6 ms·

The dangerous allure of the “Billion Dollar Startup Club”

47 points by sethbannon 12y ago

sp332 12y ago
That footnote seems very unlikely to me. I would guess that there are far more companies valued at $900MM than $1B.
- fragsworth 12y ago
  It looks like a mistake by the author, and the numbers should be reversed.
  - vedant 12y ago
    I don't think it is a mistake. I think the author is trying to make the case that startups end up having round-number valuations. I don't think he is making the case that the number of startups decreases exponentially as a function of valuation, which is what would be implied by the points (900M, Many), (1000M, 22), (1100M, 6).
- sethbannon 12y ago
  Notice how there are 7 startups at the $2B mark, only 1 at the $1.9B mark, and none at the $2.1B mark. To me this strongly implies that entrepreneurs are indeed trying to hit these big round numbers.
  - shykes 12y ago
    This could be an artifact of how these valuations are communicated, rather than the actual valuations. It's common for companies to not disclose their valuation when announcing funding, but for journalists to make assumptions based on rumors and educated guesses - those assumptions make their way in the headlines surprisingly often. What starts as "approximately $2bn, according to our sources", pretty soon becomes "$2,000,000.00" in an analyst's spreadsheet.
  - pbreit 12y ago
    What's wrong with that? Why would you raise at 1.9 or 2.1 instead of 2?
    - rgbrgb 12y ago
      All things equal, 2.1 gives slightly less dilution to current shareholders but the same positive "optics" as 2. Likewise, 1.9 gives slightly more equity to the VCs but a lot less prestige to the company their investing in (so arguably they get less value). The same psychology comes into play when pricing anything else. We price things at $1.99 rather than $2.00 because there's an irrational feeling that a price starting with a 1 is much less than a price starting with a 2. I think the OP is just making the point that a lot of these $1B companies are priced as such because it gives some extra legitimacy, thereby increasing their chance of success and increasing the value of the VC's share. The question is whether this is speculation or whether investing at that price actually makes the company worth that price.
  - pyrrhotech 12y ago
    There are 10 employees with 140k salaries at my company and 5 with 150k but none with 139k or 147.26k. People like round numbers, especially when you consider significant figures and how speculative the valuations are. Airbnb could realistically be with anywhere from 500 million to 30 billion or more. The current valuation is a largely bullshit arbitrary number that VC and founder agreed to for God knows why in their latest negotiations. In these negotions you don't counter for 5 or 10% more. That isn't within the significant range.
- peterjancelis 12y ago
  What the author is implying is that entrepreneurs seek those nice round X billion valuations, and the VCs are fine giving it to them as long as they can write the term sheet. Remember, these valuations are not cash paid for common equity like in the stock market. It's an extrapolated total equity value based on a smaller amount of cash given for a smaller amount of preferred equity that comes with a lot of conditions such as liquidation preference and maybe even preferred dividends or, god forbid, personal founder liability. The valuation number is really just a bullshit number and meaningless to anyone who doesn't know the entire term sheet.
pedalpete 12y ago
Though I agree with the general statements made by the author, on a tangent, I disagree with the 'solve a problem' advice which is constantly being touted. I look at some of the largest start-ups or even companies, and they aren't solving problems so much as creating opportunities. AirBnB didn't really solve a problem, they created an opportunity for you to rent your extra space, or find a place other than a hotel to stay. This also applies to larger companies. Coca-cola didn't solve a problem, they just made something people really liked. Apple and Microsoft didn't solve a problem people had. They didn't have computers, so what what problem could you have been solving by giving people an operating system. At the time, people didn't know what they would use a computer for, so what problem was being solved.
- deleted 12y ago
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- hugs 12y ago
  Here are a few of the problems people had that Apple and Microsoft solved: 1) Maintaining a general ledger for your business (and all the calculations) by hand & on paper was tedious and labor intensive. VisiCalc was the first "killer app" that made loads of people want to buy an Apple. Apple provided the platform to make VisiCalc possible. On the PC side, the driver was Lotus 123, then MS Excel. 2) Using a typewriter was annoying, especially when you need to fix a mistake. (e.g. Liquid Paper, Wite-out). On the PC side, there was WordPerfect, then MS Word.
- harmegido 12y ago
  Seems to me like all of these companies solved problems - they were just problems that not many people knew they had. Airbnb - I only use my place 90% of the year, but I pay for using it 100% of the year. Coke - Water doesn't taste very good. Apple/MS - secretaries are expensive. Can they be automated?
  - ykumar6 12y ago
    I think it's the other way around. Airbnb had to be solving a problem on the demand side for a supply to arise. Similarly, Apple/MS must have found an early market of professionals to sell to that need excel, calculators, whatever - solving a problem for them. You don't start by automating out secretaries. You start by solving a problem for an existing set of people.
Flux159 12y ago
The author seems to be trying to dissuade founders who are only in it for the money from starting startups solely for that reason. On that note, I would suspect that a company whose primary interest is making the founders money wouldn't necessarily have their customer's best interests in mind and would probably never reach a $1B valuation.
acgourley 12y ago
"but the core purpose of these founders is clear – to make boatloads of money." This is false. If someone merely wanted to build wealth there are many options with a higher expected value and higher chance of producing life-changing results. The stated billion dollar goal has several reasons behind it, the least of which is money. Diving into those reasons one by one could be very interesting; it could expose and analyze our core beliefs (both noble and less-so). Instead the author wasted the chance to do that and left us with something both simplistic and wrong.
pbiggar 12y ago
