Market cap and/or up-round "valuations" really don't mean shit unless somebody is buying an entire company. Otherwise, that "unicorn" status might simply mean that some bit player paid way too much for their latest tiny % equity holding. (Unless all shareholders can liquidate at a given price simultaneously, it's basically fiction, as increased supply would eat through the bid stack, devaluing subsequent shares transacted.) Even setting aside discounts and premiums, selling 10% for $10M is not the same as selling 100% for $100M. The guy with $10M might be looking for (or might be) the greater fool.
Odds of founding a unicorn:
Lifetime odds of dying from local meteorite, asteroid, or comet impact:
You are 24.18 X more likely to be killed by an asteroid.
First, quintessential bay bro hatches unicorn taxi app (all the while emphatically assuring everyone that it isn't a taxi app), thereby securing multi-billion-dollar valuation.
Next, a cloned Uber-spawn launches his scooter-sharing app, "here to disrupt — by any means necessary". A last-mile land grab to blow your VC mind (or, at least your nine-figure investment).
Now, I'm thinking ahead of the curve on last-yard transportation. That's right — Uber can get you across town, Bird can get you around the block, but who will deliver your ass from the front porch right to your couch?
Bunny, the fuzzy slipper-sharing app, is officially coming out of stealth mode. This Olympic-tier problem solving should fetch at least $100M pre-money.
"You keep using that word. I do not think it means what you think it means." — Inigo Montoya, The Princess Bride
I have recently observed a number of social media posts where certain sales reps lament the lack of effort and “courtesy” exhibited by various prospects…
So, essentially, some “sales” person sent email spam, or cold called, or lied about “reconnecting” to hijack a prospect’s calendar, and the half-assed attempt wasn’t warmly welcomed (or *gasp* not acknowledged at all)? Then, they had sufficient time left over to whine on social media. This tells me they must not be very good at selling.
Sales is a statistical process, and those statistics are influenced by the competence of the salesperson.
I’ve worked with real salespeople. Real salespeople take time to thoroughly research their prospects, and their interests, and determine how those interests most likely align with the product or service being offered. This accomplishes two things: (1) it greatly increases the conversion ratio in sales, and (2) it wastes far less of everyone’s time.
You want a respectful response? Put in the work. Don’t tell me you thought that I, along with 20 million other random people, would be interested in a premium subscription to Facebook for Ferrets when I don’t even own a ferret. Don’t tell me you’re planning to reconnect when we haven’t ever met, and you have no idea who I am, or what might interest me. Don’t call incessantly to pitch fleet fueling services when I don’t even operate a fleet. In other words, don’t be a lazy moron – then maybe you’ll get my attention, perhaps earn a bit of professional courtesy, and actually sell something.
Many would assume that successful entrepreneurial outcomes are largely attributable to skill. Of course, we'd all like to think so - where's the equity in dumb luck? However, getting struck by lightning does not necessarily make one an expert on electricity. I've seen "successful" people fail miserably on subsequent attempts, and raging flakes hit highly publicized home runs (occasionally more than once). It's tiresome when somebody points to their sole metaphorical lottery win as evidence of superior skill and ability, versus demonstrating a track record that regularly defies the odds...
Don't be "that guy".
When did the definition of entrepreneurial "success" change to include (1) massive operating losses, funded by (2) excessive capitalizations, closing at (3) irrecoverable valuations? The unicorn groupies might assert that we 40-somethings just don't understand their "new" business models... (Well, one thing is certain - somebody doesn't understand business models.)
Sophisticated investors come across hundreds of doe-eyed dreamers every year, and, per brutal statistics, most of them are destined to fail. Yet, many of these dreamers behave as if it is their God-given right to be taken on faith.
One casual acquaintance habitually laments, voicing great frustration, that prospective investors just “don’t get” his business. (Years later, without much progress made, I might deduce that he doesn’t really understand his business either.) These arm-wavers and PowerPoint flippers are a dime a dozen; persistently shoving half-baked ideas into venture circles despite any real evidence that their “big idea” extends beyond a mediocre concept sketched on a napkin…
When their vague presentation craters within the first few slides, and the meeting degenerates into a lopsided Q&A (consisting mostly of Q’s without A’s), such entrepreneurs invariably get uncomfortable and annoyed. Rather than acknowledging their own lack of preparation, many of these entrepreneurs will defensively conclude that sophisticated investors are dream-killing assholes. They will then proceed to approach a number of other assholes, with the same sloppy pitch, and get essentially the same result.
Here’s the thing – it is not an investor’s job to believe you. In fact, healthy skepticism is the only thing standing between you, them, and some shared version of failure. It is your job to convince them, using facts and data, versus expecting them to choke down platitudes and jargon. If you go into pitches ill-prepared, you are not doing your job; and any investor relying on faith would not be doing theirs.
Founders are often curious (or optimistic about) what their company is worth. Investors are often curious (or pessimistic about) what a given company’s valuation should be.
The first and most important thing to understand about business valuation is that valuations are estimates; specifically, an estimate presuming a willing buyer and seller engaging in an informed, voluntary, arm’s-length transaction. In the absence of an actual deal, valuations are an imperfect mix of art and science. Valuations are not defined by how much equity a greedy founder wants to keep, or how badly an aggressive investor wants to screw somebody. Instead, valuations are defined by the figure rational parties can actually agree upon.
In short, valuations are opinions; transactions are facts.
Valuation opinions are derived using three basic methodologies that consider intrinsic value, marketability, and income potential:
Usually, it makes sense to use some combination of methodologies to derive a reasonable range of prospective valuations. Technically, calculations are subject to a number of further adjustments for applicable marketability/liquidity discounts, control premiums, and the time value of money.
