With the hottest startups raising big money from investors, and founders and early employees of some of the most successful cashing out some of their equity to the tune of millions, it's no surprise that so many entrepreneurs and wannabe entrepreneurs are taking the plunge and starting companies that they hope could be the next big thing.

Building a successful company, of course, is tough, and the odds aren't favorable. Despite the hot market, a growing number of observers believe that we may be in the midst of a bubble which may not be as big as the first, but which could still create significant pain for entrepreneurs and the startup investment community.

In perhaps another sign that the good times are going to be ending sooner than later, a startup called Wahooly aims to launch a business around helping other young startups with one of their biggest challenges: acquiring users.

That company, Wahooly describes itself as "Klout meets Kickstarter meets Shark Tank." The proposition for startups: if you're looking for users and exposure, set aside some equity, which we'll divvy up and give to members of our service who are interested in being a part of yours.

The proposition for users: "Imagine if you had owned just a fraction of a percent of Linkedln when it went public? Or, what if you had a piece of any company that got purchased by Google?" You'd be rich, right?

If only it were that easy.

There are numerous legal, tax and logistical issues problems with the Wahooly model that will almost certainly keep it from being adopted by serious startups. But the fact that something like Wahooly is even being launched harkens back to the first .com boom (and bubble), when several companies tried a similar equity-for-early-adopters model. Their names elude me because they, not surprisingly, did not survive the bust.

Which gets to the heart of the problem with Wahooly: money can't buy you love. Money may be able to get you attention, and you may be able to convert some of that attention to meaningful action for a short while. But you can't bribe users to stick around, or customers to keep them coming back to buy more of your widgets. In other words, if your product or service smells bad, you can't get rid of the smell with stock options which are effectively worthless.

This, of course, should be fairly obvious. After all, the most prominent consumer internet startups of the past decade didn't have to convince consumers to use their services by handing out equity. The founders of Facebook, YouTube and Twitter, for instance, weren't handing out stock options to the first 5,000 people who showed up because they needed help finding users. They built services that appealed to consumers and they successfully marketed themselves to the public. And thus far, they've largely done more to keep them happy than they have to drive them away.

Wahooly may not be a serious, well thought-out venture, but in these frothy times, entrepreneurs shouldn't forget: the market may not be a pure meritocracy, but if your product or service doesn't have merit, nothing -- not even an equity handout -- will make up for it.

Patricio Robles

Published 18 October, 2011 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

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