"there’s a disturbing trend developing of people deciding to found a company simply to get rich."
- ok I have to stop you there. This is not a new developing trend. It has always been a part of tech startup lore. If there is any current trend it's the democratization of startups. 10 years ago you needed $10 million in funding to build something real. 5 years ago $3 to $5 million. Today that's probably $1 -$2 million. The interesting thing about startups _today_ is that you can build real, decent, 10's or 100+ people startups without having to raise gazilions of $'s. Prior to very recently it was go big or go home entirely.
Which is a good point. Has anyone done any analysis on the YC/500 alums that fall in-between the Billion Startup Club and failing? My guess is there might be literally 100's of Olarks that are really great places to work with interesting teams doing millions in revenue that never needed to raise big dough. That option didn't really exist 5 or 10 years ago. The option to strike it rich though always has.
We (at Olark) are wondering the same thing. We just recently talked to Poll Everywhere (S'08) - they are also bootstrapped and well over $1m / year in revenue. Wufoo was as well (they were acquired in 2011).
If you're a bootstrapped company (let's say < $100k in outside funding) and you have revenues >> $1m / year, we'd love to hear from you!
Does it count if you raise after you hit $1m / year in revenue? I'll let you decide.
I wouldn't say raising money is necessarily a "good thing". Sure it gives you a bit of validation that someone would take a risk on you/your idea. But the data shows most companies will just burn through the money and never make a return.
Making profit is a "good thing". Raising money is just this side process that may or may not be necessary for your company.
Though I agree with the general statements made by the author, on a tangent, I disagree with the 'solve a problem' advice which is constantly being touted.
I look at some of the largest start-ups or even companies, and they aren't solving problems so much as creating opportunities.
AirBnB didn't really solve a problem, they created an opportunity for you to rent your extra space, or find a place other than a hotel to stay.
This also applies to larger companies. Coca-cola didn't solve a problem, they just made something people really liked.
Apple and Microsoft didn't solve a problem people had. They didn't have computers, so what what problem could you have been solving by giving people an operating system. At the time, people didn't know what they would use a computer for, so what problem was being solved.
Here are a few of the problems people had that Apple and Microsoft solved:
1) Maintaining a general ledger for your business (and all the calculations) by hand & on paper was tedious and labor intensive. VisiCalc was the first "killer app" that made loads of people want to buy an Apple. Apple provided the platform to make VisiCalc possible. On the PC side, the driver was Lotus 123, then MS Excel.
2) Using a typewriter was annoying, especially when you need to fix a mistake. (e.g. Liquid Paper, Wite-out). On the PC side, there was WordPerfect, then MS Word.
Seems to me like all of these companies solved problems - they were just problems that not many people knew they had.
Airbnb - I only use my place 90% of the year, but I pay for using it 100% of the year.
Coke - Water doesn't taste very good.
Apple/MS - secretaries are expensive. Can they be automated?
Aging is a major problem everyone has, but few people think of it in those terms.
Generally when people talk about 'creating opportunity's' they just mean solving problems that people don't think of as problems.
In that context Google's quest to 'organize the worlds information' is really just solving the gap between what humanity knows and what you know. EX: Someone knows where the closest ATM is, but you have no idea. Someone knows what error code 237b means and what to do next, but you don't.
> AirBnB didn't really solve a problem, they created an opportunity for you to rent your extra space, or find a place other than a hotel to stay.
I guess it can be argued that AirBnB didn't solve a problem but they definitely created a better experience for me. When I traveled to Paris and Amsterdam last year, I actually felt like I was experiencing the country as someone who lives there when I would walk home to an actual apartment every night instead of a hotel room where everyone is experiencing the same bland room. It didn't hit me until my very first night but it was a nice realization.
I think you are making my point for me. It wasn't a problem that you had, but they created a better experience, or the opportunity for a better experience.
