View profile

Fragile business models under threat

Revue
 
It has become quite obvious during this pandemic which business models are built to survive the vario
 
April 22 · Issue #83 · View online
Daily Brief
It has become quite obvious during this pandemic which business models are built to survive the various cycles of scarcity and prosperity during our lives and which ones are not. - Tefo

Advertise here. E-mail us for more details.
Staying mostly at home during South Africa’s lockdown has made me observe which services and products are not necessary in our lives. Perhaps “not necessary” is the wrong phrase, I guess the phrase being used recently - essential services - is more accurate.
From a tech startups point of view, it feels like it is version 2.0 of the 1999 DotCom bubble bursting again.
Pets.com is perhaps the infamous poster-child of the 1999-2000 DotCom bubble. By February 2000 it had raised about $80 million through an IPO only to file for bankruptcy nine months later. Why? Simple, they weren't generating cash and had a flawed business model. 📷 1 March 2001, Pets.com (courtesy of the Wayback Machine)
Pets.com is perhaps the infamous poster-child of the 1999-2000 DotCom bubble. By February 2000 it had raised about $80 million through an IPO only to file for bankruptcy nine months later. Why? Simple, they weren't generating cash and had a flawed business model. 📷 1 March 2001, Pets.com (courtesy of the Wayback Machine)
During the DotCom bubble of 1999 - 2001, overvalued and overhyped tech startups that barely generated cash through sales were receiving truckloads of VC money to keep them going. I remember this, although vaguely because I was in my second year of working in the ICT industry and I was wet behind the ears with eyes filled with dollar signs 🤑🤑🤑 thinking as long as any website I built goes viral, I would be an instant millionaire. 
As we know now, most of those startups crashed, and looking back it makes sense why they crashed. The core reasons why they crashed can be summed up into three reasons (although there were other reasons).
Most of the startups during that period chased and focussed on vanity metrics. They measured and optimized on metrics that didn’t benefit the income statement of their businesses and were propping up the balance sheet artificially in the short-term. These are metrics such as unique visitors, new users (not necessarily paying customers), media features, and speaking appearances. These metrics, and many others like them, mean very little and make for a fragile startup. The hope when a startup optimizes such metrics is that by some miracle and magic, all these metrics will convert into cash in the bank. This hardly ever happens.
The other reason, which follows from the first, is that they generated very little sales which meant very little cash flow for them. In short, they had no real business model.
Lastly, to keep them going, they received a lot of VC money which somehow lulled them and made them believe that their non-existent business models were validated. So, when the DotCom bubble happened, they were like turkeys before that famous American holiday - Thanksgiving. 
“Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it’s the general rule of life to be fed every day by a friendly member of the human race ‘looking out for its best interests’ as a politician would say. On the afternoon on the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision in belief.” - Nassim Nicholas Taleb
“Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it’s the general rule of life to be fed every day by a friendly member of the human race ‘looking out for its best interests’ as a politician would say. On the afternoon on the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision in belief.” - Nassim Nicholas Taleb
It appears we never learned anything from that period of time.
As our memories faded, more tech startups have been born. Many are propped up by nothing more than vanity metrics (e.g. registered non-paying users, page views, app downloads) and hype. Oh, and just like ‘99, lots of VC money, and as is the case across Africa - lots of grant and donor money.
Thus, it is no surprise that many have been caught off-guard by the 2nd and 3rd order effects of the COVID-19 pandemic (e.g. country and city lockdowns). Worse, it’s going to be tougher to raise VC investment in this climate with a fragile business model.
Lesson: don’t be a turkey.
Recommended
Amazon announces AWS Data Center in Cape Town, South Africa Amazon announces AWS Data Center in Cape Town, South Africa
Smarter Benin-City featuring Emeka Okoye
New rules in some countries could force Facebook and Google to pay news organizations
Tracking COVID-19 excess deaths across countries
Naspers delivers the first shipment of critical PPE for health workers in South Africa
Did you enjoy this issue?
If you don't want these updates anymore, please unsubscribe here.
If you were forwarded this newsletter and you like it, you can subscribe here.
Powered by Revue