Why do start-ups fail?

Sašo Papp: But Monika, there are also many, many, many cases where a business model was changed, strategy was changed. What about the “just go with the flow” model and taking the fake it till you make it approach?

Monika Kek: Well, I have to admit that we see lots of things, but as a matter of fact I would counter advise. Because I know that this is a fashionable term, “to go with the flow”, but I think first of all, you have to recognize the right flow to go with because there are lots of flows, there's a lot of noise around you. In business as well, it is a crowded place to be a startup if you are, let's say, in the tech industry as well. I'm not against change, so change is a natural part of life. But I would counter advice to have unstructured impulsive changes all the time because, after a while, you will lose the sense of the track on which you would like to achieve your ultimate vision. So this kind of renaissance approach, probably it's not for business. That's for art, I would say.

Sašo Papp: Great answer. Thank you. And then we come to the big question of money. We know of numerous cases where startups fail simply because their runway is not long enough, as we say. Basically they run out of money before they fly. So at the moment, it looks like there are immense quantities of it available on the market. According to Crunchbase data, venture funding to startups in Europe totaled an unprecedented $59 billion in 2021, which is crazy money. Money can answer a lot of problems, but is money the answer to every single problem, Sasa?

You have to develop the product further, protect its IP or business secret, build a customer base, secure contracts or delivery, the list goes on.

Saša Sodja: Money is not the answer, but it really always helps, like in normal life. But work still needs to be done that will never go away. With money, you can employ assets that solve the problems you have. And maybe if you want to do the work by yourself, you don't have the additional pressure of survival so you can focus better. So getting funds of course is good, actually is the goal; but one needs to be careful not to relax too much. The investors will not come in and do the work for you. So at this stage, you no longer just work for yourself, but also have to meet commitments that you made to the investors and there's work to be done. You have to develop the product further, protect its IP or business secret, build a customer base, secure contracts or delivery, the list goes on.

    But like you said, money is burnt easily. And a lot of times it's not burnt on stuff that is paramount. So you still have to run a tight ship and be pragmatic. And a lot of times the investors don't feel bad for losing the initial investment, they’re used to that. But once that happens, it's difficult to get someone else to believe in your business plan. And it's always important to balance the enthusiasm of getting funded and having this notion that someone believes in you and that you will be successful with hard work and knowing that there is still road ahead, and it's not a short road, it's kind of a long drive.

Sašo Papp: So this is somehow a groundwork startups need to do if they want to scale as investors and big corporates expect a certain maturity of startups, right? I would imagine that investors are not some guardian angels that will encourage the startups to incredible feats, they have the ability to do so. But I guess they will kind of scrutinize the business, Monika?

Monika Kek: Well, that's a difficult question if you ask this way to be honest, but I have to tell you upfront that money may also generate problems. As Sasa said, it easily blinds us, everything that is glamorous and glittering and the hope that we can achieve everything could be very controversial even in the short term. I might be a myth buster here, but there is such a thing as too much money. Because once you receive the funds from your investors, they want returns, so you have to get your money to work. And this is what we see probably less often nowadays, because we are bathing in money, as you said, and the funds are very easy to achieve at the moment for certain reasons, which is another podcast probably. And once you get it, I think it somehow has the tendency to generate some corporate hedonism instead of keeping a sharp focus on the original agent when it comes to growth plans, et cetera. So money could be also toxic.

    Not to be so negative, I have to admit that basically this is a solution for taking a leap to scale up or generate quick growth where it is vital, let's say in a particular industry because of competition. And in this case, I would say some of the founders have their best days when somebody gets and scrutinizes the business, forcing some minimum reporting and obligations on them and forces some structures on them, et cetera. Because it seems like a pain at the beginning, but even in the medium term, it gives such a structure to the business life that it will flatten a bit the road to success, even though it's hard to believe at the very beginning. So yes, funds are good, so we all hopefully have big ones, but I would also give a warning here to be very keen on choosing the right ones and in the right amount, just to be clear about the capacities, the capabilities, time frames, et cetera, not to run into the trouble of being blinded by the huge availabilities. Yes, I would say that exactly.

Saso Papp: Thanks. Yeah, we'll come back to that. But I can imagine that it can be quite stressful to let someone peek around the business you have set up and developed and it's like your baby. And now it's like an uninvited guest nosing around your home and looking for flaws. Sasa, how do you see this?

Saša Sodja: It's a very human trait actually, nobody wants to see people in their underwear draw. But if you want to work with someone and hopefully also raise funds, you'll want to get to this phase because it's literally one step before negotiations. And I think that startups have to remember that every company has risks, has issues, has things that are not compliant or like skeletons in the closet and that really rarely impacts the transaction or the investment, because investors just want the notion that something is being done about the issue. So I guess that a problem solving mindset should not be that difficult for startups because that's what they're all about. And fair disclosure is key. You still need to draw the limits at least before the commitment is made for the funding and put a non-disclosure agreement in place, of course. But this is not for basic information or for non-core business information, this is just to protect your competitive advantages.

