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

Have you ever wondered what makes a new app fly?

Have you heard of early adopters?

Would it surprise you to know that they make up only 13.5% of the population?

But that small percentage dictates what new products and services you will be able to do on your phone, tablet and computer.

Not 100%, obviously, but close, especially if you are an entrepreneur without “connections.”

Doubly so if you are a woman and triple (or more) for a person of color.

That 13.5% dates back to 2012. Two years later it had doubled to 28%, according to the Pew Research Center.

Still not much considering the outsize impact.

Image credit: Pew Research Center

Poking through 11+ 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.

There’s not a lot on TV that I like, but I used to really enjoy Shark Tank. Past tense; haven’t watched in several years. Why? Two words: lifestyle products. With very few exceptions that’s what was being presented, whether an app, a product or a service. I understand that entrepreneurs create stuff that will get funded, and while I’m not saying they are bad investments or that the entrepreneurs don’t mean well, I am saying that I don’t care about them. They won’t change the world or even improve it. Uber and Lyft are good examples; they haven’t decreased traffic, as they claimed they would, in fact, they’ve increased it. Most in the “life style” category are focused on “personal care.” (Have you noticed that sometime in the recent past “personal growth” morphed into “personal care”?) More packaging in the landfills, more time on the screen, more focus on self — so not my mindset.

Read other Golden Oldies here.

Innovation isn’t nearly as mind-boggling today when compared to what startups were doing in the late Seventies/early Eighties when I started working with them.

That’s not surprising when you consider who gets funded these days.

A recent Reuters report found that the majority of Silicon Valley startup founders that receive Series A funding come from the same pedigreed cohort: either they previously worked at a large, well-known tech firm, a well-connected smaller tech company, they previously created a successful startup, or they come from one of three universities—Stanford, Harvard, or MIT.

Not surprising when you consider the attitude of Valley stalwarts like Paul Graham of Y Combinator, who publicly stated that he would be unlikely to fund someone with a strong accent or a woman.

It’s been 15 years since I first wrote about the proclivity of managers to hire people like themselves and more over the years showing it leads to homophily and the negative impact that has on a company.

It seems it’s no different for investors.

They are funding people like themselves who were raised, educated and worked along paths similar to their own who they either know or are introduced to them by a friend.

“Like a lot of the investments [Instacart] that have come our way, a friend of a friend talked to us about it, and told us about it, and encouraged the founder and the CEO to come and chat with us. One thing led to another.” –Sequoia partner Mike Moritz

When you fund from a homogenous group, no matter where they are, creativity and innovation are watered down, because those groups tend to be insular and badly interbred talking mostly to each other.

If you’re fishing from a pond of rich white guys, you’re mostly going to get ideas that address the needs of rich white guys.

AKA, people like themselves.

Image credit: Frits Ahlefeldt

Have you ever wondered how much smarter VCs, money managers, corporate CEOs, and the super wealthy really are? (They’re not.)

What “due diligence” actually involves? (Not what HP did.)

Do they really fall for scams and do stupid stuff like the rest of us? (Absolutely.)

CB Insights recently shared 17 Of The Biggest Startup Frauds Of All Time.

I found it hilarious (I have a warped sense of humor) and well worth reading.

Click the link (or save it for later) and all your questions will be answered.

Image credit: Beatnik Photos

Mega rounds of funding are creating a frenzy in the startup world.

Start-ups raising $100 million or more from investors — known as a mega-round in Silicon Valley — used to be a rarity. But now, they are practically routine, producing a frenzy around tech companies with enough scale and momentum to absorb a large check.

But are they smart?

It may be great for ego and bragging rights, but does it make you richer?

Probably not.

Consider Zappos and Wayfair.

EACH ONE of Wayfair’s two co-founders made as much money as ALL of Zappos’ shareholders combined. (…)  Put another way, Wayfair co-founders made at nearly 10X as much as Hsieh.

Mega rounds hurt employees by substantially diluting their stock and forces you to grow, often at an unreasonable rate.

In these days of frenzied money, some founders, such as Gusto’s founder/CEO Joshua Reeves choose to say no to excessive funding.

Gusto, a payroll and benefits software company, raised $140 million in July, but could have done five times that, according to Joshua Reeves, its chief executive and founder.

Startups seem to have forgotten that the purpose of a company is to make money, not raise it.

