For founders and investors alike, parsing out which startups are looking to capitalize on long-term trends from those that might be just passing fads can be tricky. Fads can be deceptively disruptive and lucrative to start, but ultimately burn out quickly. Here is how you evaluate startups for long-term potential and avoid getting sucked into the hype.
Fads vs. Trends
The lifecycle of a fad may be a brief as a few months, or as long as a few years. A major sign that something is just a fad is the hype surrounding it. It may be something that seemingly pops up out of nowhere, garnering a significant amount of attention and consumer demand very quickly. While fads can change consumer habits in the short-term, they generally do not hold longevity. As quickly as fads appear, they can fade out in a similar, rapid fashion.
Unlike fads, trends tend to emerge more slowly over years, or even decades. They are broader in scope and can make an impact across many industries. A key differentiation to make between fads and trends is that trends in this context are often more macro-level, while fads often occur on a smaller scale. Trends tend to make a lasting impact on the market, changing consumer needs or habits long-term.
Signs that a Startup is Just a Fad
Competition is one thing, but a business that is easily replicated may be one that is relying too heavily on a fad. An example of this pitfall is Blue Apron. The meal kit delivery service took off quickly, reaching a valuation of roughly $2 billion in 2015. Since its public market debut in 2017, the company’s shares have steadily declined in value. While there are many factors that could have contributed to this rapid decline, one that has been pointed to frequently is the company’s struggle to retain customers in the face of growing competition. As competitors like HelloFresh, Plated, and Sun Basket entered the market, offering discounts for new customers, it has proven difficult for Blue Apron to incentivize customers to stay.
Failure to Evolve
Similar to companies whose primary offering is easily replicated, startups that fail to grow beyond their initial offering are likely to be outpaced by others who do. A couple of examples of this are the photo messaging app SnapChat and Twitter’s Periscope, a video live streaming app, both of which have struggled to keep up with the major incumbents – Facebook and Instagram, who have effectively copied and quickly improved upon Snap and Periscope’s main offerings.
While once wildly popular, since going public in 2017, Snapchat has not exceeded its opening price per share and has yet to turn a profit. Many speculate that this is due to Instagram integrating the same feature into its more robust and already popular app. In fact, upon Instagram’s release of its own ‘Stories’ feature in 2017, the photo-sharing app’s daily active users rocketed past SnapChat’s.
Similarly, Periscope has struggled to live up to the hype that led Twitter to acquire it in 2015. While the app did help to popularize live-streaming, many users now turn to Facebook and Instagram’s live-stream features instead.
While there are certainly other factors at play here, both Snapchat and Periscope’s failure to grow beyond their initial functions has left them behind other major players in the social media space.
Spotting Longevity Potential
Incorporates Macro-Level Trends
An example of a macro-level trend would be the consumer shift towards shopping online rather than in-person. An excellent example of a company that took this trend and ran with it is Amazon. After learning that web commerce growth was projected to skyrocket with the growth of the internet, Jeff Bezos leveraged that trend, and Amazon the online bookstore – and eventual marketplace – was born.
In order to stay at the forefront, it’s important that companies keep an ear to the ground to spot trends as they emerge, helping them to adapt as needed, better positioning themselves for the future.
Imitated, But Never Matched
Competition is healthy. It helps keep businesses on their toes, and ideally, and often makes things better for consumers. Just because an idea is easy to imitate, doesn’t necessarily mean a startup is doomed. It does mean that it needs to have a competitive advantage. This could be intellectual property, excellent customer service, speed, ease of use, etc. Companies that can do something better than the rest will always have that edge, potentially increasing longevity.
As seen with Snapchat and Periscope, if you don’t evolve, your competition will. Companies with true longevity don’t stop with one good idea – they expand over time, remaining relevant to customers by growing to match evolving tastes and needs.
When you think about startups that have endured, you will see that they often share these traits. And whether you’re a founder looking to get your idea off the ground, or an investor considering a potential investment opportunity, it’s important to take a step back and ask yourself – does this follow the trajectory of market trends? Or is it the next fad to bust?
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.