Numbers, not Percentages

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“The company has been growing by 120% YoY.”

We see similar statements in announcements, press releases and pitch decks everyday. The moment I see percentages, I start thinking about what the company is trying to hide. Most often, it is the fact that it is still tiny.

I can understand this when it’s a general announcement.  You want to get the public’s attention amd impressive numbers (even if they are just percentages) rend to achieve that goal.  For B2B ventures, you may not want to remind your clients that you are still very small, so you try to direct attention to growth rate rather than size.

However, when you are talking to investors, I hoghly recommend disclosing absolute numbers early on. Of course, momentum is important. But, so is size and scope. At least expressed as an order of magnitude.

Miracles

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FireShot Capture 49 - Barcelona complete greatest comeback i_ - http___www.goal.com_en_news_1716_c

Last night, Barcelona came back from a 0-4 deficit from their first leg defeat against PSG, to win 6-1 and advance to the Champions League quarter-finals.  It is the most dramatic score in the championship’s history.

The sports press, naturally, is beside itself, lauding the victory as a miracle.

However, it seems like miracles happen to those who have aggregated the necessary resources and toiled tirelessly.  You put Messi, Neymar, and Suarez on your team, and then, sometimes, they pull off the impossible.

We see the same in the best companies.  You sacrifice, bring together the most talented professionals, work, work, work and then one day, you have pulled off a miracle.

Time and “No”

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The word “no” is the most valuable tool for founders. It’s the currency with which you buy time, your most precious asset, as you are building your business.

Time is your asset, but it works against you.  The moment you launch your business and start spending money on your team, your overhead, marketing, etc., you notice that they are mostly denominated by time.  Almost all of your KPIs are also time-driven.  Revenues, gross profit, visitors, customers… are all meaningful when you attach time to them. The same with your monthly burn and your runway.  Time dictates your success.

When you say “no” to activities that do not contribute to the few success metrics on which you focus, you are buying yourself time, with which you can continue that focus.

Snap Thoughts

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Since the Facebook IPO in 2012, I had not been asked to opine on any new listing as much as Snap. The company had its highly-anticipated IPO last Thursday, and things went smoothly, with the stock popping to $24/share at the opening, a big jump over its issue price of $17.

What do I think of the company and the IPO?

It’s expensive given the numbers. The current $30b market cap is 75X 2016 revenues.  I also think that the quality of Snap’s ad revenue is lower than that of Facebook and Google, as it’s largely intermediated through media planning agencies. Almost all of it is brand advertising.

Still, i was not surprised with the strong IPO. With the small float (scarcity), hey could have priced higher and didn’t. I think the buyers were willing to take the risk of a 50-60% downside, with the hope that this becomes the next Facebook.

I, personally, did not bet on it. Facebook is, at its core, a tech company, whereas I think Snap is more of a media company. With the Facebook, Messenger, Whatsapp and Instagram apps, Facebook is the most dominant force on mobile.  Either Facebook’s 13X sales price is mispriced, or Snap’s 75X.  Both can not be right.

Facebook owned (and still owns) the identity layer of the internet and that makes it very resilient. Snap owns the attention of the (very valuable) US teenagers. Not as resilient.
I have not looked at the allocations that Fidelity, T. Rowe Price, etc. got at the IPO. These public market investors were already shareholders and had an insider’s perspective. If they bought more at IPO, it’s a bullish sign.
The great news is that this was a closely-watched IPO and it will usher in a wave of listings, creating liquidity for VC LPs.  Those dollars are likely to get recycled into VC fund providing the fuel for the global innovation economy.

Absorbing Daily Shocks

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Print

It would not be controversial to classify 2016 as a tough year, both in Turkey as well as the rest of the world.  We have seen increased terror attacks globally, and surprises like the coup attempt in Turkey, the Brexit vote and Trump’s election.

Startups require relentless focus on execution.  Yet, founders are human and they, like everyone else, are vulnerable to the distractions caused by the barrage of shocking events.  Add to this the ups and downs of a startup – landmark client wins, finding your company in the headlines, your competitors releasing new features, your co-founder leaving… The list can go on for pages.  With this much hitting a founder’s psyche, they have to work hard at keeping their focus and not get swayed too much by external factors.

I’ve always felt that helping our founders absorb these shocks is one of the ways we as investors and board members can be valuable to our portfolio companies.  We are there to remind them that it’s usually not as bad (or as good) as it feels at the moment, and that they are in a marathon, not a sprint.  They need to keep their  dual focus : one eye on the horizon, at their destination, and the other one on their desk, at their immediate next step.

Focus on the Upside

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Point Nine’s Pawel has a good post on why complex liquidation preference structures are bad for your startup.  It’s worth reading.

I agree with Pawel that complex liquidation preference starts entering term sheets in tighter VC markets.  Being notoriously lemming-like in behavior, the mood pendulum swings very dramatically in the VC industry.  You can go from SAFE term sheets with $30m caps at seed stage to offers with 2X participating preferred clauses in a matter of weeks.

More than the economics involved, complex liquidation preference terms are alarming to us in what they tell us about the VCs mindset. In our experience, success in VC comes from helping build great companies.  True, strong liquidation preference terms can theoretically boost a fund’s returns by a few basis points.  However, we believe that they do more harm in the precedent they set for future investors, the needless extra pressure it extracts on the others on that cap table and impede the VCs alignment with the founders.

We try to keep our focus on the upside in every investment we do and concede that some of our investments will not work out as planned.  The best way to keep those cases to a minimum is to stay aligned with our founders as much as possible.  Sticking with simple liquidation preference structures helps us achieve that.

Down and Flat Rounds

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There’s been quite a bit of talk on valuations over the past few months.  I think it began with Benchmark’s Bill Gurley’s April post On the Road to Recap.  The summer was a filled with similar news of flat or down rounds in highly-visible startups, including numerous unicorns. What prompted me for this post is the Ola news I saw today.

Whether valuations are spiraling down is a favorite topic of those chatting with VCs – I am not sure if this is schadenfreude or a genuine interest in what drives valuation trends – and I find myself repeating the same words when dealing with the subject: “It really does not mean much”.

The private valuation of a tech startup is the result of a complex equation with a very simple premise: the ultimate number satisfies the need of both parties at the table, the existing shareholders of the startup and the new VC.

In some situations the need is primarily cash. In that case the deal gets done at where the supply and demand curves intersect. In other cases, the company may want to maximize the PR from the financing, maybe get the coveted “unicorn” designation, and then the headline number becomes important.  The press loves lots of zeroes when reporting on startups.  As far as VCs are concerned, we can offer a startup any valuation, as long as we control the rest of the terms of the financing. That’s why the valuation is really less important than perceived.

Our advice to startups is to focus on just one coefficient when thinking of their business: the probability of success.  Of course, not running out of money is a critical factor of success so fundraising is very very important. However, the valuation is rarely the key factor in fundraising. I think it comes after:

  • Securing the right amount of funding to get your business to the next milestone
  • Partnering with the right investors
  • Making sure the company is able to focus on building its business rather than getting bogged down in fundraising-related bureaucracy or investor relations

In summary, as capital markets liquidity expands and shrinks with business cycles, there will be periods where we see valuations of subsequent rounds adjust accordingly.  I don’t think there’s much to read into in this phenomenon, other than noticing how the press can be distracting to entrepreneurs.