Uber angel investor JF (you call him Jeff) Clavier raised some eyebrows last year when he was quoted as telling startups that their income is “noise”, even if said income is approximating $300,000 in monthly revenues. A $300K monthly revenue implies an annual run-rate of $3.6M.
Maybe he’s right: Ning just raised $60M on a $500M pre-money valuation despite making $1.7M in revenues. That’s also the valuation Slide got, and it too probably commands an eye-popping revenue multiple. Any way you dice it, Clavier’s $300K per month revenue would be for a company with twice as much revenue as Ning. In a linear world, that would be a $1B company (if Ning is indeed wirth $500M at $1.7M in revenue). Obviously, we’re playing with numbers, because a company with $1.7M in revenues should not be worth half a billion… but who cares, obviously investors don’t, argues Macromedia founder Marc Canter, who sold his firm to Adobe for a cool $3.4B a few years ago.
To put that $300K figure in context, when I left my old job as VP of ad sales for a mid-sized online publisher, I had taken our company’s ad sales from $0 to $300,000 per month, or $3.6M per year. That’s not noise anymore; that’s called independence. Any self-respecting entrepreneur should care about that word: independence. When you raise VC money, you lose freedom. When you raise $102M, chances are you lose a lot more than independence, even if your name is Marc Andreessen.
I wonder what kind of deal terms Ning had to agree to to raise that $102M in financing to-date. Of course, as the founder of Netscape, Andreessen can raise money for a pile of crap. I am certainly not saying Ning.com is crap, it’s a smart idea… but I don’t really think Ning is worth $100M, let alone worthy of raising $100M. But who cares what I say.
Anyway, back to Clavier, in all fairness, he says his comments were taken out of context and were in fact “off the record”. I commented on that here, the gist being:
I agree that focusing on revenue is a bit moot. For us at WatchMojo.com for example, worrying too much about running pre-rolls to generate revenue from our millions of video streams is indeed secondary to getting as much content seen in as many high-traffic destination points online… but guess what: unless we have some revenues, we’ll die… so I don’t think either extreme works. You need some revenue, but you should probably not think about revenue alone.
Let’s face it: no self-respecting new media company gets acquired for the income component, all investors look for that capital gain payoff… and I suppose Jeff Clavier is the epitome of that… in all fairness, his track record is good enough that one cannot blame him.
I said that then… and I still believe it… However, the sooner an entrepreneur gets money in the doors, the sooner he frees himself from the false sense of security that financing provides. Financiers are not your friend, much the same way your lawyer (or your doctor, accountant, gardener, etc.) is not your friend. They’re professional with a finite amount of time trying to make as much money in said time. The only difference is that financiers make more money when they own more of the company, instead of how much time they actually spend on your company. So guess what? Your investor’s objective is to own as much of the company for as little time as possible. That’s how they earn the highest IRR on their time.
The point I’m trying to make is: Clavier isn’t right or wrong, but he represents a more laid-back West Coast mentality where revenues don’t matter; a mentality that has become the envy of East coast money managers who have seen gargantuan fortunes created before they get a shot at investing in those projects (by the time they go public).
As such, I don’t find it surprising that both Slide and Ning had to go out East to raise their recent round. There’s no money in revenues, one is led to believe. One company that will make money off both Slide and Ning is of course Allen & Company, and more props to them for being the intermediary on both Slide and Ning’s massive rounds. Some companies never cease to amaze me, and Allen & Company is one of them.
When push comes to shove, entrepreneurs need to realize that VCs earn a living by maximizing their investments, and if that means stepping on and pushing entrepreneurs out, then so be it. They have no qualms about doing just that.
The only way to protect yourself [as an entrepreneur] then is to be conservative and pursue revenues, or as Clavier calls it, noise. That’s half the equation, the other half, frankly, is to keep costs down. This is why a lot of companies that raise too much money are making twin sins… but I digress. More power to them if they can raise oodles of money.
But it’s worth noting that just because you can does not mean you should. Chris Rock once said “just because you can drive with your foot doesn’t mean that you should”. I concur.