I think the OP misunderstands the words "billion dollar company". Which is actually completely understandable, since money is in the title you assume it's about the money. Typically founders are product people, they want to solve a problem that exists in the world. But, to solve that problem, they need to make a big impactful company, that grows to dominate a particular niche or industry and disrupt the current way of doing things. To these founders, "billion dollar company" is a shorthand for all these ideals: to make a great and lasting company, to solve a real problem for a very large number of people, and to make a real impact in the world. It's not coincidence that this phrase is also important to VCs, for whom "billion dollar company" may have a different meaning, that being "make back the fund for our LPs". I say "may" because that's a simplistic view: many VCs are looking to make the world a better place too, and in many cases they have more money than they need already. And to journalists, these mean "companies which we have to pay attention to". And when you think about, they're not paying attention because of the value, but because of the impact. Which is why journalists are always talking about consumer companies, because they have much more impact in the world than more successful enterprise companies. Of course, that's not to say there aren't people in it for the money. But we rarely need to worry about them, since they rarely succeed.
- sethbannon 12y ago
  I agree that some use "billion dollar company" as shorthand for all the things you mention (a great lasting company, solving a real problem, and making a real impact). My point is that while it's often used as a proxy like this, it's a dangerous proxy because it's easily disconnected from the company's original mission(s). In this sense, it's an unhealthy simplification. Surely there must be a better stand-in for a startup's hard-to-measure progress towards achieving their mission than their valuation.
  - softdev12 12y ago
    I couldn't agree more with your full post. It's almost become so obvious and cliche that people have forgotten why business exists. It's as if all the media hype puts the focus on the riches of the founder and not the value created by the product. Every once in a while you see a publication do a retrospective of a failed startup. And every once in a while you see a blog post from a startup that exploded. But the statistics are completely skewed with distorting the reality of startup success. Mentioning that there are now X number of billion dollar startups masks how many startups are simultaneously failing. I would love to see a study that showed the total number of inflation-adjusted billion dollar startups as a percentage of the total number of startups started over time. This percentage may actually be decreasing, even though the media seems to be suggesting that there's a tech bubble.
jusben1369 12y ago
"there’s a disturbing trend developing of people deciding to found a company simply to get rich." - ok I have to stop you there. This is not a new developing trend. It has always been a part of tech startup lore. If there is any current trend it's the democratization of startups. 10 years ago you needed $10 million in funding to build something real. 5 years ago $3 to $5 million. Today that's probably $1 -$2 million. The interesting thing about startups _today_ is that you can build real, decent, 10's or 100+ people startups without having to raise gazilions of $'s. Prior to very recently it was go big or go home entirely. Which is a good point. Has anyone done any analysis on the YC/500 alums that fall in-between the Billion Startup Club and failing? My guess is there might be literally 100's of Olarks that are really great places to work with interesting teams doing millions in revenue that never needed to raise big dough. That option didn't really exist 5 or 10 years ago. The option to strike it rich though always has.
- steiza 12y ago
  We (at Olark) are wondering the same thing. We just recently talked to Poll Everywhere (S'08) - they are also bootstrapped and well over $1m / year in revenue. Wufoo was as well (they were acquired in 2011). If you're a bootstrapped company (let's say < $100k in outside funding) and you have revenues >> $1m / year, we'd love to hear from you! Does it count if you raise after you hit $1m / year in revenue? I'll let you decide.
  - pbreit 12y ago
    You make it sound like raising is bad. there is absolutely nothing wrong with raising and in fact it is a good thing.
    - jvyduna 12y ago
      Raising is a great thing. Bootstrapping feels harder though.
    - steiza 12y ago
      I meant does it still count as bootstrapping if you raise after hitting $1m / year in revenue. Without VC there would be no Google, no Microsoft, no Amazon, ... I don't think many people seriously advocate for a world with no VCs.
deleted 12y ago
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pbreit 12y ago
This article is just stupid. Pretty much any billion dollar company is meaningful by definition. You can't just manufacture something like that out of thin error. And what's the scary danger?
- adventured 12y ago
  The only scary danger I'm familiar with from it (for businesses and entrepreneurs), is the potential for mass delusion and altering behavior based on believing the good valuation & funding times will never end. Falling into that trap is very common. I've seen two large stock market / tech implosions in my relatively short lifetime, the 1999/2000 bubble and the smaller 2005/2007 pre-great recession era. In both cases there was a lot of hubris around the notion that because you acquired a massive valuation, you had a business that was really worth that, and really had that sort of potential. It's a failure to separate the financial atmosphere at the time, and the reality of business when it comes to generating the sales and profit that it takes to support a given valuation over time. You most certainly can manufacture a billion dollar valuation out of, essentially, thin air - it happened frequently in 1999.
fiatmoney 12y ago
It takes a peculiar kind of narcissist to convince themselves that the point of a business isn't making money, but rather to self-actualize themselves.
- pyrrhotech 12y ago
  exactly. there's nothing wrong with making money legitimately. If the purpose were theft or exploit to make illegal gains, criticize away. But to make money legitimately, you have to create value for society. They are inseparable
j_baker 12y ago
> there’s a disturbing trend developing of people deciding to found a company simply to get rich I understand what the author is getting at. But the purpose of a business is to make money. What's wrong with starting a company to get rich? My suspicion is that the author means something more along the lines of "There are too many people starting companies simply to make a quick buck." All things considered though, I agree. There are simply too many people in the Valley chasing huge valuations and quick exits and not enough building sustainable companies.
- UmDieWelt 12y ago
  I don't see it as something morally wrong. I think the point is more that you're less likely to succeed if you're just doing it because you see other start-ups getting rich. So you start a company just to start a company, instead of having an actually good idea that you're passionate about.
chadmaughan 12y ago
It was published by the Wall Street Journal. The opening sentence incorrectly attributes Forbes. "Yesterday Forbes published a piece on 'The Billion Dollar Startup Club'.” http://graphics.wsj.com/billion-dollar-club/ http://graphics.wsj.com/billion-dollar-club/
deleted 12y ago
[deleted]