    And I think that the investors actually really expect that, it shows maturity that you want to protect what you have. And also if other investors are snooping around, if you are an investor you don't want that everyone else also knows the same things that you now know when you actually bought in the company. So yes, definitely snooping around is not something that is pleasant. It's scrutinizing. Like Monika said, it also helps sometimes because the startups or the founders get to be aware of their shortcomings. But it's a normal business, it's how it's done. It's basically a part of growing up as a startup. And on the other hand, you also need to ask questions to the investors, you have to get to know them. It's kind of like a beauty contest, but more in a way of congeniality and not as much focused on the facade. Do you know what I want to say?

Sašo Papp: Sure.

Saša Sodja: It's normal.

Sašo Papp: Yeah. So what would be the best way to choose an investor or maybe no investor at all and try to scale organically, Monika? How do we do this?

Monika Kek: I think it's question of decision and how much money you have at home to invest further. I think this is a thing because you can always choose if you have the capacities to do something on your own. But I guess most of the companies, the startups at least we meet, very quickly reach a stage when to take a leap to scale up, something external is very much needed. Again, I can repeat myself that we have to be very clear about what exactly we want. So if we would like to expose ourselves to the variety of availabilities, we will easily be distracted by the variety and we might not be able to make the right choice. Because as you said, there is a huge amount of money available for viable project nowadays. So if you have a clear vision, because you did your homework, you have a clear business model, you have your proper vision and you also have a strategic plan in place, it should show you what is the interval in which you might seek either your funding partners or your corporation cooperative relationships, because that could be twofold.

    There are cases when investors are seeking a return basically. They see something shiny and they are ready to invest at a huge risk, hoping for a very huge reward at the end of the term. Others are looking for synergies in startups surprisingly, synergies for their own businesses, I have to emphasize. It doesn't mean that this is something toxic or unhealthy, but it means that you have to be very honest with yourself in order to find a mutually beneficial corporation for let's say the long term, if it is what you really want. It depends on the circumstances, of course. I also have to tell you that there are some negative examples when certain business entities or market players show up as investors and try to sniff around a certain target for whatever reason.

    But the real intention is not really businesslike or acceptable, at least not in our circles, according to our principles. Because that could also target some business secrecy, compromises let's be PC, which in no way should be the part of the game, even when it comes to startups and small companies at the beginning of their lifetime. So what I would advise is: don't hesitate to ask for advice. So once you have your baby in your hands as Sasa characterized, because it's really an emotional place, when you have to make such decisions to get rid of a part of your initial idea. So you naturally want to protect it and give it to the right hands. Be very careful and consult someone who sees you from the outside, so it doesn't overweigh certain issues or underestimate the relevance of other ones. So it's very, very crucial.

    Once you have someone on board, they might help you with the market intelligence. They might introduce you to the right group of investors or might keep you on track or from being blinded or distracted by some non-commercial, non-economical factors around the investment itself. So probably one last sentence here, it's about fair disclosure and how to make it in a particularly fair way. Having a structured and focused fair disclosure doesn't mean unlimited or unbounded honesty and a flood of information necessarily, that can be as damaging as hiding or misinterpreting things. So someone can help you really to structure what you would like to let's say show or present about yourself and how to do that the right way, to have a mutually beneficial relationship in the business for the long term. [crosstalk].

Sašo Papp: Very good. Yeah. Monika, scaling, investing, growing for the startup, it's not just rainbows and butterflies, as we say, it's a long journey. But how does one make the process of growth as enjoyable as possible?

Be prepared for the three A's because we all have letters to remember, which is like align, adapt and adjust if necessary, without giving up the original vision.

Monika Kek: Well, I think you have to be kind of an adventurous type, I guess, because you are jumping into the unknown and then you are very persistently swimming towards something that you have in your mind, and probably you are the only one who has all the details in mind. So I would say to keep to the vision, so always remember why you started, I think it's a good start. And be prepared for the three A's because we all have letters to remember, which is like align, adapt and adjust if necessary, without giving up the original vision. And simply enjoy the ride: even if it's bumpy and difficult, enjoy it.

Sašo Papp: Enjoy the journey as they say, right?

Monika Kek: Exactly.

Sašo Papp: Sasa, your thoughts on this?

Saša Sodja: I think we need to support startups. They have this idea that with a good idea, or just with the idea, you can make it. So basically they're making the world a better place for everyone with having this process. And even if they don't, they're kind of the cool kids that have the vision and believe in themselves. So if they tell you at the beginning that two thirds of startups never make a positive return, then it takes some courage to travel that route. And I've met incredible people in the community, I have huge respect for them. And as long as they do not lose their will to learn and to assess things from a different perspective; in less words, they should not be stubborn and should listen to experts that want to help, then I'm sure they'll be fine. We just need to be here to offer support and live vicariously through that, hoping to catch some of their enthusiasm. Because the idea that with having this better solution for something, and you can make it and make the world a better place, it's a good thing for everyone.

Sašo Papp: Sure. Yeah. Monika and Sasa, it was such a pleasure talking to you. Big thank you for your time and for sharing your thoughts and knowledge, have a wonderful rest of the day. To all of you who were with us, thanks for joining us in this episode of At Center Stage. Until next time, stay safe and enjoy life.