Paul Wallbank – Brilliant Communications

Category: startups

  • Value versus valuation

    Value versus valuation

    “There are people who build media companies for valuation, then there are others who build media brands for value,” writes Skift c0-founder Rafat Ali in his account of how the business stopped worrying about raising venture capital and focused on bootstrapping the travel industry website.

    Ali’s story of how Skift’s founders gave up on finding investors, refocused their business and found revenues to bootstrap the organisation is worth a read for anybody starting a venture, not just a tech or media startup.

    Notable is Ali’s distancing Skift from the startup label, claiming it’s “a meaningless word that comes with too much baggage”.

    The story of Skift is an interesting perspective on growing a business outside the current focus on external investors, instead focusing on the value it adds for customers, users and readers. Just as Skift went back to basics, many of us should also focus on how we and our businesses add value.

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  • Startups feel the squeeze

    Startups feel the squeeze

    A key factor in the unicorn startup valuations is the prospect of the company building a near monopoly. Over the years this is what’s driven the valuation of companies like Microsoft, Google and Amazon.

    This is what underpins the valuations of companies like Uber and Lyft and their potential monopoly positions have been entrenched with ride sharing service Sidecar deciding to wind up.

    In the food delivery space, things are more competitive and with no clear leader which makes things even more difficult for the companies operating in this space. High profile service Instacart yesterday announced its laying off recruiting staff and increasing delivery charges as it deals with a tighter market.

    Instacart and Sidecar’s woes are an indicator of what’s to come for more of the tech startups which haven’t achieved some sort of profitability.

     

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  • The victims of unicorns

    The victims of unicorns

    It’s not all good news when a tech company becomes a unicorn reports the New York Times as it often means employees and other ordinary stockholders may be diluted out by later investors holding preferential shares to secure their big bets.

    The danger with these high private valuations is the later investors whose big cheques created the unicorn mythology insist upon preferential shares to protect their stake. Should the company go public or be sold for less than the valuation then it’s the common stock holders who take the greatest hit.

    Good Technology’s sale to BlackBerry is the example cited in the New York Times’ story. The company’s last round of funding valued the business at $1.1 billion but it’s eventual exit was less than half of that.

    As a consequence, the common stockholders lost 90% of their wealth in the company while executives and late stage investors came out with only a slight dip in the preferred shares valuation. The CEO walked away with nearly six million dollars.

    With the last two years investment mania and the clear topping of the market, situations like Good’s are now becoming common. The New York Times points this out in the story.

    The odds that the unicorns will all reap riches if they are sold or go public are slim. Over the past five years, at least 22 companies backed by venture capital sold for the same amount as or less than what they had raised from investors

    For employees in these highly valued startups, those valuations and the risk of losing most of your own equity is a serious concern. Analyst firm CB Insights flagged earlier this week an exodus of talent from overvalued firms with dubious prospects is a great opportunity for the top tier companies.

    While the headline numbers for unicorns are impressive, the reality for employees, founders and early stage investors is an overvaluation is a dangerous place to be.

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  • When startup growth pains prove fatal

    One of the most dangerous things for a startup business is trying to grow too quickly.  In his blog, Jun Loayza describes how RewardMe, one of the startups he was involved in, failed after it tried to scale to fast.

    In his list of factors that led to RewardMe’s demise Loayza cites an undue focus on customer acquisition, however this is a fundamental part of the current Silicon Valley greater fool model.

    As the exit strategy is to sell the business, whether it’s to a trade buyer or through an IPO,  the aim is to maximise the value of the operation ahead of that sale. Boosting the numbers of users is a key task for management.

    Loayza says in retrospect he would have liked to focus on product development rather than user acquisition, but that’s a luxury not available when you’ve taken venture capital funding.

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  • Atlassian and the changing tech investment mindset

    Atlassian and the changing tech investment mindset

    Last week’s successful float of software collaboration tool service Atlassian may mark a number of turning points for the tech industry, both globally and in the company’s home country of Australia.

    Unlike many of the high profile unicorns which have dominated the tech industry headlines in recent times Atlassian is a real, and profitable, business with revenues of 320 million dollars that has grown at over 40% in each of the last three years.

    An even greater difference to the unicorns is Atlassian has raised little in external funding, instead the company was bootstrapped from a $10,000 credit card debt as this BRW profile of the business describes.

    Having a profitable, debt free business not beholden to a small army of investors is distinctly different to the Silicon Valley greater fool model hoping for cashed up sucker to buy their unprofitable, but well publicised, operation out. In fact it appears the greater fools themselves are dropping out of the market.

    Atlassian’s float may well be the marker that investors are looking for more substance in tech companies than just the promise of millions of eyeballs.

    For Aussies the lessons are sharp, Atlassian shifting its corporate functions to the UK last year and now listing on the US stock is a sharp reminder of just how out of touch with the technology sector Australian industry has become.

    Had Atlassian listed on the Australian Securities Exchange at the same capitalisation, it would have been the market’s 38th biggest company sitting between two property companies and one of the few technology listings on the board.

    On the ASX Atlassian would be one of a handful of technology businesses on the banking, mining and property dominated Australian exchange. It was that dominance of old world businesses and local investors’ lack of understanding of technology stocks that saw the company’s co-founder Mike Cannon-Brookes long maintain that Atlassian would never be listed in Australia.

    Another weakness for the Australian markets are local investors’ obsession over yield with businesses large and small paying out dividends at a far greater rate than global equivalents. This makes it hard to retain earnings and invest in new markets and R&D. Basically an Amazon could never exist in Australia.

    For companies looking at following Atlassian’s footsteps the lesson is clear – the Bay Area startup model of chasing investor funding with the hope of finding a greater fool isn’t necessarily the best way to build a business and that bootstrapping a cash flow positive business gives founders greater control and flexibility.

    To Australian entrepreneurs Atlassian’s lesson is to find a worldwide problem to solve and go global immediately. A domestic market focused primarily on property, banking and mining while being obsessed with short term yield isn’t going to be hospitable for local startups.

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