Wednesday, July 05, 2023

NEW INC. MAGAZINE COLUMN BY HOWARD TULLMAN

 

In a World Ruled by Giants, Staying Small May Be the Smarter Play

Too many startups are built for growth -- in sales, product offerings, and staff. That can make them overextended or attract competitors. Think instead about building to be bought. 

 

BY HOWARD TULLMAN, GENERAL MANAGING PARTNER, G2T3V AND CHICAGO HIGH TECH INVESTORS@HOWARDTULLMAN1

 

I suppose in a country where constant change, reinvention, and disruptive innovation are so critical to our future that we should be grateful for the regularly refreshed stream of eager and strikingly ignorant wannabe entrepreneurs who attempt to build new businesses. I've been there many times. And let's be clear that their energies and efforts fuel and support entire industries of investors, advisers, educators, marketers, and techies. So, the whole painful process makes economic sense even if a staggeringly large proportion of the money invested ultimately ends up being wasted.

It's just a little sad to know how many of them will never get their startups out of the gate and how few of them that actually do will ever survive more than a year or eventually thrive. We never seem to tell them that well-known truth or alert them to the many pitfalls along the way. We think we're helping them by wishing them well and encouraging them on their journey. I think we can do better and give them some concrete advice and some practical plans for how to best navigate the shoals and the sharks.

If they knew the unlikely odds of success or how painful and hard the process of building a new business has become in a "winner take all" world controlled and dominated by predatory platforms and structured by tech-driven oligopolies, it's pretty clear that millions of them - even given the lack of viable alternatives these days - wouldn't start down the path. We're never going to convince them of the odds, and millions of new businesses are still being launched every year, but the competitive environment really has changed over the last decade. Going forward, the survivors are going to have to use new more conservative strategies and adjust their expectations as to what's a reasonable outcome for all the interested parties.0

Right now, I'm watching new entrants, entrenched institutions, regulators and legislators, as well as long-established managers, agents, and gatekeepers engaging in the NIL space (name, image and likeness), which is all the rage in college sports. The battle lines are being drawn in this emerging new area of competition, which surprisingly has virtually nothing to do with A.I. or image recognition, annotation, and interpretation. However, it's certain to be another toxic environment where we'll see rampant dream snuffing, early entrepreneurs bigfooted and crushed by the eventual entry of the big guys, and opportunities to make real economic and equitable changes rapidly evaporated by the politicians and institutional powers.

Not the most pleasant prospects, but a clear and present warning to anyone looking into any greenfield space, especially one that involves big money, college sports and student athletes. I realize that the prospect of a novel market segment free from the threats and promises of A.I. is almost inconceivable right now, but you can rest easy. Because the NIL marketplace has everything to do with the economics, players and livelihoods associated with millions of names, images, and likenesses as well as the data and stats that swamp our smart phones and clog our social media channels daily. 

We've recently seen the froth, frenzy, and failures in the world of legal cannabis cultivation, commercialization, and consumption, and in online betting. There are certainly instructive parallels in the broken hearts and dreams, wasted millions, hypocritical politicians and lip service efforts toward equity and inclusion. Ultimately the clean-up consolidations and rollups engineered by the usual suspects have rapidly contracted and oligopolized those industries.    

There's also a lot to be learned from the abrupt surrender and sellout by the craven senior management of the PGA Tour to the sports-washing Saudis in secretly signing the LIV merger deal without bothering to share the critical terms or even to alert most of their own board members to the pendency of the arrangement.  In fact, if you ask me, almost nothing beats the scummy way the PGA bosses left their own players in the lurch after those guys acted honestly and with some dignity while some of their peers and fellow players fell all over themselves chasing the big bucks being thrown around by Saudi leader Muḥammad ibn Salmān and his minions. Notwithstanding the many hypocritical early statements by the same money-grubbing PGA slugs who wrapped themselves so piously in chauvinistic pronouncements flavored with 9-11 trappings until the dollars got large enough, they swiftly caved like the greedy phonies they've always been when the cash register started ringing in earnest.

The message which every startup builder and entrepreneur needs to hear and take to heart is that when the elephants dance, the grass takes a beating.  More simply stated, in almost every instance where the big guys wake up and wade in, the little guys lose. Sometimes it's just mountains of money; sometimes it's lobbied legislation or new regulations that abruptly and unfairly tilt the playing field; sometimes the nature of the emergent technology really dictates a "winner take most" kind of outcome; and other times it can be quiet collusion among the market leaders that skews the situation.

But to be sure, however the game ends up and whatever the particular drivers turn out to be, it's likely to be rigged and it's never gonna be bent in favor of the little guys, whether they're new entrants, small players, customers or consumers. The "house" always wins in the end, but the smart little guys can thrive in the cracks and with the early crumbs if they're quick and clever. And that's my main interest in the coming conflagration.

If you're intent on entering one of these new marketplaces and you want to survive, here are five critical rules to keep in mind.

(1)   Stay Simple

Launch with an MVP (minimum viable product/application) as soon as possible and don't spend a lot of energy enhancing or upgrading the offering. You won't have the time or resources to educate and support your users -- rely on them to learn on their own or from their peers. Simple is smart, swift, and viral. Complicated is painfully slow and looks more like a chore than a challenge.

(2)   Stay Low

There's no upside in the short term to press, PR, conferences, or competitions. Noise attracts premature and competitive interest, knockoffs, and rip-offs. If you've built something that does a great job of getting a simple and important job done quickly and well, the promotion, word of mouth and spread will take care of themselves. You want to get broad (widely distributed and adopted), but not so big that you become a target too soon.

(3)   Stay Focused

Do one thing really well and avoid the temptation to grow and expand horizontally or vertically -- building new functions and app extensions simply adds costs and complexity. Not every app needs email and only your engineers love bloat and feature creep -- your customers don't really care.

(4)   Stay Small

Simple, smart offerings don't need staff. They don't need support or middle management or extensive infrastructure and overhead. The world now understands that the best businesses are as virtual and hybrid as possible and are focused on access, convenience, and utility rather than space, facilities and headcount.

(5) Stay Skinny

The name of the game is getting in and out -- the design and the execution plan are all about creating a valuable and attractive asset that can be economically acquired -- before you find your business being crushed. You can't attract a buyer and make a reasonable return for your team and your investors if you've raised and spent too much for an acquirer to find your business attractive and accretive. Too much funding can make you soft and lazy, not tough and to the point.

Bottom line: these aren't guidelines to build a business intended to last a lifetime, mainly because the current market conditions in almost every new industry are so hostile to that prospect that it's not a realistic objective or plan. The simple goal these days is to get in, get broad, and get out. Build to be bought.

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