, the end of an idea and a dream, all of these have existed from the time business has taken off.

People have waded through these miseries and tasted success or failure. The 20th century has been the pinnacle of humanity’s greatest technological inventions, never mind the conspiracy theory that the invention of transistors in 1948 was actually reverse engineered technology from the alien spacecraft of Roswell UFO incident in 1947. But we discovered vacuum tubes and made TVs and even computers with them.

The magnitude of those inventions can never be matched because no matter how technologically advanced we become, the roots of technology will never change. They were made by the ones who dared to challenge and look beyond all conventional logic.

Edison once remarked that he learned a 1,000 ways of not making an electric bulb. The Wright brothers had to make countless efforts before they conquered the sky. All these people had were ideas. The ones around them believed in those ideas and stood by them through flawed executions and strategies. Their greatest inventions were born from the mistakes they made.

In a post, I read that the value of an idea is in its execution. But I am inclined to believe that true value is in the flaws of the idea and in the flaws of execution. I believe that an idea becomes an innovation when we work diligently towards correcting those flaws. Everything in the universe is flawed and it is in the nature of the universe to always try to improve itself. That’s why it is tending to infinity in integral calculus.

This is my biggest concern with the world of startups. It’s all about financial valuation; everything is measured in terms of revenue and return on investment (ROI). The pressure is maximum from the moment startups seek investment. Seed funding, series A, B and C funding – these are catchy terms and there is huge hype around them. Now, the startups get measured with respect to these words.

Weren’t nascent companies in the past taking investments? Yes. Weren’t they under pressure to not fail? Yes/maybe. So what was different then? I believe those people were able to focus on their ideas and build their core values without the stress of investors holding them by the scruff of their necks. Apple, Microsoft, Facebook – they all started small from garages and dorms and I believe they grew because of their unwavering focus on their idea and vision and not because of perfect execution.

The chronicles of mistakes Steve Jobs made in his professional life is legendary. Now big companies are looking to acquire startups and startups are looking to be acquired by big companies. That’s a complete shift of focus from core values of innovation and building a company to making quick money and fame. It is nice to be in the league of successful entrepreneurs who sold their companies to bigger players and even better to tell the world that the next target is to look for bigger and better ideas or look to invest in a startup.

On the other hand, there was a certain Amar Bose who quietly built Bose Corp, one of the biggest companies in the world without even being there on any of the stock exchanges. No fancy stuff there, they just put all their profits back into their R&D and into their people. Momentous strategy, something every company aspiring to innovate should look up to.

But the rules of engagement have changed in financially challenging market conditions. Big companies are willing to acquire startups only if they are making profits or at least they have achieved their break even and if they have decent cash flow statements. I believe all of this is killing the true spirit of ideas, innovation and entrepreneurship. The number of innovations that have truly changed the world before and after the advent of the concept of startups will tell the whole story. How many companies of the magnitude of a Google or an Apple or a General Motors have come up from the present startup ecosystem?

Nothing in the cosmos lasts forever. What goes up has to come down eventually. This is why I am wondering if the startup ecosystem is another bubble that will burst in the near future. The question that we always seek the answer to is where is the next wave of ideas going to come from? This has been the origin of the startup ecosystem because investors want the first and the biggest bite of the innovation pie.

One positive aspect of all the startup buzz is that it has managed to extend the innovation and entrepreneurial mindset into the student community all over the world. Uncluttered minds, buzzing energy, ability to absorb failures and look ahead, the mindset to take risks – all these are the essential characteristics for innovation and thinking beyond all boxes.

We all know about the college dropouts who have built the biggest companies on the planet. If Africa is going to be the next hub of business, then undergraduate classrooms and even schools are going to be next hub of fresh ideas. The fancy terms of the startup environment may not fit that realm. I know someone who, along with his team, conjured a brilliant idea to convert coconut husk into completely biodegradable plastic-like sheets as their engineering project. The idea is lying in cold storage because they never managed to get investments. They are all employed and settled in their lives now and are not in the mindset to let go of their current lives and chase their idea.

The kids just need to be put in the right direction at the right time. It is the older generations and the academic world that need a complete transformation and makeover to understand and fit in with the exploding young minds.

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