47 points by sethbannon 12y ago

sp332 12y ago

That footnote seems very unlikely to me. I would guess that there are far more companies valued at $900MM than $1B.

fragsworth 12y ago
It looks like a mistake by the author, and the numbers should be reversed.
- vedant 12y ago
  I don't think it is a mistake. I think the author is trying to make the case that startups end up having round-number valuations. I don't think he is making the case that the number of startups decreases exponentially as a function of valuation, which is what would be implied by the points (900M, Many), (1000M, 22), (1100M, 6).
sethbannon 12y ago
Notice how there are 7 startups at the $2B mark, only 1 at the $1.9B mark, and none at the $2.1B mark. To me this strongly implies that entrepreneurs are indeed trying to hit these big round numbers.
- shykes 12y ago
  This could be an artifact of how these valuations are communicated, rather than the actual valuations. It's common for companies to not disclose their valuation when announcing funding, but for journalists to make assumptions based on rumors and educated guesses - those assumptions make their way in the headlines surprisingly often. What starts as "approximately $2bn, according to our sources", pretty soon becomes "$2,000,000.00" in an analyst's spreadsheet.
- pbreit 12y ago
  What's wrong with that? Why would you raise at 1.9 or 2.1 instead of 2?
  - rgbrgb 12y ago
    All things equal, 2.1 gives slightly less dilution to current shareholders but the same positive "optics" as 2. Likewise, 1.9 gives slightly more equity to the VCs but a lot less prestige to the company their investing in (so arguably they get less value). The same psychology comes into play when pricing anything else. We price things at $1.99 rather than $2.00 because there's an irrational feeling that a price starting with a 1 is much less than a price starting with a 2. I think the OP is just making the point that a lot of these $1B companies are priced as such because it gives some extra legitimacy, thereby increasing their chance of success and increasing the value of the VC's share. The question is whether this is speculation or whether investing at that price actually makes the company worth that price.
- pyrrhotech 12y ago
  There are 10 employees with 140k salaries at my company and 5 with 150k but none with 139k or 147.26k. People like round numbers, especially when you consider significant figures and how speculative the valuations are. Airbnb could realistically be with anywhere from 500 million to 30 billion or more. The current valuation is a largely bullshit arbitrary number that VC and founder agreed to for God knows why in their latest negotiations. In these negotions you don't counter for 5 or 10% more. That isn't within the significant range.
peterjancelis 12y ago
What the author is implying is that entrepreneurs seek those nice round X billion valuations, and the VCs are fine giving it to them as long as they can write the term sheet. Remember, these valuations are not cash paid for common equity like in the stock market. It's an extrapolated total equity value based on a smaller amount of cash given for a smaller amount of preferred equity that comes with a lot of conditions such as liquidation preference and maybe even preferred dividends or, god forbid, personal founder liability. The valuation number is really just a bullshit number and meaningless to anyone who doesn't know the entire term sheet.