John Battelle recently said something in the wake of raising a whopping $50M (somewhat ironic, I presume):
“I went through the most insanely scarring experiences of my life, which was The Industry Standard. We went from $200 million in revenues to $50 million in four months. I had $80 million in leases over 10 years, and had 400 people. That, of course, shaped my experiences in how I built FM. Now I have 20 percent of the staff and 8 percent of the lease. I built this company with the idea that it had to be nimble and lightweight…that was something I was studying with Web 2.0, effects of search on media, etc”
Well, I don’t buy this social media mumbo jumbo (it’s the latest incarnation of wireless, or B2B) but I agree that what we have seen during the Web 2.0 period is not to let costs get out of hand. However, by raising over $100M, Ning has no option but to let costs go up. Investors don’t want you to sit on the cash, they want to see their capital at play.
I always thought investors backed entrepreneurs. They don’t. They back entrepreneurs they know or models they can trust. Paul Graham is right: VCs have lost any semblance of risk taking, adopting a me-too approach to investing in what the greater fool has plunked money into. It’s not even herd mentality anymore: it’s turtle mentality.Yes, it’s the CEOs job to explore all options and one of those is raising external financing, but it’s the VC’s job to actually invest. Let them do the heavy lifting. The only thing you should avoid is falling for the trap of raising money just because you can, or raising as much money as you can when you can… those are cliches VCs use to fool entrepreneurs to dilute too early, get expectations get too far out ahead of realistic options and ultimately lose control.
How much is too much money? If you’re running a business in SF, NY, London, you need a lot of money. It’s not just fixed costs that are killer, naturally labor costs are also much higher than they would in a smaller market.
Yesterday Marc Andreessen announced that his latest company Ning raised a massive $44M for a post money valuation of over $200M. That’s a lot of money for a company in a space that has yet to prove it can generate substantial revenues. In other words, the only successful companies yield exits that come in the shape of an M&A, and these are scarce despite the big headlines.
MSFT’s Don Dodge - who’s worked with some of the most notable startups, well, ever - pointed out the lunacy in the numbers. Of course, he was quick to add that Andreessen is one of the few entrepreneurs whom you can trust with such a valuation. Jason Calacanis who recently raised a rumored $16M on a $100M valuation is, like Andreessen, in the “seize as much as you can” camp.
I don’t mean to knock neither Andreessen or Calacanis, but their advice is somewhat irrelevant to an entrepreneur who did not, well, create Netscape or sell his startup to the company that bought Netscape!
Anyway, I’ve long stated that massive valuation don’t help, neither do low ones. Everything taken to the extreme will come back and bite you.
My first Web experience ended up doing a valuation at $40M in 1999. Little, if any, cash exchanged hands, but what that deal did was put the founder (my boss) in a corner because by 2000 no deal made that round look smart.
My second Web experience ended up doing a very low valuation. In many ways, it put the founders in a corner because they were shell-shocked into diluting in a further round. Ultimately, despite having a stellar business on paper, the company only fetched $13.5M in a sale for 12 times EBITDA (the mean was 15.9 times EBITDA, don’t ask).
Neither one of those cases were ideal, and both cases, the founders got squeezed in one way or another. My gut says the right strategy lies somewhere in between: if your valuation is low, you’ll regret it pretty quickly and won’t be comfortable raising more money even if you need it; if your valuation is high, your financiers might block deals that might seem rich to you. A Series A investor likes a 10x return, a Series B or C wants to see 5x return (according to Dodge’s post above).
For the record, the second company returned 27 times on a convertible deal. I generated $8M of approx. 10M in the company’s sales… because my background in sales, business development, marketing and finance, I’m not too keen on doing a financing round that does not make sense for the financier and the founders. Of course, running a company that is 75% content and 25% technology (just because our media business is that strong, of course 
- means that VCs are not really even the best fit… but I do advise some entrepreneurs formally and informally and I don’t think that you should ever accept terms that you are not comfortable with…
Frankly, I advise people to look at the financing challenge differently, the good thing about media, for example, is you can hit ad revenue sooner than securing licensing revenue if you’re a tech company. Bottom line, you should also look at costs in a different light. In my experience, apart from the gaga Web 2.0 crowd, most companies don’t really have much traction in sales or business development until they have a meaningful business to show off, so in the initial months, why even bother setting up shop in SF or NY?
I think moderation is key.
But when you see some successful VCs come out and urge lower valuations, it makes you wonder, what is broken: the entrepreneur’s mold or the VC’s?
Related:
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