When Strategy Fails: We Write Off Start-ups Because They’re Unprofitable

When Strategy Fails is a periodic point of view on common trends, missteps, and miscalculations companies across industries and growth trajectories make in relation to their long-term strategy and execution. These are broad reflections and anecdotes from years of working in business strategy and digital transformation, and are not specific to any individual client or industry. Follow along with this series to uncover some overarching themes and common fallacies, and how to potentially combat them at your organization.

When Strategy Fails: We write off start-ups because they’re unprofitable

I’ve been in countless meetings where digitally native startups are mentioned and then quickly dismissed. Startups that threaten the business models and market leadership positions of many of my clients. The dismissals are firm statements, things like:

  • “Yeah, but they don’t have our scale.” 
  • “Let’s see them try to use an app with the Medicare audience.” 
  • “They’ve been around for five years and barely made a dent.“ 
  • “Of course they have a great customer experience, but they’re not profitable.” 

It’s not that these statements are untrue. They’re all true. They’re just incomplete and short sighted. And that’s because consumers don’t really care. 

  • Scale only matters if a brand can’t meet your needs. 
  • Apps are easy and convenient, even for older generations. So if the app drives value, it will be adopted (think of how grandparents adopted FaceTime).
  • Startups take time to scale. Blockbuster closed its final store 21 years after Netflix launched.
  • Profitability matters for investors. But customers want the best product and most relevant experience they can get for their money. 

We fail to realize that these startups with better experiences permanently change how we view industries and shift expectations for how products and services should be. Because consumers don’t care if a brand is profitable as long as that brand is still around. And if the brand goes away because ultimately their costs are too high, consumers will just go to the next brand that offers a similar business model. If Uber and Lyft disappeared tomorrow, would we all go back to hailing taxis off the street? Probably not.

Many established companies have spent years optimizing their business models, and digital startups threaten their positioning and worldview. But they shouldn’t expect consumers to flock to the trusted brand that is profitable. Instead they should figure out how to meet customer expectations profitability. This may mean learning from, investing in, or partnering with startups, even those that are flawed or don’t have all of the answers. This will help them evolve their offerings as expectations evolve.

Because the Quips, Silvercars, Betterments, Oscar Healthcares, Lemonades, Brooklinens, and countless other startups that have been dismissed at executive meetings will come and go. Some have been or will be bought, others will eventually fizzle out. But they will forever alter the expectations of their category.

Instead of dismissing startups, learn from them. For example, consumer packaged goods companies such as General Mills and Kraft Heinz operate incubators. Incubators give these large companies a way to learn from startups — and to share in their success by taking a financial stake in them. In addition, businesses can collaborate with startups through third-party organizations and academic institutions. For instance, the Connectory acts as a collaboration space for startups and large organizations (such as IBM) with a focus on technologies such as the Internet of Things (IoT). These collaborations also make it possible for startups to learn from large businesses, too. The choice is clear: evolve or fade.

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