In regards to AirBnB not solving a problem...I remember before AirBnB when I traveled to NYC and looked for apartments to rent for a weekend or a whole week. It was kind of scary because I didn't know if the people were legit or would come by and try to kick me out. AirBnB provided confidence that you were actually getting what you wanted--an apartment as opposed to a hotel.
I think the OP misunderstands the words "billion dollar company". Which is actually completely understandable, since money is in the title you assume it's about the money.
Typically founders are product people, they want to solve a problem that exists in the world. But, to solve that problem, they need to make a big impactful company, that grows to dominate a particular niche or industry and disrupt the current way of doing things.
To these founders, "billion dollar company" is a shorthand for all these ideals: to make a great and lasting company, to solve a real problem for a very large number of people, and to make a real impact in the world.
It's not coincidence that this phrase is also important to VCs, for whom "billion dollar company" may have a different meaning, that being "make back the fund for our LPs". I say "may" because that's a simplistic view: many VCs are looking to make the world a better place too, and in many cases they have more money than they need already.
And to journalists, these mean "companies which we have to pay attention to". And when you think about, they're not paying attention because of the value, but because of the impact. Which is why journalists are always talking about consumer companies, because they have much more impact in the world than more successful enterprise companies.
Of course, that's not to say there aren't people in it for the money. But we rarely need to worry about them, since they rarely succeed.
I agree that some use "billion dollar company" as shorthand for all the things you mention (a great lasting company, solving a real problem, and making a real impact). My point is that while it's often used as a proxy like this, it's a dangerous proxy because it's easily disconnected from the company's original mission(s). In this sense, it's an unhealthy simplification. Surely there must be a better stand-in for a startup's hard-to-measure progress towards achieving their mission than their valuation.
I couldn't agree more with your full post. It's almost become so obvious and cliche that people have forgotten why business exists. It's as if all the media hype puts the focus on the riches of the founder and not the value created by the product.
Every once in a while you see a publication do a retrospective of a failed startup. And every once in a while you see a blog post from a startup that exploded. But the statistics are completely skewed with distorting the reality of startup success. Mentioning that there are now X number of billion dollar startups masks how many startups are simultaneously failing. I would love to see a study that showed the total number of inflation-adjusted billion dollar startups as a percentage of the total number of startups started over time. This percentage may actually be decreasing, even though the media seems to be suggesting that there's a tech bubble.
This article is just stupid. Pretty much any billion dollar company is meaningful by definition. You can't just manufacture something like that out of thin error. And what's the scary danger?
The only scary danger I'm familiar with from it (for businesses and entrepreneurs), is the potential for mass delusion and altering behavior based on believing the good valuation & funding times will never end. Falling into that trap is very common.
I've seen two large stock market / tech implosions in my relatively short lifetime, the 1999/2000 bubble and the smaller 2005/2007 pre-great recession era.
In both cases there was a lot of hubris around the notion that because you acquired a massive valuation, you had a business that was really worth that, and really had that sort of potential. It's a failure to separate the financial atmosphere at the time, and the reality of business when it comes to generating the sales and profit that it takes to support a given valuation over time.
You most certainly can manufacture a billion dollar valuation out of, essentially, thin air - it happened frequently in 1999.
> there’s a disturbing trend developing of people deciding to found a company simply to get rich
I understand what the author is getting at. But the purpose of a business is to make money. What's wrong with starting a company to get rich? My suspicion is that the author means something more along the lines of "There are too many people starting companies simply to make a quick buck."
All things considered though, I agree. There are simply too many people in the Valley chasing huge valuations and quick exits and not enough building sustainable companies.
I don't see it as something morally wrong. I think the point is more that you're less likely to succeed if you're just doing it because you see other start-ups getting rich. So you start a company just to start a company, instead of having an actually good idea that you're passionate about.
The author seems to be trying to dissuade founders who are only in it for the money from starting startups solely for that reason.
