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Generic Strategies for Start-Ups

Behold! My fellow entrepreneurs! Resist the temptation to be gods. Resist the temptation to follow a dream or passion. To waste precious years puzzled by “doing a startup in legaltech” when legaltech business models are not yet established.

Behold! And beware! Take the easy route. And raise more capital. And execute fiercely. And follow your 5 year exit plan. And you may become rich. Untill you may afford to create a truly great company without any external financing.

Anyway, a non exclusive list of generic approaches founders use when creating start-ups. Part of a series on playbooks for entrepreneurs. .

1. The Project Management Proposal

LargeCo X is massively excited about a new market. But it is completely clueless about anything that relates to making this market attractive. Not only clueless. It might also be politics, budget issues, etc. Employer branding issues. All that Jazz.

Entrepreneur Eduard D has come to the rescue. He identifies the stakeholders of the new market problem he solves at X. He talks to them about what they think is relevant for their future success, how they think budgets might form, etc. D does market research. But a different kind from the one your local bakery owner does. He does Exit market research.

D identifies a potential set of buyers for his company and maps out several budgets. He elicits from the buyers what needs to be done to be worthy of acquisition. He plans how long it takes to get it done, how much capital he has to raise to make new friends an how much he can shell out on his own.

After all being done, he starts to execute. 3 years later, his project succeeded and he sells to one of the buyers B. Mission achieved.

2. Assembling experts

It is hard for some people to attract the best people for the best ideas and what they product. There are may problems here. (a) Problem A might be, that the subject expert E just doesn’t want to work for any big company. In that case, no company will ever get the fruits of Es work. (b) Problem B might be, that the overall culture and salary and incentive schemes of company X might just not fit the bill for the highly talented E. So B will never get the fruits of Es work. (c) There might be problem C, that all the experts are living in area A and there is simply no way company X will open a beach head in area A.

In all cases, company X has simply no access to talent. And the work results of these talents. So why not get the extremly likable and funny entrepreneur Eduard D hire those folks for company Y. A start-up. A start-up with the right mission, right culture, right incentive scheme, etc. etc. and it attracts those sought after talents. Finally, after a few years, X can buy company Y. The people will likely leave after a while, but they will cash out well and they will not smell that it was in deed their work results that X wanted, and not them. The acquihire case.

Again, smart as D is, he did his Exit research and used his superior knowledge on industry experts and his ability to round them up to possibly create this company Y. And yes, this is typically harder to pull off. These kinds of things are more likely orchestrated by the universities and incubators which then network the successful incubation projects to the relevant investors who then place the company in front of buyers.

3. Revenues for purchase

Particularly popular among M&A hungry companies that have no clue why they are doing innovation. They are looking for new cash cows. Not knowing that cows are not bred in the innovation ecosystem. Cows are bred and raised by the low performers of the innovation systems. (Just think opportunity costs)

But this stuff works in practice. Someone knows how to use SEO? Oh, why not apply it to a field where the big players don’t know anything about it, where the market competition is low and where there is an abundance of venture capital hype and human capital supply. Yes, I am talking about Berlin and the German eCommerce ecosystem (yeah, beat me for it!). Do a new Watch business. Or sell Second Hand Art. All those eCommerce shops that have nothing really to show apart from a standard system of displaying physical goods for sale and having unique approaches to their lead generation and targeting. In the end, you build a revenue pipeline that grows into more or less attractive margins and profits and cash flows and sell that beast to a larger company. Yes, that is exactly what works for a lot of people. And it impresses VCs that only think in medium and decently secure IRR. But then, if you do it well, and repeatable, because it is so boring, you might have global success. Oh yes, that is sounding a lot like a bigger German VC house whose founders made money selling ads to undereducated kids at the peril of their non-affluent parents. No hating. You can make money with old-school, not so innovative ideas. Just as the guys that auction product reviews on massive amounts of Google-Algo-punished fake content websites that provenly generate content and revenue for its customers as long as they monetize searches such as “where can I buy the best whale meat from Siberia online?”0

4. Selling a dream to a hungry man

Just think about a recently news-making Uber competitor. Selling a disruption play or an Uber alternative to a large cash-rich conglomerate that just loves growing via M&A somehow worked for the founders. But, of course, the company tanked. People that sell the hype and don’t deliver exist everywhere. Maybe a bit more in areas where investors with low liability – speaking for example shareholder protection and lack of punitive law in Germany – and sub par experience are doing the playing. And this isn’t only working in Germany.

