Yesterday’s post focused on the importance of financial controls.

Unicorns focus on funding.

The “horses” talked about yesterday are focused on profit and building sustainable business.

But when it comes to valuation, founders often focus on just one number: the magic B (as in billion).

This was analyzed in great detail in a post from CB Insights last month.
On the 31% of unicorns that are worth exactly $1B, partner at Lightspeed Venture Partners Jeremy Liew wryly noted (via this tweet) that it’s “potentially not a coincidence.”

Investors are still enamored by founders with their fast talk and passionate visions to “change the world.”

However, enamored or not, when funding, investors focus closely on CYA.

Which is easy, since investors have all the leverage, because they dictate the terms.

This is what is happening to get that exact $1B valuation. Even if the fundamentals don’t justify the $1B valuation, the investors can lay on enough structure and terms to get the founders to a $1B headline valuation (while investors have the protections they need). With the $1B valuation, founders get:

• desired media exposure to attract talent
• bro-grats tweets
• conference speaking gigs
• a place on this list

Of course, it’s the programmers, marketers, sales and support who actually build the products that will pay the price for the inflated valuation.

In these exit situations, common shareholders, aka employees, get fleeced.

Harking back to 2015, money has tightened again and being profitable is at the forefront of founder thinking — mainly because it’s the focus of investors.

Stockpiling cash is at odds with the model of most venture capital-backed start-ups, which typically raise piles of money to spend on growing faster. Many investors are now pushing their companies to turn a profit.

Shades of déjà vu.

Image credit: Purple Slog

Poking through 13+ years of posts I find information that’s as useful now as when it was written.

Golden Oldies is a collection of the most relevant and timeless posts during that time.

Burn rate is why companies (and people) should budget. Unfortunately, budgeting is often driven by burn rate when it should be vice versa — as most learn the hard way. Hard, but not impossible, just ask the guy who went from a burn rate of over half a million a month to $15,000. Although this post is from 2016 when money was tight and focused on entrepreneurs, it applies to companies of any size, as well as people, no matter their income.

Read other Golden Oldies here.

Last summer David Bladow, co-founder and CEO of flower delivery startup BloomThat, had the worse kind of ah-ha moment after deciphering the company’s accounting — a self-described “convoluted mess.”

What he found was a monthly burn rate of $550K that meant the company would be out of cash in just 4 months.

That knowledge drove a laser focus to change.

Now instead of shutting its doors in November, its self-diagnosed death date, the startup launched nationally on February 3. The company that was burning through half a million a month is now down to $15,000 a month.

BloomThat did early what every founder should be doing now.

Yesterday Mark Suster wrote about how to figure the right burn rate for your company and last week we talked about doing more with less.

Actually, I think the tightening of funding is a very good thing, although it will create a certain amount of carnage, it will force founders and their teams to grow up.

If that sounds harsh, so be it.

Funding based on unproven future sales is driven by hopes that are heavily shaped by outside circumstances — circumstances beyond any founder’s control.

Sam Altman warns that funding is not a guarantee of success and in the next few years David Bladow, Andrew Wilkinson and dozens like them will prove that horses have the staying power that unicorns lack.

Flickr image credit: Tsutomu Takasu

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here.

Pundits and investors of all kinds, from lone angels to major VCs, say that your company’s culture is critical to its success.

Therefore, the most important question founders should ask themselves is what are my values?

Not what you say out loud, or agree to in order to fit in, or because they are good talking points, or to be PC.

You need to be brutally honest, at least with yourself, because, in the long run, whatever your values truly are will out.

Mark Zuckerberg claimed he wanted to do good by connecting people.

Larry Page and Sergey Brin wanted to organize the world’s information and “not be evil.”

But, in the long run, their top core value became obvious, echoing Gordon Geko’s, “Greed is good.”

Also long term, Andrew Wilkinson’s 2015 words reflect his values, I’m not a unicorn, I’m a horse.

Culture is based on founder values and sooner or later the real ones do surface.

This is where being “your authentic self” trips up a lot of people, not just founders.

Image credit: HikingArtist

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here.

Short post, longer articles, but worth the read.