Note that pre-money valuations are figured prior to new investment. The pre-money valuation plus the financing amount equals the post-money valuation.
In any case, a valuation opinion can only be “proven right” when somebody writes a corresponding check per mutually agreed terms.
One of the great benefits derived from having seven billion people on the planet is that there are a lot of people regularly doing a lot of really stupid things. How is this beneficial? With a little observation, one can easily learn from the mistakes of others…
I’ll share one of these observational concepts relating to business growth; essentially a validation of the Peter Principle (that any employee rises to his or her own level of incompetence). I’ve found the principle applies equally to founders. Consider the following thresholds:
Skill – Many people start businesses, and those with some level of technical competence often achieve a degree of small-scale traction. A competent cabinet maker, for example, might end up selling a few cabinets to his friends and neighbors. That represents a very small unsustainable business. In this stage, he must learn to work smarter.
Capacity – If the cabinet maker gets a clue, he might end up promoting his cabinet business, and thereby sell as many cabinets as he personally finds time to make. This might result in a few hundred thousand dollars of cabinets being sold. He’s achieved modest growth, but is still running a rather small business, limited by the length of his work-day. In this stage, he must learn to ask for help.
Delegation – If the cabinet maker decides to delegate some minor tasks, he might end up producing as many cabinets as he can reasonably supervise. Say one can directly micro-manage a half-dozen people, and he might hit a million dollars per year. In this stage, he must learn to stop micro-managing.
Replication – Now the cabinet maker has a serious problem. He honestly believes that nobody makes cabinets as well as he does, and if he insists on touching every cabinet, he will be doing a million dollars per year forever. On the other hand, if he starts to run this enterprise like a real business, he could hire other cabinet makers (and perhaps do several million per year). In this stage, he must learn to hire competent people and let them do their jobs.
Management – He hires some other cabinet makers, and soon wakes up in a cold sweat realizing that there are cabinets being sold that he’s never even seen. Eventually, he understands that his role is no longer about building cabinets; but rather ensuring that other people are effectively building cabinets (maybe $10M+). In this stage, he must learn to develop his team.
Leadership – Having mastered the fundamentals of management, he recognizes that it has been a long time since he last assembled a cabinet. However, the team he developed tells him that the cabinets are of superior quality, and demand has increased exponentially. They look to him for guidance, but he doesn’t have all the answers anymore (this thing is rocketing towards $50M+). In this stage, he must learn to attract and hire people smarter than him, and inspire them to fulfil their collective potential.
In summary, when a founder’s personal and professional growth stagnates, their business predictably stagnates as well. If you doubt these observations, feel free to learn the hard way.
I might wrestle to articulate today’s observation, as I admittedly feel like I’m trying to illuminate a topic from the unpopular side of the Twilight Zone. At issue is the increasingly ambiguous distinction between form and substance among business professionals. Indulge me…
It seems, within my middle-aged lifetime, that professional pursuits have gradually lost touch with reality. For example, I recall working in high-tech in the late 1990’s and early 2000’s – and there was a presumption that people working in such companies were actually competent (you know, one could reasonably expect to work with other people having amassed sufficient education and expertise to be capable of doing their core jobs). Coworkers operated in a manner presumptive of competence, and the consequences were harsh for those who failed to deliver. Incompetent candidates were swiftly discovered and, euphemistically, invited to pursue other opportunities (usually the same day they first rendered an assignment FUBAR).
Then, I went to work in the energy business (OK, it was basically a utility, and a study in contrasts). There, I tried to apply the same level of business rigor, with the same expectations of my peers, and was promptly guided to the conclusion that “that’s not how we do things here”. I noticed there were a curious number of expatriates from the foreign parent company placed in key positions, whose strategic priorities seemed to consist not of achieving objectives; but, rather, keeping up the appearance of achieving objectives. Monumental effort went into messaging and spin, so nobody would be at risk of getting “sacked”. When noting that being good isn’t appreciably harder than looking good, I was met with blank stares (apparently, being good at one’s job was too much to demand).
Subsequently, I joined a struggling wannabe tech company, with delusions of actually making a difference, and things were even worse. Officers and board members were invariably “friends of friends”, and the quarterly earnings release(s) might as well have been a recording – the company was still blowing goats, but management was eternally hopeful that their vague strategy would bear fruit in some future quarter. A narrowing loss was quite the cause for celebration; layoffs via rightsizing meant another quarter without anyone “important” getting fired. Meaningful contributions were seen as a threat to the collective reputation of well-compensated incumbents clinging to executive suites. After six months, I simply couldn’t take it anymore, and I’ve been self-employed ever since.
If I might digress for a moment, referencing the agricultural revolution to put this commentary in stark terms: In the olden days, if a farmer sucked at their job, they starved. Nowadays, they can simply talk a good game, shake some hands, kiss some ass, and end up running an agricultural conglomerate; no food output required. Metaphorically speaking, I must ask, where have all the good farmers gone?
When did appearances become more important than substance? When did we slide into this sad state of affairs, sniveling about first-world problems and pushing platitudes in a grotesquely self-indulgent corporate workplace?
Maybe this is why I’m intensely drawn to early-stage companies; particularly those backed by equally intense professional investors. There is no hiding in an early-stage venture. There are only results, or a glaring lack thereof. Critical metrics like cash flow aren’t kind to slick politicians, bumbling bureaucrats, or bulls*** artists – and, in my humble opinion, that’s how the whole world should work.
We think about business a lot. Sometimes, late at night, we even write a few things down...