Many people have been chiming in on the unicorns and what it is doing to the state of investing. It has become part of the echo-chamber in the tech industry. Mark Suster went off on a rant that I concur with.
Companies take time to grow. Pushing money down the throat of a company to grow quicker or to just grab more real estate without a path to actual profitability (ever) is scary. At one point those companies either explode into oblivion or they have something worth something to someone and find a way to exit. Although the people who put money in the last few rounds more than likely will lose their shirts. I find this behavior fascinating and it is fueled with this desire to create another unicorn.
I had this conversation with someone who comes in very late to the investment process. He is top of the charts smart and understands actual valuations when it comes to the Series D+ rounds. These rounds are not about gut they are about real numbers and an analysis of what the real trajectory is and of course the real valuation. In the past those rounds are not so out of touch with the public markets that smell bullshit and have zero interest in buying into it. For some reason we are seeing a lot of people jump in super late with blinders.
I have been spending time talking with a handful of investors who look at consumer products. Most of them have been in that arena a long time. They get how long it takes to build a company and they are willing to ride that long wave. They are also happy to bet on companies that might be worth over a hundred million dollars that can be profitable. Those might not be unicorns but I’ll take that kind of investment any day of the week.
I am not convinced we are going to see a bubble burst because there are a bunch of companies out there that are building intelligently and are working their asses off year after year and it shows. There are plenty of losers too but time will prove that they aren’t or that they are. There are no shortcuts. Once in awhile there is a hit on something that just explodes overnight but that is rare.
One founder I invested in met with a possible investor a few months ago. He asked her if she could guarantee that there would be an exit in 3 years tops. That is what he expected. She asked me what did I think about that. What did I think? That it is utterly ridiculous and an investor like that is expecting some kind of miracle. My suggestion…tell that guy to take a hike.
Raising capital in the consumer space is a different ballgame and new to me.Wildly different from tech.Few rules. Less transparency. Crazy weird pov’s.More understanding of business models. More stingy on valuations. Both driven from the capital needs of these types of businesses.And huge fluctuations from wacky people to astoundingly brilliant with completely new perspectives.Less overt networks to follow.I like it.
Great recapI love it too
Again Joanne, I agree with you and also enjoyed Mark’s “rant”….interesting to see how France’s first Unicorn fares too (Bla Bla Car).
See, personally I think a lot of EARLY stage will get crushed due to liquidation preferences. In late stage deals 1-2x preferences are fairly standard right? So if a company raises $150 million at a “billion valuation” (which its really not, the common valuation there is likely $300-600 million), that late money in any aquistion gets to take their $150 million to $300 million off the top. So while they surely want a bigger outcome, they have protection. Lets say the early money has $30 million in it. If they sold for a mere $300 – 500 million (often an option or should be if raising at a BILLION), then they get healthy returns. However if the company has a down 2-4 years with now $100’s of millions in preferences, the early person could get crushed. Crushed most of all with be founders with only their common… this is something I think some founders will realize (this is mitigated a little by the fact these mega-rounds often let a founder take meaningful money off the table)
Lots of early stage will get crushed b/c they go nowhere. Late stage companies that are over-valued have their own set of issues.
These rounds are not about gut they are about real numbers and an analysis of what the real trajectoryThe above really says it all. This reminds me of the day trading of past years. Doesn’t matter what the company does at all, just what you think the stock (or greater fool) will do.He asked her if she could guarantee that there would be an exit in 3 years tops. Well there is a saying “turnabout is fair play, eh?”. (Meaning she can promise anything but do what she wants in the end, right?) What does “guarantee” mean anyway? She could have said “oh sure for sure” and then it’s meaningless (assuming she has control of course). I get the point of course about the “devil you know”.
She could have said yes but who would want an investor like that?
What I am thinking is get the commitment in the can, and then hopefully not need it, and simply back out in a graceful way. For example if someone comes and gives me a bid for some contracting work that is way to high I don’t say “oh no way sorry” I say “ok sure get me some more info” and meanwhile continue to explore other possibilities. Because maybe in the end I will need them because the other bids won’t work out as planned. If I blow them off then I can’t crawl back it puts me in a weak position.If the investor was not sophisticated enough to flush out that strategy then “a pox on his house”. After all, he was dealing with someone who was inexperienced enough to ask for your opinion in terms of making the decision. So to me it’s fair play.In other words if you are in a negotiation and are trying to take advantage of the other party by preying on their lack of experience, if it comes back and bites you, you have little reason to complain. Pigs get fat, hogs get slaughtered.This is all based on hypotheticals I don’t know more details than what you are saying above (so you are probably right I am just giving another angle!)
An investor once asked me “What’s your exit?”I replied: “I want to build the largest possible business with over $1B in revenues. I’m sure my investors will find a suitable financial exit along the way.”He asks: “but who will acquire your company?”I replied: “A lot of people could mess up what I’m building if I sold too soon or to the wrong person.”He continues: “But what about your stock? How will you monetize your equity?”I replied: “I get a decent salary to live on, I have around 2 months expenses in my savings, and I work hard. I don’t think about what my equity’s worth today or tomorrow.”Never heard back from him, and thankful for that.
To me, The rush to late stage is incentivized by two things. 1. Zero cost capital (0% interest rates) which changes risk/reward perceptions. 2. The idea that somehow, later stage companies have less risk than seed stage. Ironically, when you do the math and think about it logically, check sizes for Series D+ rounds are very large-so the assumption of risk is pretty large. Check sizes for seed rounds are significantly smaller-and risk is more easily spread out and managed.
I’ve got asked ‘what’s the end game’ for my entire career as I’ve raised capital?My answer is always the same–in no way impacts what I have to do tomorrow when i come to work. Goal is to build value day after day.
Excellent post Gotham Gal. I’m sensing the culture is very different in the US to the UK, but the fundamentals of good investing are universal. Can I be cheeky and share a post I wrote recently which addresses the startup world’s latest buzzword in response to the ‘Unicorn Crisis’: Cockroach. https://medium.com/@rhughes…It concerns me that we even need a word at all for ‘building a sustainable business’. Not all businesses have to be Unicorns. Let’s just help entrepreneurs build great businesses and not create strange cultures of what constitutes success. Rich
great post you wrote on medium.