Not all founders are focused on valuation.

Some think it through, realize their mission is the most important thing and find like-minded investors.

What has made us really successful is this idea that we’re not building a company. What we’re doing is solving a problem. In that sense, we’re not emotional about our solution but, rather, constantly listening to our customers and the market and being able to then adjust alongside that. –Shivani Siroya, founder of Tala.

Others get seduced by the idea of ego-boosting valuations, money to drive growth and a buy-out that lets them retire — or do it again.

Most founders dream of building a product that eventually becomes a household name and sells for a billion dollars, but chasing that goal comes with some downsides. The grow-at-all-costs model inevitably forces you to sacrifice something you care about in service of short-term revenue growth, whether that’s your culture, your employee experience, your products, or your creative approach.

That said, when they find the fun gone some go to great lengths to extricate themselves and their company from the investor attitude of “growth first/last/always!” as opposed to the radical idea of pleasing customers, employees and thinking for the long-term.

The Wistia founders felt so strongly that they preferred debt to selling — a large amount of debt.

We turned down the offer to sell Wistia and instead took on $17.3M in debt. This allowed us to buy out our investors, gain full control of Wistia, and take the path less traveled in the tech industry.

Read Wistia’s story, as told by it’s founders, on it’s site.

There’s a lot of hard-won wisdom, along with pragmatic explanations of what look like touch-feely decisions.

What is often forgotten in startup land is the high value associated with being happy to get up and go to work.

Image credit: Tala and Wistia

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here.

I’ve been working with startups since the 1980s; long before many of the current crop of entrepreneurs were born.

Back then, startups were focused on raising enough.

Enough was the minimal amount needed to develop their product start selling it — with the tightly focused goal of building a viable, sustainable business with strong financials and profit.

An old fashioned idea in an era where founders are lauded for their fund-raising skills and their companies are valued accordingly.

However, the idea of enough is gaining supporters.

The most recent is Sachin Kamdar, CEO of Parse.ly.

Kamdar needed to raise $5 million and couldn’t, in spite of strong financials and substantial growth.

Why?

They didn’t want enough money.

While they wanted 5 million, the VCs said they weren’t thinking big enough and offered 25 million and, eventually, 40 million.

What’s really going on here?

As has been noted by many entrepreneurs, and even some investors, VCs don’t offer what’s best for your company.

They offer what is best for their company.

Because they are awash with money, then need to deploy it. They’re limited by how many companies they can work with, so their preference is to make larger investments in fewer companies.

From studying the data, this much is clear: VCs are cash-rich right now, and it’s affecting startups. It pushes companies to raise more money than they actually need. Their viewpoint is, if VCs focus on writing bigger check sizes to companies that have a conceivable path to $100M in annual revenue, then they can put their capital to work “efficiently”. But that efficiency is self-defeating: writing bigger check sizes doesn’t, in itself, put that capital efficiently to work. It might, instead, breed company inefficiency.

VCs also don’t really care who succeeds; they only need one or two 10X successes for their fund to succeed.

In the end, Kamdar turned to his board for advice and found the solution, instead.

Our existing investors knew our business better than anyone. They understood how we were able to scale revenue and product on a lean budget. While they’d seen other SaaS companies come and go since our 2013 Series A, Parse.ly maintained rapid growth. And as it turned out, not only was there enough money to meet $5M in financing, most all of our past investors wanted to double-down. As a result, we ended up raising $6.8M.

A good outcome for Parse.ly and the data they uncovered means a better one for you.

Image credit: HikingArtist

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here.

This is a short post, aside from the quotes, and I honestly don’t care if you skip my part and just read the  main links, especially the last on from DHH.

It’s exactly two years since I saw a successful lifestyle business founder, Andrew Wilkinson of MetaLab and Flow, loudly and publicly say that he would rather be a horse than a unicorn.

Meaning, he would rather build his businesses organically and self-funded than take outside investment.

I wondered if his attitude was a harbinger of returning sanity.

Ha! Wilkinson’s attitude was an outlier, as opposed to a trend.

However, early as he was I see more successful founders following a similar path.