Mr. Reeves, of software start-up Gusto, acknowledged that founders who obtain outsize sums of capital can get caught up in a “growth at any cost” mentality. That is why he chose not to maximize his funding round despite the intense interest. “It’s up to the founder to realize that’s a distraction,” he said. “Success is not having more money or a bigger team, but having more customers or revenue.”

Think about it.

Image credit: HikingArtist

Yesterday’s Golden Oldie ended with my sarcastic comment about tech’s distorted and manipulative approach to data a la “gut instinct” and “pattern recognition,” especially when it comes to age and gender equity.

Data only matters when it supports prevailing prejudice.

A couple of years later I linked to articles that clearly showed that age was more a mental state than a physical one, including this one.

Vivek Wadhwa, a Duke University researcher, worked with the Kauffman Foundation in 2009 to explore the anatomy of a successful startup founder. That survey of more than 500 startups in high-growth industries showed that the average founder of a successful company had launched his or her venture at the surprisingly high age of 40. The study also found that people over 55 are almost twice as likely to launch high-growth startups than those aged 20 to 34.

In March, Forbes again focused on the fact that older entrepreneurs are more successful.

…late-career entrepreneurs benefit from the kind of deep domain expertise that younger counterparts lack. The more intimately an entrepreneur knows their particular industry, after all, the better positioned they are for success. A newly published study of hundreds of companies confirmed just this: the startups most likely to succeed have technically savvy founders who know their space inside and out. A classic example is Garmin, maker of the ubiquitous GPS devices. The company was started in 1989 by two career aerospace contractors (in their 40s and 50s, at the time) who pooled their technical know-how to turn military-grade technology into consumer tools. Today the company is worth more than $10 billion.

Even Brian Acton was almost ancient when he founded WhatsApp at 37.

Earlier this month, KG sent along an article from TechCrunch that added more data.

What they found is that the average age of a startup founder is about 41.9 years of age among all startups that hire at least one employee, and among the top 0.1 percent of highest-growth startups, that average age moves up to 45 years old. Those ages are taken from the time of the founding of the company.

The researchers broke down the population of founders along a number of lines, including geography and industry. They found little difference in their results between subcategories, and, in many cases, the subcategory definition actually increased the average age. For instance, industries like oil and gas can have average founder ages as high as 51.4 years old. The researchers wrote that “The only category where the mean ages appear (modestly) below age 40 is when the firm has VC-backing. The youngest category is VC-backed firms in New York, where the mean founder age was 38.7.”

One interesting dynamic in the data is that older entrepreneurs appear correlated with better startup performance. “For example, the 1,700 founders of the fastest growing new ventures (1 in 1,000) in our universe of U.S. firms had an average age of 45.0 (compared to 43.7 for the top 1% and 42.1 for the top 5%),” the researchers wrote.

As you mull these numbers, stay aware that these are companies with actual, and often substantial, revenues, as opposed to valuations based on fundraising and hype.

Image credit: Hawking.org

Poking through 11+ 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.

This post is from 2014. Study after study has proven that more successful founders are in their 40s and 50 than in their 20s. More on the most recent studies this week.

Read other Golden Oldies here.

On one hand you have Jim Goetz, partner at Sequoia Capital, lamenting the lack of enterprise startups and on the other you have Sequoia’s Michael Moritz, “an incredibly enthusiastic fan of very talented twentysomethings starting companies. They have great passion. They don’t have distractions like families and children and other things that get in the way.”

Other things such as experience.

The shallowness of so many of today’s startups makes a great deal of sense if you remember the advice given to every aspiring writer, i.e., write about the things you know; write from your own life and experiences.

Investors give entrepreneurs similar advice, which is probably why you have an abundance of hook-up apps, gossip apps, games and social time-wasters.

And then there is the question of what purpose our economic growth actually serves. The most common advice V.C.s give entrepreneurs is to solve a problem they encounter in their daily lives. Unfortunately, the problems the average 22-year-old male programmer has experienced are all about being an affluent single guy in Northern California.

Monday we looked at the economic dangers from Silicon Valley’s generational gap highlighting the incredible waste of talent engendered.

But the real stupidity in the rush to fund the young is that their success is a myth and not backed up by any kind of hard data.

