Tuesday, September 17, 2013

Paul Graham to Entrepreneurs: Stop Worrying About Valuation

Paul Graham has just published one of his best essays ever, "How To Raise Money"

I was nodding my head through the entire essay, but I want to draw particular attention to what Paul has to say about valuation.  Now YC companies are (in)famous for raising money at huge valuations, and Paul has been a consistent advocate for entrepreneurs.  But even Paul thinks that entrepreneurs have gone valuation mad:
"Founders who raise money at high valuations tend to be unduly proud of it. Founders are often competitive people, and since valuation is usually the only visible number attached to a startup, they end up competing to raise money at the highest valuation. This is stupid, because fundraising is not the test that matters. The real test is revenue. 

Not only is fundraising not the test that matters, valuation is not even the thing to optimize about fundraising. The number one thing you want from phase 2 fundraising is to get the money you need, so you can get back to focusing on the real test, the success of your company. Number two is good investors. Valuation is at best third.

The empirical evidence shows just how unimportant it is. Dropbox and Airbnb are the most successful companies we've funded so far, and they raised money after Y Combinator at premoney valuations of $4 million and $2.6 million respectively. Prices are so much higher now that if you can raise money at all you'll probably raise it at higher valuations than Dropbox and Airbnb. So let that satisfy your competitiveness. You're doing better than Dropbox and Airbnb! At a test that doesn't matter."
There is so much to love about what Paul says above.  But the real kicker is that Paul backs up his opinion with facts.  Dropbox raised money at a $4 million premoney and AirBnB at $2.6 million.  That doesn't seem to have hurt them.  Nor did raising Facebook's first round at a $4.5 million premoney seem to hurt Mark Zuckerberg.

Jim Fitzsimmons, the CEO I recruited to run my very first company, gave me some wise advice, back when I was an egotistical young 25-year-old founder who was worried about valuation: "You don't make your money when you're fundraising.  You make it when you exit."

I think Facebook, Dropbox, and AirBnB would agree.*

* Yes, I know Dropbox and AirBnB haven't exited yet.  And I'm happy to take the other side for anyone who wants to bet that they go out of business before going public or getting acquired.  They're successful, period.

Carte Blanche and the Creativity of Constraint

As Los Angeles native, I can't help but see parallels between my home town's industry (movies) and my adopted home's (startups).  Today's parallel concerns the problem with having too much money.

In Hollywood, studios love to work with successful directors.  When a director produces a critical and commercial smash, a studio or production company is likely to give him (or her) "carte blanche" (literally, blank check) to make any movie he wants.

The result, throughout the history of moviemaking, is almost inevitably a disaster.

Steve Spielberg followed "Jaws" and "Close Encounters of the Third Kind" with the notorious flop, "1941".

Paul Verhoeven followed "Total Recall" and "Basic Instinct" with "Showgirls".

And perhaps most famously, Kevin Costner followed "Dances with Wolves" with "Waterworld" (which, regrettably, I have to admit I saw in the theaters).

The reason this happens is that paradoxically, having too much money is one of the worst things that can happen to a filmmaker.  Spielberg had to improvise much of "Jaws" because he didn't have the money to fix a malfunctioning mechanical shark.  With a larger budget for "1941", he simply spent more money on effects, and more time on reshoots (to no avail).

When this happens in Silicon Valley, we call it Color.

The irony is that Hollywood has also given us a model for success--the creativity of constraint.  Louis CK's eponymous show is a critical hit, unlike his previous show, "Lucky Louie".  The difference?  FX gave him a tiny budget...and complete creative control.

Other shows like "Breaking Bad" and "Mad Men" have larger but still tightly constrained budgets.  "Mad Men", for example, costs about $3 million per hour-long episode.  "The Lone Ranger" cost $250 million for a 2-hour movie (and a pretty crappy one at that...which makes it Gore Verbinski and Johnny Depp's "carte blanche" disastrous follow-up to "Pirates of the Carribbean" and "Rango").

There are certain kinds of movies you can't make for less than $200 million, just like there are certain kinds of startups that need $40 million before launching a product...but your chances of success are better when the studios and VCs provide a tight budget, but creative control.

Sunday, September 15, 2013

Start With “Why” not “What”

I've been catching up on my RSS feeds this weekend, and loved a piece that the great Eric Barker wrote on the secrets of great presentations:

The part of the piece I'd like to focus on is the very first point, which he sums up with a quote from Simon Sinek, the author of "Start With Why":
"People don’t buy what you do. They buy why you do it… Start with "Why."
I love this advice, but not for the reasons you might expect.  Sure, it's a great way to persuade people, but I think it's an even better way to manage the entrepreneurial life.

Most entrepreneurs focus on "what" they're doing.  They rarely focus on the "why."  When asked, many will spout platitudes about "changing the world" or "making a difference."  It's a great line when Steve Jobs, who actually did change the world, speaks it; it's an empty cliche for most of the rest of us.

You might not like the honest answers you give when you try to articulate your "why."  For many entrepreneurs, many of the following whys apply:
  • To prove my worth to all the people who doubted me
  • To make a lot of money
  • Because I'm envious of all my friends who got rich starting companies
  • Because I suck at working for others
These are not good reasons to start companies.

I met Michael Wilkerson through the Unreasonable Institute.  Michael is the founder of Tugende, a microfinance institution that helps Ugandans buy their own motorcycle taxis, while earning a decent return for investors.  He's already helped 300 entrepreneurs get their own motorcycles.

Michael has a clear "Why"--he wants to help more Ugandans become entrepreneurs.

Your mission doesn't have to be so altruistic, but it has to be equally sincere and personal.  Start with "Why."