A few days ago I read a Medium post from Mara Zepeda, Co-founder and CEO of Switchboard, and Jennifer Brandel Co-founder and CEO of Hearken, coining a new term, zebra, to denote a sustainable approach to growth.

A year ago we wrote “Sex & Startups.” The premise was this: The current technology and venture capital structure is broken. It rewards quantity over quality, consumption over creation, quick exits over sustainable growth, and shareholder profit over shared prosperity. It chases after “unicorn” companies bent on “disruption” rather than supporting businesses that repair, cultivate, and connect. After publishing the essay, we heard from hundreds of founders, investors, and advocates who agreed: “We cannot win at this game.”

Adam Eskin, founder and CEO of expanding restaurant chain Dig Inn and a former private equity associate at Wexford Capital puts it this way,

“Having a background in private equity, we don’t just want to grow this business for growth’s sake, lose passion for what we do, or the reasons why we’re here. I think that’s what some folks can end up doing when they raise this kind of capital.”

As a tech person, who has been seduced into believing that valuation is everything, why should you listen to an outlier or non-tech founder, let alone a couple of women?

Perhaps you’ll be more inclined to listening to the guy whose tech generates raves and may even be the source code of your company.

DHH (David Heinemeier Hansson), creator of Ruby on Rails, Founder & CTO at Basecamp (formerly 37signals), writer of best-selling books and winning LeMans racecar driver.

There is no higher God in Silicon Valley than growth. No sacrifice too big for its craving altar. As long as you keep your curve exponential, all your sins will be forgotten at the exit. (…)  The solution isn’t simple, but we’re in dire need of a strong counter culture, some mass infusion of the 1960s spirit. To offer realistic, ethical alternatives to the exponential growth logic. Ones that’ll benefit not just a gilded few, but all of us. The future literally depends on it.

Image credit: HikingArtist

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

Last Friday I compared valuation based on investment vs. revenue with AppLovin as my example.

Put another way, it’s the difference between focusing on outside money and inside money, AKA, revenue.

“One of the problems with raising money is it teaches you bad habits from the start,” said Jason Fried, the co-founder of the software company Basecamp, who has written frequently on the perversions of the venture capital industry. “If you’re an entrepreneur and you have a bunch of money in the bank, you get good at spending money.”
But if companies are forced to generate revenue from the beginning, “what you get really good at is making money,” Mr. Fried said. “And that’s a much better habit for a business to work on early on, to survive on their own rather than be dependent on money people.”

That’s the approach embraced by 16 year-old MailChimp, with 2015 revenue of $280 million and will top $400 million this year.

As a private company, MailChimp has long kept its business metrics secret, but founder Ben Chestnut wants to publicize its numbers now to show the road less traveled: If you want to run a successful tech company, you don’t have to follow the path of “Silicon Valley.” You can simply start a business, run it to serve your customers, and forget about outside investors and growth at any cost.

Chestnut also doesn’t have a Silicon Valley ego, as demonstrated when defining the company’s values

I asked all of our managers and senior managers to help me out with them, and we came up with three: creativity, humility and independence.

and hiring.

I’m looking for that philosophy because I want someone to push me and make me better. I want people who are smarter than me, and who will push and fight for something they believe in while also respecting the values and unique nature of the company. We have to be creative in pushing our boundaries, but sticking to our values.

There is an interesting thread I find running through founders who bootstrap and build their companies by focusing on generating revenue, as opposed to fundraising and hypergrowth.

Both types have vision, focus, drive and grit, but, based on reading, those building their companies on internal money don’t seem to have the same need for validation — not of their vision, but of themselves.

Image credit: HikingArtist

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

A founder I know is complaining that almost it’s impossible to achieve unicorn status with investment dollars so tight.

Really?

I guess nobody told the founders of AppLovin, who just sold a majority stake in the 115 person company for $1.4 billion.