A 2005 paper by Benjamin Jones of the National Bureau of Economic Research studied Nobel Prize winners in physics, chemistry, medicine, and economics over the past 100 years, as well as the inventors of revolutionary technologies. Jones found that people in their thirties contributed about 40 percent of the innovations, and those in their forties about 30 percent. People over 50 were responsible for 14 percent, the same share as the twentysomethings. Those under the age of 19 were responsible for exactly nothing. One study found that even over the last ten years—the golden age of the prepubescent coder, the youth-obsessed V.C., and the consumer Internet app—the average age of a founder who could claim paternity for a billion-dollar company was a rickety 34.

Everybody in tech focuses on the importance of “data driven” decisions—until the data doesn’t support the decision they want to make.

That’s when they start talking about the importance of “gut instinct” and “unconscious pattern recognition.”

Data only matters when it supports prevailing prejudice.

Flickr image credit: Deryck Hodge

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

Unlike most folk, when tech types want to improve their sex life they assume there’s an app for that.

If there isn’t they create one.

[Jakub] Konik’s foundational story is a simple one: he was having sex with his girlfriend, and he started wondering how many calories they burned during one particularly memorable session. Stunned to discover there were no existing apps that could answer that rather specific question, he came to the conclusion that he should create one.

Wow! It doesn’t take much thought to see how connected sex toys can make a difference.

And before you laugh, know that at least a couple of the companies received funding.

So, give a cheer for this sexy version of ‘change the world.’

Image credit: HikingArtist

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

I had a $15 K lesson in founder ego when I lived in San Francisco. That’s how much I lost when I invested in a startup run by a guy with a bad case of it.

The only thing to do when that happens is to move forward and forget it. Money is replaceable — your sanity isn’t.

I haven’t thought about it in years, but reading the abstract from Do Alpha Males Deliver Alpha? Testosterone and Hedge Funds reminded me of “Craig,” in spite of its focus on hedge funds. (The full paper is available at the link.)

Using facial width-to-height ratio (fWHR) as a proxy for pubertal testosterone, we show that high-testosterone hedge fund managers significantly underperform low-testosterone hedge fund managers after adjusting for risk. Moreover, high-testosterone managers are more likely to terminate their funds, disclose violations on their Form ADVs, and display greater operational risk. We trace the underperformance to high-testosterone managers’ greater preference for lottery-like stocks and reluctance to sell loser stocks. Our results are robust to adjustments for sample selection, marital status, sensation seeking, and manager age, and suggest that investors should eschew masculine hedge fund managers.

This makes one wonder if the lack of testosterone is an underlying factor in the outstanding success of women-led companies outperforming those led by men.

Hedge fund managers have a number of traits in common.

They are white, attended ‘good’ schools, graduated from elite colleges and are connected through a web of similarly privileged friends.

Sound familiar?

That description fits much of Silicon Valley, both founders and investors.

As does the abstract.

As do the egos.

Image credit: HikingArtist

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

If you’re a guy and have a daughter/niece/sister/mom/female friend this post is for you.

If you’re a bro this post is especially for you.

You’ve all heard the stories of women who weren’t taken seriously as founders and couldn’t get funding.

You’ve heard it as anecdotal evidence, directly from women founders, and from those around them.

In fact, there’s finally enough data-driven proof that the fact can no longer be denied or blamed off on something else.

It’s not just investors; but suppliers, partners, and vendors who ignore/condescend/etc., when the other party is female.

Penelope Gazin and Kate Dwyer experienced all these problems when they launched Witchsy last year.

So they took a time-honored approach.

Having noticed that the mostly male artists, developers, and designers they were working with took their sweet time to respond to requests and were often slightly rude and condescending in email— “They’d say things like ‘Listen, girls…,’” Dwyer tells Quartz—they decided to bring in a male co-founder named Keith Mann to make communication easier.

Pre-Keith, Dwyer explains, “it was very clear no one took us seriously and everybody thought we were just idiots.” When “Keith” contacted collaborators, Gazin says, “they’d be like ‘Okay, bro, yeah, let’s brainstorm!’”

Keith only lasted six months, but, by then, being Keith had taught them to stop being communicating “like a girl.”

Neither the approach nor the result is unique; women have been obscuring their sex to get ahead for centuries. But…

In era that touts gender equality, even school-age children are still absorbing warped messages about the sexes. A recent study published in the journal Science revealed that by the time most girls are six, they believe that only males can be geniuses.

That means by the time a female hits first grade she’s already convinced she’s second best.

And that’s on you.

Image credit: HikingArtist and TechCrunch