When I first heard the phrase “start ups,” I assumed it just meant new businesses. But I soon realised I was wrong.
They meant tech businesses whose goal was to get funding and then be sold to a larger tech company.
I would listen as they explained their plans. They’d talk about getting “users.” They wouldn’t talk about “customers” – because no-one was paying them any money.
And that’s where my problem lies …
You see, I’m pro business. I’m pro sales. I believe, when customer A gives money to company B, that’s an exchange of value. Company B is adding value to customer A. And, usually adding far more value than the customer is paying.
That seems honest to me.
In the startup world, most companies aren’t making profits. Instead, they’re losing money. And, what’s worse, they have no concrete strategy for turning that around. Either now, or at any time in the future.
Now, in a healthy ecosystem, that wouldn’t fly. You couldn’t get away with that nonsense.
But the system isn’t healthy. Venture capitalists are just as bad as the startups.
According to a number of insiders, most VCs are investing with other people’s money. And, instead of being judged by overall profitability, they’re judged on the deals they FAILED to make.
So you can make a string of high ROI investments. But, if you passed on the latest “unicorn,” you’re a failure.
So decisions aren’t being driven by value, they’re being driven by FOMO.
Let me give you a couple of examples:
#1: I had a client in the SAAS world. They were actually making money (which is why they hired someone like me – to make them MORE money).
Because I was running a large part of their marketing, I knew their numbers inside out. I knew where sales were coming from, how many visitors we were getting, our conversion rate, our lifetime value per customer etc…
So that, coupled with my finance background, meant I had a pretty good idea of the company’s value.
Along came a company with more money than sense. They bought my client for more than double its value.
#2: If you think that’s strange …
A year or so later, one of our rivals got funding that was 5 times larger than my client was sold for.
Funding.
They weren’t BOUGHT for 5x our price. They were just handed money that was 5 times greater – in return for a percentage of their shares.
Now, that rival was smaller than my client. So there’s no way the value of the shares could have been worth it.
But, not only that, there was no way to recoup the money through sales.
As I mentioned, I knew my client’s sales numbers. I also knew our market share. That meant I could work out the size of the whole market.
So, even if this rival grabbed the entire market, it would have taken them over a decade to earn an amount equal to their funding. And that’s revenue, not profit. It assumes they’d have zero costs.
Two problems with that:
#1: A decade is a lifetime in SAAS. Chances are, 10 years from now, the landscape would look totally different.
#2: They only had a small % of the market.
#3: They’re in a competitive market where marketing was expensive.
#4: The company had no real use for the money.
So why did the VCs give them the money?
Frankly, I have no idea. And, if you asked the investors, I suspect they’d have no idea either.
Steve Gibson
PS There’s an article this week about start ups rejecting venture capital. Instead of trying to create a “unicorn” – or the illusion of a unicorn – they’re building real businesses …
https://www.nytimes.com/2019/01/11/technology/start-ups-rejecting-venture-capital.html
