The Startup Iceberg

When I was at Endurance International, I was part of numerous conversations (usually with outsiders who didn’t know hosting too well) that had a certain mindset about startups. From their perspective, every startup was on a rapid growth track. Their presumption was that startups would move inexorably from few employees to many employees, from low revenues to high revenues, and from simple needs to complex ones. The conclusion was that the company’s strategy should revolve around companies moving through a small-to-large lifecycle.

But the reality was that only a tiny fraction of our customers were on that path. Most were small and would stay that way, and while most would have been happy with growth, few were shooting for rocketship-like progress and most knew that growth would be bumpy and not a straight line.

Entrepreneurship educators traditionally call the rocketships “growth” companies, and the others, disparagingly, “lifestyle” companies – as if starting and running a business was something relaxing that one did as a hobby. In practice, attention and resources and – let’s say – glory have always gone disproportionately to “growth” companies, leaving “lifestyle” and “small” businesses relegated to second class status.

And yet everyone knows that small business is the engine of the U.S. economy and the number of businesses in this country is huge (23 million, 54% of all U.S. sales). Logically, those companies have to start somewhere. The vast majority of “startups,” then, are not potential rocketships but small businesses in the making.

That’s the iceberg. 90% of U.S. startups are below the waterline: out of sight, out of consideration. At best they receive only a tiny fraction of the resources dedicated to more visible and more glamorous startups, and yet they account for a vastly larger amount of value. If we really think entrepreneurship can make a difference in the world, we should focus on the bottom chunk of the iceberg.

The world beyond TechCrunch

It’s clear that they need it. According to a recent study by Bradley University and the University of Tennessee, 25% of businesses fail in the first year. 36% of those remaining fail in the second, and 44% of what’s left fail in the third year. In business circles, these numbers have been taken for granted for so long, they’ve become something of an unchanging background reality. Most businesses fail, that’s just the way it is.

But why? Nearly all business failures come from bad management decisions. The Bradley/UT survey cited “Incompetence” (emotional or bad pricing decisions, living too high for the business, nonpayment of taxes, lack of planning, bad recordkeeping), “Lack of Managerial Experience” (poor credit granting practices, too-rapid expansion) and “Lack of Business Experience” (inventory and supplier mismanagement, wasted advertising) as responsible for 87% of all business failures. Do we really believe that bad management decisionmaking is an unchanging background reality? If that’s true, why do we have business schools at all? Do we really believe that business education only applied to people who start rocketships?

Moreover, think of all the resources available to rocketship startups in Boston alone: social networks, mentoring programs, workspaces, accelerators, networking events – and the same thing is happening all around the country. The startup ecosystem is thriving … for the tiny fraction of all startups that have a shot at being high-growth.

The rest get ignored.

Where are the neighborhood startup initiatives? The ones that are helping people run their own electrical or retail businesses, not just software dotcoms? Where are the mentoring programs and workspaces and events that support and celebrate startups that will create products and services and livelihoods and value for their employees and their customers and stakeholders, one small firm at a time? When will we trade in our cultural bias towards “go big or go home” in favor of “go small lots of times”?

A manifesto for change

  • First we need a new name. “Lifestyle business” and “small business” are not only misnomers, but carry linguistic and cultural baggage that segregate and denigrate these businesses from the “sexier” rocketship mainstream. We need a term that removes presumptions of growth or founder intent from the picture.
  • Second, we need a different definition of success. Steve Jobs and Mark Zuckerberg are worthy role models for rocketships, but poor ones for the local restauranteur. Young entrepreneurs enter the profession with those templates on their minds, creating both unreasonable and unattainable expectations. It’s the “get-rich-quick” and “solo-genius” mindsets that doom most startups. Real startups are hard work but intensely rewarding  in their own right – both individually and societally. A more realistic but still rewarding vision for the would-be entrepreneur would change much.
  • Third, we need better risk capital models. Apple and Facebook meant unimaginable wealth creation for many – but mostly the institutional investors that took them on their ride. Angel and institutional investment go exclusively to rocketship vehicles; everyone else is limited to their own resources. Let’s be honest: banks are terrible at funding startups, and government/institutional funding is inefficient and inadequate at best. If we could bring modern investment practices to the non-rocketship community, we could see both more value creation and higher success rates.
  • And fourth, but perhaps most important, we need better education. Entrepreneurship is not taught in schools, and if it were it would be woefully out of date given modern techniques. Thankfully, the internet has the answers to this problem, it just has to be packaged properly. Take the same structures that rocketship startup ecosystems have created and repurpose them for the rest, and we’ll be well on our way.

Michael Sattler

With a career spent in founding and technical leadership roles with new and enterprise-level organizations, Michael Sattler is a veteran in technology strategy, operations, and product management. He’s spent decades in B2B and B2C SaaS product development, software and application design, engineering operations, new venture creation, and innovation practices.

He has scaled and managed technical teams from 2-50+ across three continents, led large-scale cross-functional program management, and founded or co-founded six companies.