Thread.🧵
Understanding startups (or scaling startups), metrics & valuations
or
how not to be misled by analog metrics when you run digital scalable ventures.
Scalable startups self-select themselves into the VC + fundraising treadmill. Founders of these are well-aware of the risks, & know what they are into.
Founders of sustainable startups focused on cash flow are typically not funded by VCs - so how can the 'VC valuation game' (his phrase) kill these sustainable startups?
https://t.co/aTf8xqaoQu
There is a big difference between doing business and doing business 'profitably'.
— Lalit (@lalitinvestor) February 7, 2021
Both VC's and startups who have raised billions without generating a penny and are running on valuation game, have killed genuine startup founders who focus on cash flows. https://t.co/j4S9ExDU5U
https://t.co/LFzDuBHqLD
Gumroad bought back for $1
— Sahil (@shl) September 30, 2019
A - scaling startups & their values, playbooks have come to stand for all startups.
B - mainstreaming of startups & the sexiness of startups / tech culture have meant business press coverage of startups as if they are traditional analog businesses.
Success of FB, Google, Flipkart + ensuing press coverage + relentless content mill by VCs + founders all mean many aspiring founders want to run their ventures by the valley playbook. There hasn't been enough education of the distinction.
As tech ate the world, a lot of the traditional financial handles for measuring business values and valuation have had to be rethought.
Traditional accounting norms (Analog Accounting?!) were invented in ‘30s/40s when capital was scarce and there was capex but no IP / brand.
DCF / value investing emerged likewise in ‘30s during depression.
https://t.co/XhAm1edgpv
Let us understand this better.
How do you value a biz when cash flows arent predictable?
One of the structural reasons for pivots is that pivots present an argument for refilling the uncertainty bucket which has been drained by thoroughly investigating the pre-pivot opportunity and finding it did not conceal a huge amount of value.
— Patrick McKenzie (@patio11) August 12, 2019
Here is @madhavchanchani
https://t.co/uWDTLFkZzl
At that point some or most of the elements of analog accounting can be used to get a grip.
VC money = rocketfuel, scale startups = rocketships, other businesses = cars. Nothing wrong w cars but rocketships need rocketfuel. Their mechanics are different from those of cars
OR
fertiilizers, high yield varieties of foodgrains + trees.
Media coverage of tech falls in 3 buckets. Let us look at these.
https://t.co/FgJ9cjUcUd
Startups, VCs may not necessarily want it or celebrate as raises Qs abt their systems or processes, but this is impt for society + startup ecosystem.
Many of them arent aware that scalable startups have to operate by a different rule book. Rocketships cant be regulated like automotives.
-An oil co spends $1b in drilling an oil will but instead of expensing can capitalize it till oil gushes
-A software co spends money on building a data moat (that can be monetized later) but has to expense - incurring losses.
Still startups have to file for statutory reasons/
The issue is taking financial accounting data from scenario #2 to generate clickbait or even worse, hint, wink (misleading) narrative around it.
a. VC-fundable startups (scalable startups) are a small minority of overall startups
b. unfortunately their huge success and coverage has meant a conflation of scalable startups with other (sustainable) startups
f. Media has a responsibility to understand scalable ventures and communicate the true nature of their performance.
You May Also Like
Why is this the most powerful question you can ask when attempting to reach an agreement with another human being or organization?
A thread, co-written by @deanmbrody:
Next level tactic when closing a sale, candidate, or investment:
— Erik Torenberg (@eriktorenberg) February 27, 2018
Ask: \u201cWhat needs to be true for you to be all in?\u201d
You'll usually get an explicit answer that you might not get otherwise. It also holds them accountable once the thing they need becomes true.
2/ First, “X” could be lots of things. Examples: What would need to be true for you to
- “Feel it's in our best interest for me to be CMO"
- “Feel that we’re in a good place as a company”
- “Feel that we’re on the same page”
- “Feel that we both got what we wanted from this deal
3/ Normally, we aren’t that direct. Example from startup/VC land:
Founders leave VC meetings thinking that every VC will invest, but they rarely do.
Worse over, the founders don’t know what they need to do in order to be fundable.
4/ So why should you ask the magic Q?
To get clarity.
You want to know where you stand, and what it takes to get what you want in a way that also gets them what they want.
It also holds them (mentally) accountable once the thing they need becomes true.
5/ Staying in the context of soliciting investors, the question is “what would need to be true for you to want to invest (or partner with us on this journey, etc)?”
Multiple responses to this question are likely to deliver a positive result.