pedalpete 12y ago

Though I agree with the general statements made by the author, on a tangent, I disagree with the 'solve a problem' advice which is constantly being touted. I look at some of the largest start-ups or even companies, and they aren't solving problems so much as creating opportunities. AirBnB didn't really solve a problem, they created an opportunity for you to rent your extra space, or find a place other than a hotel to stay. This also applies to larger companies. Coca-cola didn't solve a problem, they just made something people really liked. Apple and Microsoft didn't solve a problem people had. They didn't have computers, so what what problem could you have been solving by giving people an operating system. At the time, people didn't know what they would use a computer for, so what problem was being solved.

deleted 12y ago
[deleted]
hugs 12y ago
Here are a few of the problems people had that Apple and Microsoft solved: 1) Maintaining a general ledger for your business (and all the calculations) by hand & on paper was tedious and labor intensive. VisiCalc was the first "killer app" that made loads of people want to buy an Apple. Apple provided the platform to make VisiCalc possible. On the PC side, the driver was Lotus 123, then MS Excel. 2) Using a typewriter was annoying, especially when you need to fix a mistake. (e.g. Liquid Paper, Wite-out). On the PC side, there was WordPerfect, then MS Word.
harmegido 12y ago
Seems to me like all of these companies solved problems - they were just problems that not many people knew they had. Airbnb - I only use my place 90% of the year, but I pay for using it 100% of the year. Coke - Water doesn't taste very good. Apple/MS - secretaries are expensive. Can they be automated?
- ykumar6 12y ago
  I think it's the other way around. Airbnb had to be solving a problem on the demand side for a supply to arise. Similarly, Apple/MS must have found an early market of professionals to sell to that need excel, calculators, whatever - solving a problem for them. You don't start by automating out secretaries. You start by solving a problem for an existing set of people.

Flux159 12y ago

The author seems to be trying to dissuade founders who are only in it for the money from starting startups solely for that reason. On that note, I would suspect that a company whose primary interest is making the founders money wouldn't necessarily have their customer's best interests in mind and would probably never reach a $1B valuation.

acgourley 12y ago

"but the core purpose of these founders is clear – to make boatloads of money." This is false. If someone merely wanted to build wealth there are many options with a higher expected value and higher chance of producing life-changing results. The stated billion dollar goal has several reasons behind it, the least of which is money. Diving into those reasons one by one could be very interesting; it could expose and analyze our core beliefs (both noble and less-so). Instead the author wasted the chance to do that and left us with something both simplistic and wrong.

pbiggar 12y ago

I think the OP misunderstands the words "billion dollar company". Which is actually completely understandable, since money is in the title you assume it's about the money. Typically founders are product people, they want to solve a problem that exists in the world. But, to solve that problem, they need to make a big impactful company, that grows to dominate a particular niche or industry and disrupt the current way of doing things. To these founders, "billion dollar company" is a shorthand for all these ideals: to make a great and lasting company, to solve a real problem for a very large number of people, and to make a real impact in the world. It's not coincidence that this phrase is also important to VCs, for whom "billion dollar company" may have a different meaning, that being "make back the fund for our LPs". I say "may" because that's a simplistic view: many VCs are looking to make the world a better place too, and in many cases they have more money than they need already. And to journalists, these mean "companies which we have to pay attention to". And when you think about, they're not paying attention because of the value, but because of the impact. Which is why journalists are always talking about consumer companies, because they have much more impact in the world than more successful enterprise companies. Of course, that's not to say there aren't people in it for the money. But we rarely need to worry about them, since they rarely succeed.