It is kind of funny to look into why these things exist. The hype-rider-companies that always tank or perform far below average. And I am not talking Enron here. There are far more.

But it all somehw makes sense. Snake stink from the top. If the tier 1 funds don’t let you in, your asset manager or private wealth management membership card don’t get you in, yada yada, you will end up as an inexperienced limited partner in an inexperienced private equity fund structure overpaying inexperienced investment managers who know one thing better than you, how to ride you on carry and management fees. Having such a strong team on your side, you are investing into hype-riding founders who have either no intention or no clue on how to execute on their hype. They will hire and overpay for more hype-selling top executives and employees and realize they will not make the hype a reality. Then they will hire even worse candidates to lower their cost base and extend their burn rate, and sell them as more hype. As long as your over-hyped investment manager and his risk aversion keeps buying the hype and reports it in his quarterly. But we are jumping too far. Your hype entrepreneur will sell hype to your investment manager, who will use hype diligence providers to confirm the hype, puts it into the hype investment memo, and sells you the hype. You invest your non-hype, but real money into the hype scheme. The hype entrepeneur again hires more hype people to hype about his hype and … oh, it tanked.

Why? The underhyped hire from floor C messed it up. Case closed.

This entire scam, eh, sorry, “hype” system starts at the top with inexperienced investors with bad advisors giving too much liquidity to a shady market. And it boils right down to hype ntrepreneurs who hire hype employees and sell hype products to hype buyers.

This stuff exists. This is why I mention it. And it works well for everyone in this hype cycl of death. Because colluding increases the ability to absorb risk and threats to integrity. So this is a viable model. And chances are everyone you know burned his hands on this at least once in a lifetime.

5. The First Timer

Oh yes, here they come. The first timers. They coded an app. Some people use it. They make some money. They want to grow it into a billion dollar business and know it won’t happen. In reality they want to exit their illiquid company at a decent premium and are willing to take a haircut. And they get their hair trimmed quite hard. What they are really saying : “I have no clue about this. Please take this. Accept I don’t know what I am doing. Rip me off. And maybe give me something back out of fairness”.

The benevolent funds are actually giving in and provide capital and access to even more clueless people to see if they create a viable business. Yes, money can be made. If you have real traction and the ego that accomodates a strong team under you as a founder. And you are willing to learn, grow and trust. Sometimes it works, sometimes it is a desaster, sometimes it is a decent exit. All depends on a large set of factors. A good VC will know. A bad one won’t. Well, first timers rock!

Disclaimer: I try to keep this humble and nice. First timers are the future rockstar founders. Everyone does the same mistakes. Nobody should be discouraged to try. Just stay away from the hype and vultures. Get good advisors. Do the right thing.

6. The IPO guys

They can be technocrats or just viable visionaries. A viable visionary having all the characteristics of case 4, but he chooses the right investors and actually knows how to execute decently on the vision. The latter is more rare than the technocrat. The technocrat is a seasoned entrepeneur, he knows the market he operates in from the selling side – revenues – from the human capital side – where to hire and build – from the go to market side – which locations when and how – and how to build a great marketing and sales team and keep R&D up to date and – last, but not least – has the breath and the vibrance to keep up to any changing market environment and has the gut, aggression and power to drive the company to the big valuations and cash inflows that make it leap ahead of competition. 

Yes, the IPO guys build sustainable, well-positioned, decently diversified and sufficiently capitalized / market-capped companies that go IPO and stay in the market for while. They also know they want to stay in the game. This is their market. This is the company and culture they want to run for a while. This is their opus magnum. And this is what they love doing. If experience, track record, heroicism and all that come together, you have a good technocrat. 

If on top you have someone that knows how to capture people. How to get valuations that just are insane given the fundamentals, if you know how to be that leader of the crowd, that mass-seducer, that VC-brain hacker, etc. Then you might be the visionary IPO guy. But again, rare. Very rare. Lots of more can be written or read about those. And of course, this isn’t a show of house of cards. Luck plays a big part and role, too. But this topic would need more writing. This article isn’t about visionary founders that work out.

Just know, the IPO card is tough. It is easy to read the hunger for an IPO. It is harder to read between case 4 and case 6. It is harder to estimate traction, sincerity, integrity, ability to execute and follow a superior plan. Etc. 

Thx

Enough for today. Not exhaustive. Merry Christmas.

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