Startups need to start valuing themselves on impact not valuation
The increasingly fever pitched gnashing of teeth over the past year about a possible tech bubble doesn’t seem to be slowing down this year.
Mythical animals get all the press
The hot topic of course are the issues surrounding “Unicorns” and whether their valuations have any relation to reality or if they are just funky paper exercises. This was summarized brilliantly with this example:
VC: We will buy .0000001% of your company for $1. Welcome to the Unicorn club
Obviously this satirizes the reality, but the overall point that private valuations seem to be divorced from the long term value of a company still stands.
That begs the question though, by what metrics do we call a Unicorn, or any startup for that matter, successful?
The answer of course depends on who you ask. Ask their investors and they will say, “When they return X multiple of my money.” Ask the local chamber of commerce and they will say “When they bring X jobs to our community.” Ask their users and they will say “As long as I’m getting value out of it, it’s successful.”
The problem is that people focus almost exclusively on the VC’s answer.
The Startup world focuses too much on valuing companies only by their financial worth
There are a lot of reasons for that probably. For one, it makes great news. Forbes, BI, etc… hang their hat on that metric. This just creates a self licking ice-cream cone where startups focus on valuation to get press, press covers it and you start the process over again.
It’s also really easy to measure, and takes relatively little effort to understand. It also really impacts fundraising. The more money you have the more money people want to give you. For all these reasons financial value has won the day when evaluating startups - the same as any other company no matter what they are producing.
So who is valuable?
According to VC and business tech press, the highest financial goal of a startup is a big exit, with an IPO being the ultimate validation. Both GoPro and Square achieved this vaunted status. So is that the end? Not by a long shot and the press is flogging them:
GoPro: IPO in 2014 at $24. Today they are trading at $10.
Square: Trading below its IPO price
Both are “under IPO” price, so according to the financial valuation metric, as of today, they are duds in terms of what they brought the world. You would have been better off investing in the S&P over the same time period. So why should we care about them anymore?
Why we should value “startups” differently
We care about GoPro and Square because they are totally changing the way people work and play by bringing fantastic new technologies to the masses.
That’s the difference between Tech startups and every other company in the world and how we should be valued. We should value ourselves based on our ability to transform for the better how people work, live and play.
Tech startups should be valued based on their ability to transform for the better how people work, live and play.
Great startups really are different
At the same time as all of this talk about valuations and bubbles, there has been lament that “Startups” and “Silicon Valley” itself is no longer comprised of scrappy, small, moonshot companies, creating world changing technologies. Whether or not that narrative is historically true or not, and there is good evidence it isn’t, this lamenting makes the point that small, privately owned, high growth, high technology companies should be about more than just making money. They/We should be at the forefront of technological commercialization.
If we aren’t, then what is the point of taking the risk? We as founders and startup employees are probably all better off working at large comfortable mega-corporations with 50+ years of longevity. The risks of starting a high-technology company are massive and 90% of startups die in the first two years. We win by pushing the limits of technology and process in a way that can’t be done through traditional business.
There are certainly cynical actors that look for a quick buck or take advantage of the startup ecosystem with less than revolutionary technologies and shady business practices. Unfortunately that is just part of business in a fast growth industry. That doesn’t mean we should resign ourselves to being valued primarily by our financial metrics and just makes those that do look bad when they inevitably crash and burn. The trouble comes when those groups are the loudest voices and their implosions affect the rest of the ecosystem.
Focusing on bringing massive value to a broad range of consumers, quickly and in new and innovative ways that large gregarious companies simply can’t, is how the best startups prevail. That doesn’t mean we ignore revenue or financials, fundamentals are of course necessary, only that those aren’t the most important metrics worth evaluating.
So for the good of the community, lets start measuring ourselves on how we are tangibly making people’s lives easier and better, and how we move technology forward to bring about the future that we want to live in.
Andrew Kemendo is the co-founder and CEO of Pair
