Now’s Not the Time to Make a Big Bet on a Startup
Startups can bring innovation and fresh ideas into your association, but recent financial trends suggest that things are getting risky. You can still use tech tools from startups—just know what you’re getting into.
The past couple of months in the business world have offered a good reminder that the fundamentals still matter—and that’s even the case for companies built around technology, where the rules often feel different.
WeWork has been the poster child for this. An attempt to go public on the stock market turned into a five-alarm disaster for the company, leading to a leadership shake-up and raising concerns that other “unicorns” without margins to back up their billion-dollar-plus valuations will come crashing to earth in the coming years. Even big names, like Uber.
Now comes word that WeWork, the largest tenant of office space in many big cities, could be out of cash in a month if it doesn’t get fresh investment. Beyond posing an immediate concern for associations with WeWork leases, I’m worried about what the company’s woes could mean for other startups that associations increasingly rely on.
Last month, the CEO of a cloud-based payment processor, MyPayrollHR, stole millions from customers as the company shut down out of the blue. That’s an extreme case, but even a garden-variety vendor shutdown can harm clients.
If even your landlord and payroll processor can go poof, what does that say about every other startup the average business relies on in a given day?
Scott Galloway, a New York University marketing professor at the Stern School of Business, has made a name for himself reading the tea leaves of the tech business. He has been particularly harsh on WeWork, and he has implied that the episode may create a ripple effect across the rest of the tech industry.
“I believe we are seeing the mother of all shifts from a focus on growth to margin,” he wrote in a recent blog post for Business Insider.
That shift is going to have a major effect in the coming years on tools you’ve come to rely on in doing business—particularly software-as-a-service tools that may be a fundamental part of your day-to-day. To offer an example: Since Slack entered the stock market in June, its valuation has fallen by nearly half. And the chat service is actually seen as performing better than many of its peers, with stronger fundamentals. What about all the startups that aren’t as well-known as Slack?
Worries about a looming recession are rising, causing associations to consider their readiness for an economic downturn, as my colleague Rasheeda Childress noted last week. In the business world, these concerns are likely to affect investment in new ideas, such as those that startups specialize in. It’s not necessarily right, but when investors get burned, they tend to tighten up what they’re willing to give.
Betting on a startup is already a risky business. Apps shut down regularly, even those run by large companies. Sometimes, they can spark important trends—I imagine you wouldn’t be using real-time chat in your office had Slack not come along—but not every service is built to last.
An old coworker of mine once told me that “startups scare me,” speaking to the way that companies often come in and out of a market within a couple of years with a lot of flash but little in the end to show for it. At the time, we were having a debate about different tools. One was well established but difficult to use; the other was fresh-faced, easier to use, and less expensive. I pushed for the little guy, and I lost.
Within two years, the little guy was gone, eaten up by another company, its work forgotten. The big guy, complex as ever, is still very much there. I love using startup-made tools, often more innovative than their competition, but I keep that in the back of my mind.
As I wrote earlier this month, the problems that WeWork ran into probably won’t kill coworking as a concept, just as a service like Uber will probably get market replacements rather than die out entirely. And even if a service you use doesn’t fade out, it could simply raise prices, which may create other problems.
In ways big and small, we could be facing a period of disruption with all the tech tools that get us through our workday. Most of these companies aren’t public—you may not get a clear idea that things are going south until it’s too late. If you made a big bet on one, keep an eye on it in the coming months as the move toward margin over growth starts changing the shape of the startup field.
And if you’re thinking of making a big bet on a startup, slow your roll. Think it through.
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