Growth Times

Varun Mathur, the Techvibes Community Manager, who I just learnt is based in Toronto (I look forward to meeting you, Varun), made an excellent point yesterday in his Techvibes post on What Separates 37signals And Twitter ? 

For all the talk about “getting to revenue” as fast as possible, VCs are still valuing companies based on hype and unproven potential for exponential revenues. You can build valuations based on traffic, but if you can’t attach a realistic average $ amount to a visitor, and if you are going to hemorrhage your traffic as soon as you offer ads, then your valuation is built on shaky grounds – which in finance means you should likely be extremely conservative or discount it.

I don’t say there is never a case for giving high valuation to companies that have great brand awareness and usage even if they haven’t made a buck yet, but my thesis is that the risk of this revenue never materializing should lead to discounting valuations more heavily than they currently are. VCs should put their valuation through a simple risk-based, probabilistic tree analysis, contemplating the likelihood of 3 basic scenarios:

1. will never get to revenue and can’t sell or IPO company
2. can never get to revenue but can get company acquired
3. can get to revenue (and then look at the different types of revenue to differentiate linear from exponential in particular)

The problem, which ultimately has to do with the probability and payoff you attribute to each scenario, is especially with number 2. Even in this market, founders and VCs can rely on overpriced acquisitions to unload a company to an unsuspecting acquirer (hello eBay).  And so, with the right connections, the probability of scenario 2 is still implicitly weighted higher than it should likely be in VC valuation models.

My theory is that the Silicon Valley is an echo chamber for tech venture hype (just like Wall Street for blue chips), and a lot of founders and investors are masters at amplifying and riding this wave – rather than focusing on actually creating a revenue engine. In other words, ladies and gentlemen, yes, there are a lot of respectable-looking scammers in that business, and very successful ones too.  VCs won’t tell you this but lots of them love embracing irrational exuberance, because bubbles is how they get rich quick. 

Right now the real-time web is where this exuberance can be found. To Varun’s point questioning whether 37signals didn’t get Twitter-type valuation because of its Chicago location, I would add that perhaps the main reason why a valley-based Twitter will get a higher valuation than a Chicago-based or Canada-based twitter is that irrational exuberance dies off quickly when you have to take a 5h flight to close an acquisition -  reality-distortion fields don’t work well that far from the epicenter of the tech mecca. Locations that can turn perception into reality have a clear edge in businesses that rely on hypothesis for their valuation. So, yes, if 37signals want to reach astronomical values, it would do well to move to Mountain View or Palo Alto, drop any source of revenue, and change its name to reduce the likelihood their past revenue figures will constrain their future valuation.

However, that’s not all. In all fairness, one must point out that the potential for exponential revenues by 37signals as a platform developer targeting, well, application developers, is lower than a Twitter that can be used by potentially anyone. There is a lesson here for business models. Based on whether you target revenue or fundraising, your runway and product mix looks very different. In the first case (seeking revenues), you often need to diversify across a small range of products to test and create multiple sources of revenues – alpha, beta and subsequent market iterations are less dangerous because they don’t impact your long-term success as badly as a highly hyped flop from a VC-funded venture. You can fix things, there is less pressure to grow to $100M in 5 years, and quite often the decision to give you money is distributed across many potential users as opposed to concentrated on just a few VCs (who know and speak to each other).

In the second case (seeking capital), you often have only one chance to build buzz, and if it fails to support your story, it’s unlikely you’ll raise a round, and it’s likely you’ll die of capital thirst. So you want to bet the farm on one-single make-or-break application. It’s a different discipline. But still, the problem remains in the fundraising model, that it doesn’t encourage you to build your product with a revenue model in mind, until often too late in the game.

All in all, that’s a real problem for venture consultants like me as we generally encourage start-ups to get to revenue asap, and then a Twitter investment by VCs reactivates pipe dreams that all you need to do is a cool app and you’ll be a millionaire. If you are after VC money, it’s better not to make revenues if those are going to disprove the revenue potential of your model… Maybe that’s why new VCs need to emerge that don’t take a “winners take all” approach to investment, and instead focus on growing real revenues across their portfolio. Mmm, sounds like a hybrid of VC and management consultant… Did I just evolve my model? Thanks Varun!