On that note, I would suspect that a company whose primary interest is making the founders money wouldn't necessarily have their customer's best interests in mind and would probably never reach a $1B valuation.
"but the core purpose of these founders is clear – to make boatloads of money." This is false. If someone merely wanted to build wealth there are many options with a higher expected value and higher chance of producing life-changing results.
The stated billion dollar goal has several reasons behind it, the least of which is money. Diving into those reasons one by one could be very interesting; it could expose and analyze our core beliefs (both noble and less-so). Instead the author wasted the chance to do that and left us with something both simplistic and wrong.
What the author is implying is that entrepreneurs seek those nice round X billion valuations, and the VCs are fine giving it to them as long as they can write the term sheet.
Remember, these valuations are not cash paid for common equity like in the stock market. It's an extrapolated total equity value based on a smaller amount of cash given for a smaller amount of preferred equity that comes with a lot of conditions such as liquidation preference and maybe even preferred dividends or, god forbid, personal founder liability.
The valuation number is really just a bullshit number and meaningless to anyone who doesn't know the entire term sheet.
Notice how there are 7 startups at the $2B mark, only 1 at the $1.9B mark, and none at the $2.1B mark. To me this strongly implies that entrepreneurs are indeed trying to hit these big round numbers.
This could be an artifact of how these valuations are communicated, rather than the actual valuations. It's common for companies to not disclose their valuation when announcing funding, but for journalists to make assumptions based on rumors and educated guesses - those assumptions make their way in the headlines surprisingly often. What starts as "approximately $2bn, according to our sources", pretty soon becomes "$2,000,000.00" in an analyst's spreadsheet.
There are 10 employees with 140k salaries at my company and 5 with 150k but none with 139k or 147.26k. People like round numbers, especially when you consider significant figures and how speculative the valuations are. Airbnb could realistically be with anywhere from 500 million to 30 billion or more. The current valuation is a largely bullshit arbitrary number that VC and founder agreed to for God knows why in their latest negotiations. In these negotions you don't counter for 5 or 10% more. That isn't within the significant range.
All things equal, 2.1 gives slightly less dilution to current shareholders but the same positive "optics" as 2. Likewise, 1.9 gives slightly more equity to the VCs but a lot less prestige to the company their investing in (so arguably they get less value).
The same psychology comes into play when pricing anything else. We price things at $1.99 rather than $2.00 because there's an irrational feeling that a price starting with a 1 is much less than a price starting with a 2.
I think the OP is just making the point that a lot of these $1B companies are priced as such because it gives some extra legitimacy, thereby increasing their chance of success and increasing the value of the VC's share. The question is whether this is speculation or whether investing at that price actually makes the company worth that price.
I don't think it is a mistake. I think the author is trying to make the case that startups end up having round-number valuations. I don't think he is making the case that the number of startups decreases exponentially as a function of valuation, which is what would be implied by the points (900M, Many), (1000M, 22), (1100M, 6).
It takes a peculiar kind of narcissist to convince themselves that the point of a business isn't making money, but rather to self-actualize themselves.
exactly. there's nothing wrong with making money legitimately. If the purpose were theft or exploit to make illegal gains, criticize away. But to make money legitimately, you have to create value for society. They are inseparable
- ok I have to stop you there. This is not a new developing trend. It has always been a part of tech startup lore. If there is any current trend it's the democratization of startups. 10 years ago you needed $10 million in funding to build something real. 5 years ago $3 to $5 million. Today that's probably $1 -$2 million. The interesting thing about startups _today_ is that you can build real, decent, 10's or 100+ people startups without having to raise gazilions of $'s. Prior to very recently it was go big or go home entirely.
Which is a good point. Has anyone done any analysis on the YC/500 alums that fall in-between the Billion Startup Club and failing? My guess is there might be literally 100's of Olarks that are really great places to work with interesting teams doing millions in revenue that never needed to raise big dough. That option didn't really exist 5 or 10 years ago. The option to strike it rich though always has.