sethbannon 12y ago
I agree that some use "billion dollar company" as shorthand for all the things you mention (a great lasting company, solving a real problem, and making a real impact). My point is that while it's often used as a proxy like this, it's a dangerous proxy because it's easily disconnected from the company's original mission(s). In this sense, it's an unhealthy simplification. Surely there must be a better stand-in for a startup's hard-to-measure progress towards achieving their mission than their valuation.
- softdev12 12y ago
  I couldn't agree more with your full post. It's almost become so obvious and cliche that people have forgotten why business exists. It's as if all the media hype puts the focus on the riches of the founder and not the value created by the product. Every once in a while you see a publication do a retrospective of a failed startup. And every once in a while you see a blog post from a startup that exploded. But the statistics are completely skewed with distorting the reality of startup success. Mentioning that there are now X number of billion dollar startups masks how many startups are simultaneously failing. I would love to see a study that showed the total number of inflation-adjusted billion dollar startups as a percentage of the total number of startups started over time. This percentage may actually be decreasing, even though the media seems to be suggesting that there's a tech bubble.

jusben1369 12y ago

"there’s a disturbing trend developing of people deciding to found a company simply to get rich." - ok I have to stop you there. This is not a new developing trend. It has always been a part of tech startup lore. If there is any current trend it's the democratization of startups. 10 years ago you needed $10 million in funding to build something real. 5 years ago $3 to $5 million. Today that's probably $1 -$2 million. The interesting thing about startups _today_ is that you can build real, decent, 10's or 100+ people startups without having to raise gazilions of $'s. Prior to very recently it was go big or go home entirely. Which is a good point. Has anyone done any analysis on the YC/500 alums that fall in-between the Billion Startup Club and failing? My guess is there might be literally 100's of Olarks that are really great places to work with interesting teams doing millions in revenue that never needed to raise big dough. That option didn't really exist 5 or 10 years ago. The option to strike it rich though always has.

steiza 12y ago
We (at Olark) are wondering the same thing. We just recently talked to Poll Everywhere (S'08) - they are also bootstrapped and well over $1m / year in revenue. Wufoo was as well (they were acquired in 2011). If you're a bootstrapped company (let's say < $100k in outside funding) and you have revenues >> $1m / year, we'd love to hear from you! Does it count if you raise after you hit $1m / year in revenue? I'll let you decide.
- pbreit 12y ago
  You make it sound like raising is bad. there is absolutely nothing wrong with raising and in fact it is a good thing.
  - jvyduna 12y ago
    Raising is a great thing. Bootstrapping feels harder though.
  - steiza 12y ago
    I meant does it still count as bootstrapping if you raise after hitting $1m / year in revenue. Without VC there would be no Google, no Microsoft, no Amazon, ... I don't think many people seriously advocate for a world with no VCs.

deleted 12y ago

[deleted]

pbreit 12y ago

This article is just stupid. Pretty much any billion dollar company is meaningful by definition. You can't just manufacture something like that out of thin error. And what's the scary danger?

adventured 12y ago
The only scary danger I'm familiar with from it (for businesses and entrepreneurs), is the potential for mass delusion and altering behavior based on believing the good valuation & funding times will never end. Falling into that trap is very common. I've seen two large stock market / tech implosions in my relatively short lifetime, the 1999/2000 bubble and the smaller 2005/2007 pre-great recession era. In both cases there was a lot of hubris around the notion that because you acquired a massive valuation, you had a business that was really worth that, and really had that sort of potential. It's a failure to separate the financial atmosphere at the time, and the reality of business when it comes to generating the sales and profit that it takes to support a given valuation over time. You most certainly can manufacture a billion dollar valuation out of, essentially, thin air - it happened frequently in 1999.

fiatmoney 12y ago

It takes a peculiar kind of narcissist to convince themselves that the point of a business isn't making money, but rather to self-actualize themselves.

pyrrhotech 12y ago
exactly. there's nothing wrong with making money legitimately. If the purpose were theft or exploit to make illegal gains, criticize away. But to make money legitimately, you have to create value for society. They are inseparable

j_baker 12y ago

> there’s a disturbing trend developing of people deciding to found a company simply to get rich I understand what the author is getting at. But the purpose of a business is to make money. What's wrong with starting a company to get rich? My suspicion is that the author means something more along the lines of "There are too many people starting companies simply to make a quick buck." All things considered though, I agree. There are simply too many people in the Valley chasing huge valuations and quick exits and not enough building sustainable companies.

UmDieWelt 12y ago
I don't see it as something morally wrong. I think the point is more that you're less likely to succeed if you're just doing it because you see other start-ups getting rich. So you start a company just to start a company, instead of having an actually good idea that you're passionate about.

chadmaughan 12y ago

It was published by the Wall Street Journal. The opening sentence incorrectly attributes Forbes. "Yesterday Forbes published a piece on 'The Billion Dollar Startup Club'.” http://graphics.wsj.com/billion-dollar-club/ http://graphics.wsj.com/billion-dollar-club/

deleted 12y ago

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