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Develop, Fund 37signals, Capital Access - Financing, Initial public offering, monetization, revenue generation, Revenue model, Silicon Valley, tech venture, twitter, valuation, valuation model, venture capital

To Revenue has a new address! I have decided to rename To Revenue into Growth Times, to better convey this blog’s core concept: assisting growth companies in their journey towards explosive growth. Additionally, most of my clients have already achieved revenues, so To Revenue was a bit of misnomer.

A little more profoundly perhaps, in this time of recession, I also want it to express my belief that the ultimate antidote to all crisis is human creativity and  innovation, targeted towards solving real problems and driven by a sense of financial, social and environmental purpose.

And lastly, it’s a better-sounding and more attractive domain name. Let’s not underestimate the power of packaging and marketing!

Please update your RSS feed subscription to this one: http://feedproxy.google.com/growthtimes

Market Blog name change, Domain name, entrepreneurship, growth, growth company, growthroute ventures, tech venture, To Revenue

At Growthroute, we believe that start-up leaders should encourage candid inputs on their company and products, and be open to discussing things that don’t work. They should welcome that feedback at least as well as they receive compliments on their successes.

Highlighting deficiencies in due time (and offering solutions) gives entrepreneurs an opportunity to address them before they really hurt, while surrounding oneself with yes-sayers is a well-known recipe for failure – and yet still as common today as it was millennia ago. So you don’t want to surround yourself with either yes- or nay-sayers, you want smart folks who tell it as it is. In the age of twitter,  getsatisfaction, yelp and blogs, being able to productively process their feedback - even when perceived as harsh - is more important today than ever before. Not doing it means not getting it.

It all starts within

In my experience, rowing in the right direction as a company requires a unique ability to invite, intelligently filter and incorporate constructive criticism. This ability must be built into your start-up culture and processes. It is absolutely critical not to prevent anyone -be it in your team or outside- from expressing substantiated concerns – and even less substantiated ones. And that starts with not punishing them when they do. Companies who don’t practice this miss critical market signals and drown in their own self-delusion.

It also starts at the top. The founders are usually the single biggest impediments to fostering a culture of constructive criticism. More than any other type, entrepreneurs tend to be driven by a strong love of freedom and independence, and we also like to be solely associated with the decisions that led our companies to success. While entrepreneurship pride helps us at many levels, unfortunately, it also makes it harder to open ourselves to criticism and learn from it quickly. 

Have you experienced start-ups that felt a lot like the Church of Scientology? Where you were “in” or “out”. Part of the tribe, or outcast. Where performance mattered less than “fit” with founders, something so fickle it leaves everyone with a differing thought wonder whether they will be around the next day. You know, organizations where real decisions are taken behind close doors, people who don’t contribute anything are still around because the founders like them, and turnover is high.

Too many start-up founders think that to row in the same direction, team members need to be somewhat constrained in their ability to think critically. They establish a culture encouraging groupthink and “following the leader” – while punishing anyone voicing a different opinion on fundamental leadership matters . There, “team-playing abilities” actually mean “blind submission to the top”. That kind of personality cult and indoctrination may feel good for the founder but it’s not doing any service to the company. Silencing people who sighted the icebergs might help momentarily calm the passengers (including investors, often a key reason for the opacity  – more than anyone, they should encourage a culture of transparency) but it doesn’t make danger disappear.

As entrepreneurs, please, let’s not require anyone to “believe”. Belief is not prescribed, it is earned. No one “believes” because you ask them to or pay them for, they believe because there is a good reason for them to. It’s our job to give them a reason. Don’t ask your people to “believe” in you and your ideas. Make them believe in your company by showing its capacity to fix mistakes, to correct trajectories and to produce great things as a result. Hire not followers, but people who showed they can accomplish great things and have a commitment not to you or even your vision, but to the success of the company.

At a company I previously was involved with, I highlighted – only after completing plenty of value-added projects as most there know well- that product development was well behind schedule (several release deadlines missed) and politely suggested that for a while, one of the founders might want to spend his time make the technology work as opposed to dealing with other matters. Most people in the team had the same concerns. Opening up my mouth was not in my direct interest, but in that of the company, and that’s why I did it. I also thought the founder would be clever enough to integrate that feedback productively instead of reacting to it instinctively.

