In 2015, the UK tech sector raised £2.5 billion in venture capital funding. That figure was dwarfed by the US tech sector which saw a record $60 billion total investment.
These gargantuan figures are an indication of a global desire for a slice of “the next big thing”. The readiness to invest huge sums in early-stage businesses, sometimes just concepts, has also created a warped sense of what it means to start and run a business.
When I first began telling people that I was planning on starting a business, a recurrent response was “you should get funding – don’t waste your own money”. Whilst I appreciated the sentiment and good intentions, it did lead me to wonder why that response had become the default position. My answer was always the same: “I don’t think I need funding, I’m just going to win clients and generate revenue”. Isn’t that the point of business after all?
Yet in 2016, where every kid in a hoodie straight out of university has plans to become the next Elon Musk and every investor has a huge sense of FOMO (fear of missing out) in case they pass on a chance to invest in the next Uber or Airbnb, perhaps the goalposts have shifted. Now, start-ups prioritise getting to the next funding round, when in reality the priority should always be getting the next client.
In an environment where money seems to be no object, entrepreneurs receive million pound VC investments and instead of spending that capital on staff, infrastructure and R&D, they blow the investment on plush central London offices, thousand pound coffee machines and designer bean bags, all before their business has made a single penny in profit.
Worryingly, today’s market conditions mirror those of the late 90s and early 00s; the lavish years of the dot-com bubble. Just as it was 20 years ago, the excitable venture capital community favour intangible metrics such as consumer confidence and speculation, over the ability to actually make money. Many investors are unable to resist the lure of sexy tech companies and are taking a gamble based on a hunch. But the market, just like the house, always wins.
Is history about to repeat itself? The fundamentals of business never change; sell, or else. The reality is that many tech businesses aren’t intended to be commercial machines. Take Facebook as a prime example. Mark Zuckerberg is a very talented developer and created a platform that changed the world and the way one billion people communicate with friends and family. Yet, despite being founded in 2004, it took Facebook until 2012 to actually begin making money. As talented as Zucks is, his mind is not a naturally commercial one, and his model wasn’t even designed to make money in first place! That is not unique in the tech community.
With an abundance of exciting new technologies, such as VR and wearable tech, rising in prominence, more investors are likely to blindly plunge their cash into areas that are creating consumer buzz and demonstrating potential, but lack a proven model to make money.
With so many foundations built on sand, we are hurtling head-first towards a crash of huge proportions. Just like Einstein’s prediction of war: “I do not know what weapons will be used to fight World War III, but I am certain World War IV will go back to being fought with sticks and stones”, I do not know what businesses will look like in the next five or ten years, but I am certain that businesses after a crash will go back to models which are based on more than the depth of their investors’ pockets.
Leon Emirali is an entrepreneur, investor and co-founder of media agency, Crest.