The mobile ad network was founded in 2011 by Adam Foroughi, Andrew Karam and John Krystynak and has  never taken traditional venture capital funding.
“I couldn’t find anyone to give us an investment at what I thought was a reasonable starting point valuation (maybe $4 million or $5 million) and, by the end of our first year of operations, we were profitable and doing over $1 million a month in revenue,” he explains. “So I put together a round with angels not really because we needed the cash, but because I thought these were influential people who could help us grow.” —Adam Foroughi to Forbes’ Dan Primack

Easy money made for high valuations sans revenue.

These days you need actual revenue as opposed to users, promises, and sunny predictions.

My reaction can easily be summed up in one word.

Tough.

Image credit: Hiking Artist

I’ve been around startups since the late 1970s; long before dot com and software took over the spotlight.

And what I learned about VCs back then was different from VCs now.

Back them, most VCs were guys who had started or helped start companies, with strong operational, not just technical, and strategic background.

Sad to say, most VCs with under 25 years experience often don’t know what they’re doing, because they have never created/built a company, while the rest are just bankers masquerading as VCs following “sure bets.”  

Granted, VCs have always had much in common with lemmings, preferring to fund “me, too,” companies, as opposed to earth-shattering, high risk products/services that actually moved society in new directions.

From my perch back then on the edge of the VC ecosystem I watched as the “names on the door” retired and were replaced by Wall Street wunderkinds, whose only skill was manipulating money.

What didn’t change was their lemming-like, follow-the-leader investment strategy.

Things haven’t improved much.

While more partners and  “names on the door” have operational experience, the investment ecosystem is more closed-door incestuous than ever before.

So unless you are one of the mostly white, mostly male, right school, strongly connected, entitled few, start your company with a bootstrap mentality from the beginning — not as a fallback contingency.

Waiting for funding is like asking for permission.

Flickr image credit: billsoPHOTO

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

I saw a great article in BI about Postmates CEO Bastian Lehmann’s attitude towards hypergrowth.

For years, venture capitalists have been pushing hypergrowth over profits, at least though the initial phases of investment rounds. Investors told Lehmann to reinvest the company’s money in pushing more growth over building a sustainable business.

That advice didn’t go far with the Postmates CEO. (…) Lehmann argues that it’s the CEO’s fundamental job to have looked at the margins and made decisions early on.

“Companies that run for the last two years in hyper growth are now wondering how to make money.”

I completely agree — hypergrowth without a hope of unit economics that lead to profitability has always been a fool’s errand with precious few exceptions, and even those had their “come to Jesus” realization points that the investors were getting nervous and were anxious for at least a hope of a repeatable, profitable set of unit economics. 

There has been a sense that pushing the bidding of sequential funding rounds at ever-increasing valuations would create a kind of de-facto “momentum” and crowd-out 2nd and 3rd and 4th place contenders, or at least amass a large enough war chest to drive pricing down as much as needed to push competitors out of the running (usually also by creating such a huge and dominant brand that customer acquisition in a noisy market is too expensive to make progress to catch up with the so-called leader).

This is ultimately as silly as the Texas and Miami and Las Vegas housing bubbles, that depended on “the next fool” to buy-in at a higher valuation, depending themselves on having a subsequent investor bail them out at a higher valuation, and so goes the escalator.  The problem is, the escalator gets to the top at some point and there has to be a “destination” where value exists and with it, a hope of profitability.

The unsteady IPO market of last year and the continued bearishness of the IPO exit market this year has effectively called-out that “top of the escalator” and there are no more “next fools” (i.e. large enterprise buyers at the >$1 Bil level and no robust IPO appetite from capital market leaders that demand value and cash flow and a hope of profits).

So now, once again we are back to reality.

The great news about being back to reality is two-fold.

1)  Sub-billion dollar valuations are no longer an “embarrassment” to VCs; and

2)  Entrepreneurs can reasonably weigh a variety of capital structures that include bank and trade debt as well as investment equity and debt structures, all supported by revenue and that means free cash-flow.

With this in mind, the VCs and the investment community in general must start to become “reasonable,” because they are suddenly back in the traditional capital markets and will have to compete with other capital sources and structures for the hot deals.

Middle and nascent deals will have to become cash-flow generating, and for this reason they will also (wisely) become more reluctant to give up huge chunks of equity just to bring in working capital (at least not until the enterprise value pops to a higher tier by using bank debt, trade debt and other creative capital structures).

