Startup general interest

When basic questions aren’t answered it’s a massive red flag

By November 2, 2015 One Comment

In a post Pondering Homejoy’s failure a former employee wrote (emphasis mine):

At Homejoy a lot of us, myself included, got drunk under the majestic startupville spell. The hangover was rough. The swirling tales of companies that had found success circumventing basic business principals had taken root. We were all too often a pack of disillusioned startup junkies that swore that even basic math could be defied by growth and startup voodoo. Let’s discount $100+ cleanings down to $19. Not to worry, growth fixes everything. Let’s lock customers into discount rates that even with infinite retention won’t become profitable. Let’s just rub the magic startup lamp. The startup genie never showed and growth didn’t fix everything. Growth is very pretty and shiny though. It’s also incredibly distracting, and it won’t fix everything. It’s kind of like being data-informed as opposed to being data-driven.

My point is not to pick on Homejoy. There are scores of other companies where this kind of groupthink gone crazy is happening, and it’s present in all startups to a certain extent. Steve Jobs’ famous ‘reality distortion field’ helped him and Apple achieve amazing things, but it’s just a short step from there to losing touch with reality altogether.

The trick then is to know when it’s gone too far, and the answer is that when basic questions about the business can’t be properly answered it’s time to take a step back and think again. It’s smart to say that growth will fix everything if there’s a credible explanation of how that will happen. It’s also smart to motivate individuals and small teams to achieve great things by setting wildly ambitious targets, provided they buy into them.

What’s not smart is to fixate on maximising growth and start to deny reality in other areas in order to support that goal. Investors love growth, and it’s possible to keep the party going for quite a long time with this path, and it’s also true that some companies luck out and ride this wave all the way to a big exit. But luck is not a strategy.