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>Hence, the rumors that some VCs actively discourage startups from making any revenue at all (let alone profits), since those could act as anchors that drag dow

by S4M 12y ago

>Hence, the rumors that some VCs actively discourage startups from making any revenue at all (let alone profits), since those could act as anchors that drag down the acquisition valuation. I am not familiar with the funded startups/VC/acquisition ecosystem, so can you explain how a startup that is having revenue would drag down the acquisition valuation? Is it because it would drag down the acquisition price of the other startups that don't have revenue?

potatolicious 12y ago
Usually chasing revenue means charging for things - removing free and instituting freemium in its place, for example. Generally speaking chasing revenue means pissing off some portion of your user base (i.e., the people who had no intention to ever pay you), and in doing so limiting your growth rate. Valuation is deeply linked to growth rate and user base in this crazy industry of ours, so "we have X committed, paying users" is worth less than "we have 100X actives!!!!11one".
- S4M 12y ago
  > Usually chasing revenue means charging for things - removing free and instituting freemium in its place, for example. Generally speaking chasing revenue means pissing off some portion of your user base (i.e., the people who had no intention to ever pay you), and in doing so limiting your growth rate. Not sure I agree. You can give for free a limited version of your product and charge something for a better version, or you can use the freemium model.
  - potatolicious 12y ago
    Yes, and the company that doesn't have to care about revenue can just give the entire thing away for free and get users to sing their praises. They will grow faster than you. This is why the "no-revenue" play works (well, until it stops working).
brazzy 12y ago
No, the idea is that revenue provides something to run numbers on to arrive at a validation. Call it an anchor or a sanity check: the idea is that it limits the acquisition validation. Whereas, it is argued in the article I probably got the idea from (http://bits.blogs.nytimes.com/2012/04/29/disruptions-with-no-revenue-an-illusion-of-value/ http://bits.blogs.nytimes.com/2012/04/29/disruptions-with-no... ), having no revenue means the only limit is your ability to excite the acquirer with "growth potential" or "strategic value".
alain94040 12y ago
Here's an example to understand why revenue lowers your valuation. Twitter grows like crazy, adds millions and millions of users. Great, maybe it's worth billions. But if Twitter had started charging for premium accounts, as an experiment, their revenue during the same period could have grown from $1M to $5M. Can a billion-dollar company have revenue of $5M? No. So the valuation of Twitter would have come back to earth, maybe $100M, maybe a bit more, but not "the sky is the limit" number.
- mahyarm 12y ago
  So why don't investors discount a valuation because the fact that revenue is undefined, and not treat it like a near divide by zero?
  - pwang 12y ago
    It's important to remember that as brokers/agents of LPs' money, VCs price risk. The valuation of companies is distinct from that, and is normally the principal component of the pricing of the risk. However, if the market is in a mode of skyrocketing/bubbling, a larger component of the price is how much you can hype up the company before your exit, and basically trade on your own credibility/brand. In a crude sense, it's a form of a confidence scheme...
pbreit 12y ago
Because revenue is easy but growth is very, very, very hard.
- brazzy 12y ago
  Seems to me the opposite is the case. Any idiot can get signups when they have millions of VC money to burn. Getting people to actually pay you more than you're spending on user acquisition is infinitely harder.
  - pbreit 12y ago
    Nope. It really isn't. The hardest thing by far is to get lots of usage. Once you have lots of usage, it's really easy to make money whether it's advertising, fees or whatever. Can you name 2 or 3 "idiots" that have done what you suggest?
    - strebler 12y ago
      I don't think any of them are idiots. But here's a small sample of companies, off the top of my head, who have had serious problems in terms of monetization / revenue and needed to use investors / host company's money to run: Pinterest. Groupon. Reddit. Snapchat. Instagram. Youtube (for many years). Twitter took a long time to make money. Most news sites have a hard time, which is why WSJ is paywalled (as mentioned in the article). On the "smaller valuation side", we could say FriendFeed, Zite, Hot Potato, Beluga, GroupMe, TweetDeck, Dodgeball. It's much harder to than you may realize to monetize.
      - tg3 12y ago
        It's very hard to monetize, but it's orders of magnitude harder to get big in the first place.
      - pbreit 12y ago
        Groupon and YouTube are printing money now that they are public. Pinterest, Snapchat & Instagram haven't even tried to make money (ie, they are doing what I explained). Most or all of those small ones never grew fast enough to matter.
api 12y ago
It's a psychological thing. If a company hasn't even tried to get revenue, then the sky's the limit. But as soon as it does it gets actual numbers, and those numbers are usually not as big as anyone's wildest dreams. Sometimes they're downright depressing, and they lead to that hard and unglamorous slog of optimizing business model and pricing strategy and such. In big companies this often manifests in the form of the project cancelled right before (or right after) it goes to market. A project that's still pie-in-the-sky tends to excite the sales and business folks, but once it gets closer to go-to-market you start getting real numbers. A lot of times this leads to cold feet, the project loses favor, and sometimes gets cancelled right before it ships. Reality is never as much fun as dreams. The counter-argument though is that rapid growth in the beginning is necessary to have any chance of getting really big. I've got an effort out there right now that's growing but has a revenue model in place. I know for a fact that if I take the revenue model away it will grow faster, and I've been having a huge debate with myself on this. The revenue isn't huge and the growth is slow-- do I trade that small amount of revenue for larger growth on the promise that I can get more revenue later? It's a tough question.

by S4M 12y ago

potatolicious 12y ago

Usually chasing revenue means charging for things - removing free and instituting freemium in its place, for example. Generally speaking chasing revenue means pissing off some portion of your user base (i.e., the people who had no intention to ever pay you), and in doing so limiting your growth rate. Valuation is deeply linked to growth rate and user base in this crazy industry of ours, so "we have X committed, paying users" is worth less than "we have 100X actives!!!!11one".

