TL;DR

In recent years, startups have increasingly shifted from being seen as early-stage business phases to becoming a distinct financial asset class. This transformation is largely driven by what Julian Brigden of MI2 Partners calls hyper-financialisation—an era of "extreme capitalism" where CEOs focus more on raising capital, buying back shares, and inflating valuations rather than building sustainable businesses. Paul Graham's essay on Founder Mode adds another layer to this debate. While it champions the founder-led model, it may inadvertently perpetuate a cycle where companies remain in perpetual startup mode, prioritising fundraising over profitability. This blog explores whether startups have truly become a separate asset class due to hyper-financialisation, and whether Graham's essay contributes to this shift.

Thought leadership versus financial reality

In a hyper-financialised environment, this mindset can trap companies in a cycle of fundraising and inflated valuations, where rapid growth is prioritised over long-term profitability. Instead of evolving into mature, self-sustaining businesses, these companies remain fixated on the next funding round, driven by the allure of increasing valuations and investor satisfaction. This shift from a business focus to a financial focus risks creating "perpetual startups" that continually chase funding rather than achieving sustainable growth.

Can a perpetual startup be a successful business?

With over 34 years of experience in equity underwriting, corporate investing, and M&A across six continents, I have witnessed many companies evolve from scrappy startups to mature, profitable businesses. While capital is crucial for early-stage growth, it should be a means to an end, not the end itself.

A successful startup in a hyper-financialised world excels at raising funds and creating liquidity events for investors. However, a truly successful business evolves from its startup phase into a later-stage entity focused on predictable revenue generation and long-term profitability. For example, Amazon initially focused on exponential growth but eventually became a global leader in e-commerce by reinvesting early profits and achieving sustainable growth.

How did hyper-financialisation happen?

Hyper-financialisation emerged from the Global Financial Crisis (GFC), when zero interest rate policies (ZIRP) and extensive fiscal and monetary stimulus led to a surge in investment capital. This trend peaked during the COVID-19 pandemic, driving unprecedented levels of investment in risk assets, including startups. The era of easy money ended in April 2022 with rising interest rates, leading to a sharp decline in startup valuations and investment activity.

Y Combinator (YC) played a significant role in this shift, offering a branded basket of early-stage innovations and making them accessible to investors. This financialisation of startups, epitomised by YC’s successful branding, suggests that startups have indeed become a hyper-financialised asset class.

The challenge of transitioning from a perpetual startup

Many startups find themselves locked in perpetual startup mode due to hyper-financialisation. Rapid scaling and fundraising overshadow the core mission of building a sustainable business. Paul Graham defines startups as "companies designed to grow quickly," but if quick growth becomes the sole objective, profitability often takes a back seat.

Examples of perpetual startups

• WeWork: Raised billions but failed due to unsustainable growth and financial mismanagement.

• Theranos: Promised revolutionary technology but lacked a viable product.

• Juicero: Secured over $100 million in funding, but its product didn’t justify its valuation.

• Quibi: Raised $2 billion but failed to find product-market fit and shut down quickly.

• Katerra: Raised over $2 billion but failed to scale profitably.

These companies remained focused on constant fundraising, ultimately failing to transition to sustainable profitability.

Examples of startups transitioning to innovation-led businesses

• Amazon: Evolved from a high-risk startup into a global leader by focusing on reinvestment and long-term growth.

• Airbnb: Grew from a lodging platform to a major player in hospitality, emphasising sustainable market expansion.

• Spotify: Became a key player in music streaming with a scalable business model prioritising growth and profitability.

• Slack: Transitioned from a team communication tool to a significant enterprise software solution.

• Square (now Block): Expanded from payment processing to a diversified fintech company with a strong focus on profitability.

These companies illustrate how startups can successfully transition from the early phase to mature, innovation-driven businesses through sustainable growth and profitability.

Tesla: a hybrid model

Tesla represents an interesting hybrid model. It began as a high-risk startup with aggressive growth ambitions but has evolved into a more mature business with consistent profitability. Yet, it retains startup-like qualities, such as bold innovation and disruption in various markets. Its ability to balance market pressures for growth with sustainable profitability will be crucial as competition intensifies in the EV sector.

Final thoughts

Given Paul Graham’s influence and the success of companies like Airbnb, his essay will likely be widely read and studied. However, it’s worth considering whether the emphasis on founder-led companies may unintentionally promote a perpetual startup mindset. This could transform startups from a phase into a hyper-financialised asset class characterised by continuous fundraising rather than sustainable business practices.

If you are in startup mode, consider whether you aim to develop a successful innovation-driven company or become a perpetual startup reliant on the vagaries of the startup ecosystem.

For insights on planning beyond the startup phase and achieving predictable revenues and sustainable profits, feel free to reach out for a discussion over ☕ and 🥐.

Mike