At the end of startups-on-steroids era

In January 2016 I wrote Time to do more with less, referring to the importance of being a RABBIT (Real Actual Business Building Interesting Tech).

In it, I cited the new funding reality as predicted by Salesforce CEO Marc Benioff and investor Bill Gurley, among many others, who believed that 2016 would be the year that tightening investment would prevent  many unicorns from raising funds based on their last round valuation and bringing a new term into the tech lexicon — unicorpse.

As the walrus said, the time has come and the bell is tolling.Unicorn_single

Image source: here

The indulgent years of cheap capital and billions invested on the basis of a great story, sans profit or even revenue, are over as investors sink ever deeper into reality and the old ways of valuing companies are once again in vogue.

Storied investor Bill Gurley issued a warning to unicorn investors in a lengthy essay posted on his personal blog. It is a must-read for all those in the startup ecosystem, not just investors, and includes links to other articles that bring the picture into sharp focus. His summation at the end is masterful.

The reason we are all in this mess is because of the excessive amounts of capital that have poured into the VC-backed startup market. This glut of capital has led to (1) record high burn rates, likely 5-10x those of the 1999 timeframe, (2) most companies operating far, far away from profitability, (3) excessively intense competition driven by access to said capital, (4) delayed or non-existent liquidity for employees and investors, and (5) the aforementioned solicitous fundraising practices. More money will not solve any of these problems — it will only contribute to them. The healthiest thing that could possibly happen is a dramatic increase in the real cost of capital and a return to an appreciation for sound business execution.

Mess is putting is politely. In the 2010 to 2015 startups-on-steroids era — when money was dirt cheap and a good story could always garner another round of funding — we witnessed companies scaling and driving growth with nary a nickel of profit.

Greed replaced thoughtfulness in due diligence and zero interest rates created a generation of investors desperate for large returns and willing to listen to anyone who claimed to offer them.

And as the money grew, so did the egos of founders who could tell great stories as opposed to building great companies.

Lucas Duplan’s Clinkle is a case study on founder charm.

Clinkle had a polished demo that came before things like Apple Pay, said one former employee, who declined to be named. But most importantly that person added, Duplan “was charismatic when he wanted to be” and could “raise money in absurd abundance.” “It was his one skill,” they said. (Emphasis mine.)

Not to be missed is the step-by-step description crash of fintech unicorn Powa Technologies and its founder Dan Wagner.

Uber is different, because, according to Greylock’s Simon Rothman, Uber used money as a weapon not as a tool.

“The strategy wasn’t buying growth, speed or liquidity. Uber’s strategy was to buy all-of-the-above. At small dollars using money is a financial decision. At Uber’s big dollars using money is a strategic decision.”

But, in fact, the jury is still out on Uber and may be for years, since CEO Travis Kalanick has said he has no interest in going public. After all, who wants that kind of scrutiny when you’re losing a billion dollars a year in China, the fastest growing market on earth?

Not that going public is any kind of guarantee (it’s just a different source of capital) as proven by this list of 21 hot IPOs from 2014-15 that have lost around 20% of their value.

In spite of the money sloshing freely about, not all founders chose to indulge.

  • Tuft & Needle didn’t take venture money, although at one point they did borrow $500K at 10% interest. “We’ve talked to the venture capitalists, and we’ve had three times in our history where we had very serious conversations and term sheets put in front of us.The reason why we turned them down all those times is because we figured it would change the way we operate as a company.”
  • Andrew Wilkinson is founder/CEO of two successful companies, Flow and MetaLab, who says he would rather be a horse than a unicorn. “I’ve spoken to everyone from angel investors to the big dogs on Sand Hill Road, but this past year I realized that I just flat out don’t fit the mold. I don’t want to be McDonalds — I want to be In-N-Out Burger.”

Perhaps now startups will get back to the basics, i.e., make a product people or companies want and will pay for > sell it to drive revenues > run/grow on operating cash > and make a profit.


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