Saying it publicly was interpreted as a lack of faith, and I was fired summarily. Keeping in line with the overall philosophy, at the time I was warned against talking publicly about my experience – the kind of things that makes you want to write a blog post about it. Much time has passed, but the company stagnates with a solution that, by all accounts, still doesn’t work and does not achieve traction. Many of my colleagues there, including my successor, have experienced the same fate and been ousted – scapegoats are obviously in demand. If that’s the culture you want to create, be ready for the results. Very sad, especially since it would be so easily fixable, and so much potential is lost by this approach.

Every company has problems. What differentiates the winners from the losers is the ability to recognize those issues and address them quickly and openly. Even a core deficiency can usually be fixed quite rapidly, once spotted. One just needs to be able to hear the signals.  Foster an atmosphere of truth. Chances are everyone will row in the same direction if they feel you are going in the right direction and that they contributed to choosing it. People naturally want to believe and to contribute.

Same goes for outside critics

Repeatedly, founders make the mistake of thinking that journalists, product reviewers, bloggers, and other messengers threaten a company’s momentum. They don’t. What does is how good the company’s solution is, and how the company reacts to their feedback.

In practice, I am sometimes contacted and asked to comment on new products, especially on my blog Semantics Incorporated. I also pick new solutions on which I want to offer my impressions. In two cases since the start of this year, entrepreneurs expressed discontent when as part of my review, I highlighted a few core deficiencies (quite often even next to an ocean of praises!). One even launched personal attacks on twitter as a result (see my blog if you want to know who did ;)

I am not alone. In the recent and less recent past, unfortunately, I have witnessed quite a few entrepreneurs being keen on receiving public accolades but quick to dismiss any constructive comments – and even go out of their way to attack the commenter instead of recognizing her help, thanking her, genuinely asking for clarifications and clinically considering the comments as valuable inputs – which would be the right thing to do, and would gain them lots of public goodwill. Other entrepreneurs, like Andraz Tori when I criticized the email version of his product Zemanta (whose blog version I praise extensively and continue to use avidly – see at the end of this post) have done just that and earned my highest respect.

Being told that your baby is ugly is tough as an entrepreneur. I know that first-hand. But the good news is that, unlike the biological kind (for now), you are not stuck with this baby as is, you can improve it. And while you may have heard that your product is ugly, the commenter may have just intended to say that it would have more potential with some minor changes.

I work quite hard at trying to provide unbiased and productive analysis, and as a result my comments often highlight weaknesses and shortcomings, next to strengths and praises. I always strive to provide corresponding solutions. That’s nothing personal. I don’t make exceptions to that rule, even with friends, and I don’t want anyone, even friends, to spare me the truth either.  Now, don’t take me wrong, there are some rules of engagement: not criticizing everything with little or no substance and without trying to offer solutions, not using overly aggressive language, and not doing it with a hidden agenda, for example. But when assessing whether someone has crossed those lines, remember that the common entrepreneur’s bias works towards magnifying those signals and minimizing the actual information that they channel. So, before you throw down the gauntlet, take a minute, think about what the person is trying to say, and reflect on what could be useful in the context of your company.

Let’s not be utopian, human nature is at work here. Ego gets in the way. As a rule, we tend to prefer those who support us. But ask yourself: who, really, supports us? The ones providing constant positive feedback, even if insincere? Or the ones highlighting a potential trap that may prevent you from reaching our objectives? Don’t be so quick at dismissing constructive criticism and qualifying your commenters as biased or unproductive whiners. More often than not, they are not. The main reason most of us comment on things is ultimately because we want them to work better for us. When human nature becomes highly counter-productive, override it.

Of course, I am not interested in any feedback you might have on this post ;) (well, if you really insist, you can place a comment, and I also just claimed a GetSatisfaction page for Growthroute at http://getsatisfaction.com/growthroute - it may take a few days before they approve it, apparently, so please be patient and do return to it!)

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• Managing Feedback (slideshare.net)
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• Criticizing Your Friends is Hard (openmode.ca)

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