Savvy entrepreneurs and founding teams will also be less excited about creating an early and dramatic bump in valuation just to bank growth capital, because a down-round will likely wipe out a giant proportion of their equity.  The giddy “we are a unicorn” has turned into “what happens in a down round?” reality check, that most people forgot about.  Early venture investors have protected their downside with special preferred terms that founders and exec teams rarely consider or can demand.  If this were real-estate, it might even start to look like over-aggressive venture investors that pump up valuations too early, only to have the market adjust to “reasonable” later, were “predatory.”  It is an interesting parallel that will not be lost on founding teams, angel investors and early exec team members that hope to be rewarded via their equity stake.

The reticence to of many of the younger venture investors (those with fewer than 20 years of experience) having yet to bring in a 5X or 10X much less a Unicorn, to invest in early stage deals, is now balanced by the abundance of crowdfunding and syndicate fundraising at the seed and angel level.  This is a great organic re-shaping of the investment and capital markets in favor of the early stage company and entrepreneur.  

There is also a growing recognition that the early stage deals that do get picked up by venture investors have been in a long slow decline and “narrowing” of deals to known insiders and repeat successful (i.e. “brought a good exit to a venture fund’) founders.  I think that this is largely common sense (bet on the horse that won the last race for you), and also based on the reality that it is a rare and elite breed of entrepreneur that can see an opportunity and execute a successful solution.  That said, a close examination of the venture deals that have been funded in favor of known founders pales next to the stats behind the successful new ventures that have been founded by first time startup teams.  The difference is largely that part of the value-add from the venture investors is the addition of those “experienced” startup executives onto the exec team as soon as the big money comes into play.  Thus the risk of execution is somewhat reduced.

What does that mean to today’s startups?  It means that the old concepts of cash-flow, repeatable and scalable selling and service delivery models, the idea of managing customer acquisition, retention and lifetime customer value, are again in vogue.  

As they should have always been.  While there will continue to be many good reasons for companies to temporarily sacrifice cash flow and profitability for raw user or customer growth, the days of “just get 1 million users and we’ll figure out how to make money later” are – at least for the time being, gone.  And we celebrate that.  

Unit economics always wins.  This goes back to the days of “the lemonade stand” cash-flow exercise. It’s what built the world’s greatest capital markets.  And it will always remain the best place to start.  Water, sugar, lemons, cups and napkins.  And a sign and a cardboard box. “How many cups of lemonade must we sell at what price to pay for the supplies, time and sign?”  Simple.  One does not need an MBA or to be a dropout PhD candidate to start with those basic principles.  

In another parallel with the real estate (mortgage) market, today’s startup teams should be asking themselves the same questions that prudent investors will be asking them (kind of like the new mortgage market, where everyone has to go through “full documentation” to get a standard mortgage loan):

How can I make money?  How can I do it at scale?  What is my selling process and is it repeatable?  Who will pay for my service or product and what will they pay, and why?  How much money do I need in working capital to find my perfect product-market fit and establish the right selling model and price point/margin?  What are the unit economics of my business?  What drives retention and churn?  What prevents others from copying me and disintermediating my base?  Is there a brand value that creates loyalty, or is this market driven by other values and factors?  What are my logical exits?  Who are the logical acquirers?  Is there a realistic IPO path? 

Yes, we are back to reality.  It sucks for some people.  And that’s okay.  Those people should get with the program or get out of the startup business.  Disrupt and question everything.  Be bold, revolutionary, even bombastic and disrespectful of the incumbents and status quo. But don’t ignore the fundamental rules of business that underly the path all companies must tread to go from small to large, and startup to profit and successful exit.  After all is said and done, you have to make payroll. Sell to a customer a second time.  Own a brand people love and trust.

Reality only sucks because it makes you work harder to win, and forces you to confront inconvenient tasks and difficult questions.  Short cuts are nice but when they don’t work you end up falling off of a cliff.  Better to work harder than run headlong at a cliff you can’t see coming.

Image credit: HikingArtist