S4M 12y ago
> Usually chasing revenue means charging for things - removing free and instituting freemium in its place, for example. Generally speaking chasing revenue means pissing off some portion of your user base (i.e., the people who had no intention to ever pay you), and in doing so limiting your growth rate. Not sure I agree. You can give for free a limited version of your product and charge something for a better version, or you can use the freemium model.
- potatolicious 12y ago
  Yes, and the company that doesn't have to care about revenue can just give the entire thing away for free and get users to sing their praises. They will grow faster than you. This is why the "no-revenue" play works (well, until it stops working).

brazzy 12y ago

No, the idea is that revenue provides something to run numbers on to arrive at a validation. Call it an anchor or a sanity check: the idea is that it limits the acquisition validation. Whereas, it is argued in the article I probably got the idea from (http://bits.blogs.nytimes.com/2012/04/29/disruptions-with-no-revenue-an-illusion-of-value/ http://bits.blogs.nytimes.com/2012/04/29/disruptions-with-no... ), having no revenue means the only limit is your ability to excite the acquirer with "growth potential" or "strategic value".

alain94040 12y ago

Here's an example to understand why revenue lowers your valuation. Twitter grows like crazy, adds millions and millions of users. Great, maybe it's worth billions. But if Twitter had started charging for premium accounts, as an experiment, their revenue during the same period could have grown from $1M to $5M. Can a billion-dollar company have revenue of $5M? No. So the valuation of Twitter would have come back to earth, maybe $100M, maybe a bit more, but not "the sky is the limit" number.

mahyarm 12y ago
So why don't investors discount a valuation because the fact that revenue is undefined, and not treat it like a near divide by zero?
- pwang 12y ago
  It's important to remember that as brokers/agents of LPs' money, VCs price risk. The valuation of companies is distinct from that, and is normally the principal component of the pricing of the risk. However, if the market is in a mode of skyrocketing/bubbling, a larger component of the price is how much you can hype up the company before your exit, and basically trade on your own credibility/brand. In a crude sense, it's a form of a confidence scheme...

pbreit 12y ago

Because revenue is easy but growth is very, very, very hard.

brazzy 12y ago
Seems to me the opposite is the case. Any idiot can get signups when they have millions of VC money to burn. Getting people to actually pay you more than you're spending on user acquisition is infinitely harder.
- pbreit 12y ago
  Nope. It really isn't. The hardest thing by far is to get lots of usage. Once you have lots of usage, it's really easy to make money whether it's advertising, fees or whatever. Can you name 2 or 3 "idiots" that have done what you suggest?
  - strebler 12y ago
    I don't think any of them are idiots. But here's a small sample of companies, off the top of my head, who have had serious problems in terms of monetization / revenue and needed to use investors / host company's money to run: Pinterest. Groupon. Reddit. Snapchat. Instagram. Youtube (for many years). Twitter took a long time to make money. Most news sites have a hard time, which is why WSJ is paywalled (as mentioned in the article). On the "smaller valuation side", we could say FriendFeed, Zite, Hot Potato, Beluga, GroupMe, TweetDeck, Dodgeball. It's much harder to than you may realize to monetize.
    - tg3 12y ago
      It's very hard to monetize, but it's orders of magnitude harder to get big in the first place.
    - pbreit 12y ago
      Groupon and YouTube are printing money now that they are public. Pinterest, Snapchat & Instagram haven't even tried to make money (ie, they are doing what I explained). Most or all of those small ones never grew fast enough to matter.

api 12y ago

It's a psychological thing. If a company hasn't even tried to get revenue, then the sky's the limit. But as soon as it does it gets actual numbers, and those numbers are usually not as big as anyone's wildest dreams. Sometimes they're downright depressing, and they lead to that hard and unglamorous slog of optimizing business model and pricing strategy and such. In big companies this often manifests in the form of the project cancelled right before (or right after) it goes to market. A project that's still pie-in-the-sky tends to excite the sales and business folks, but once it gets closer to go-to-market you start getting real numbers. A lot of times this leads to cold feet, the project loses favor, and sometimes gets cancelled right before it ships. Reality is never as much fun as dreams. The counter-argument though is that rapid growth in the beginning is necessary to have any chance of getting really big. I've got an effort out there right now that's growing but has a revenue model in place. I know for a fact that if I take the revenue model away it will grow faster, and I've been having a huge debate with myself on this. The revenue isn't huge and the growth is slow-- do I trade that small amount of revenue for larger growth on the promise that I can get more revenue later? It's a tough question.