$100M Valuation and No More Funding
davidcummings.org
davidcummings.org
"From an entrepreneur’s standpoint, it’s easy to become engrossed in the thrill of securing funding, expanding the team, and growing the business. Yet, more growth doesn’t always equal a better business. Some markets just aren’t that big. Some markets take longer to develop. Furthermore, personal priorities evolve, and one’s perspective on opportunities can shift over time. And, every round of funding shifts the goal posts further out. "
I think WeWork is a great example. That market did need some freshening up and maybe even some full blown disruption, as the incumbents weren’t delivering a modernized co-working experience attractive to young professionals.
But the founder took a great idea way too far, mistaking a straightforward office subleasing business for a cultural movement that could change the way people live and work en-masse.
It’s that founders’ hubris of “I invented the next iPhone and the world will never be the same again.”
People push for the billonaire option because it’s plausible if they have a revenue machine growing 2x every year and investors behind them. It’s likely their one shot at it.
I suspect he knew it was near pyramid scheme when their valuation had 9 zeros
But the great irony, given that WeWork might collapse at any moment (or already has?) is that it would probably be a great idea to start that right now or in the next year or so, as CBRE prices collapse and people increasingly look for cheap temporary and part time offices
I would argue that it was a poor idea that was greatly executed.
Everything was great for a while due to execution. But, when the realities or should I say limitations of the poor idea caught up, everything came crashing down.
If Softbank are throwing money around, the rational thing is to build as big a net as possible to catch it. If that happens to involve free beer in offices then so be it.
In business there's the subtle art of keeping expectations and results in healthy alignment. I think there's more pressure to avoid having too little investment than too much, but both can kill you. And it's SO brutal on morale when doubling revenue feels like a failure because 5x was the wildly-unrealistic demand of your pretend valuation.
The founders $5m turnover business success is then relatively a failure at $30m and they are unceremoniously booted out.
1) 100% of a 10M exit = $10M
2) 10% of a $100M exit = $10M
3) 1% of a $1B exit = $10M
Path is (very) arguably the easiest on the $100M exit? You likely raised outside funding, had a big enough market, grew your team and didn't have to slow-play everything, and still get a decent exit. Paid yourself some salary during that time. As the article says, lots of M&A in the ~$100M range.
$10M exit - a lot of risk, probably slower growth, bootstrapped, etc. Tons of small exists happening at that level too, but also more competition.
$1B exit - personally this seems hardest, even if probability of each occurring was the same. The size of team, scaling issues, etc all required. Of course you'd almost definitely own more than 1% at IPO.
Then stack your odds of success against those figures. Still feels like $100M is the optimal balance of risk/return.
"Time kills all deals" can be extrapolated into "Time kills all companies".
On the other hand, in the time it takes you (even with VC rocket fuel) to get 1 company to $100M with 10% ownership, you can probably start 2 or 3 smaller business that could end up at $10M.
One should never forget that majority of SV startups are not/will not be building sustainable businesses but building some technology and playing a short-term financial game. It’s easy to lose sight of that.
Both of which skew again towards preferring those outcomes to the bootstrapping one.
#3 is definitely better in terms of your longer-term ability to make money as well. The personal brand from founding a $1B startup is very monetizable (if you must / want to) after acquisition/IPO, or at the very least to raise seed money for your next venture.
Whether or not this calculus factors into founders' decisions to start a company I can't say. I doubt the mercenary motivation is as common as you suggest, just among the founders I know at least. I think the lure is more to get to build something yourself and 'not have a day job' / sense of adventure, and the potential for money is just kind of a nice cherry-on-top.
I did not mean to imply that most founders start companies to scam the investor base (who turns out to be sophisticated enough to deserve it even if so). It is just how the incentives in Silicon Valley lead you to operate. Basically SV model bribes you such that the #1 outcome would not even be rational, by design; i.e. you build a cash flow business, someone basically tells you that they are willing to give you best-case scenario upfront and ask you to come work for them and potentially make billions for them, so it is bascially a win-win for pretty much everyone except sometimes perhaps employees and customers. The natural outcome of the model means there will be a bunch of businesses with low probability of achieving their goal sustainably, by design.
This does not require the founder to be/act evil. Nor do I think the existence of such model in the world is a bad thing overall, even if it leads to some scams/useless companies. It is very good net net, as the vast majority of the world is overly conservative in capital allocation (a la Warren Buffet) to balance it out.
I’ve found that the founder community is woefully undereducated on the potentials of exiting to private equity. And, I believe it’s partially because VC’s (and YC) want founders to shoot for the moon instead of taking a lower (albeit life changing) outcome. I feel like there’s a giant opportunity for a PE firm that simply invests in founder public relations and educates them on the path to a PE exit.
VC funds with dozens or hundreds of investments may like a landscape where one or two make a 10x or 100x valuation and the rest go bust chasing that goal, but I personally can't afford to gamble my family's future with my 2,000 hours per year on a 1% chance that my employer will rocket to the moon. Also, job-hunting is a pain, I'd prefer that my employer not go through massive layoffs or risk bankruptcy unnecessarily. Equity growth or profit-sharing bonuses are just that - bonuses, mostly ignored when comparing total comp unless the 'bonus' is extremely stable and reliable. I need to take home a reasonable salary in exchange for my labor.
Even if you're wary of startups you have a founder that seems set for a predictable direction instead of hypergrowth and you might have a better chance of it not going bust next year. Then again if you're in it for the shares and the big opportunity, then probably not.
Once you take VC money and ESPECIALLY if you sell board seats and sell your own options you are agreeing to go big.
In retrospect, a lot of things would have gone differently and better if we'd been forced to take a smaller bite first. Our round was nominally a seed, but it was the size of an A or B from years past. We'd have been better off with what's called a pre-seed in today's terms.