Tuesday, May 06, 2014

Values are Ends, Not Means

Last month, Joel Gascoigne wrote about some of the decisions that he and the team had made at Buffer.  One of the things that he struggled with was how to correlate choices with success:

"If we don’t attribute our choices to success or failure, how can we assess if we are on the right track? I think in this case, the point is that our values should hold true in either case, and we should stand by them.

This is the approach we have started to take at Buffer with our cultural values such as Happiness and Positivity or Defaulting to Transparency. I can’t say that creating a company where everyone is happy is something that will make us more successful, and I can’t say that being fully transparent about revenues, user numbers, salaries and other details helps us grow faster than other companies. These are simply values we have chosen to live by."
I often struggle with the same challenge.  Humans are pattern-seekers, and we are apt to tell stories that explain what we see, even if what we see is the product of sheer chance.

Far too often, we try to justify our choices (and the values behind them) on utilitarian grounds.  Happiness is good because it makes people more productive.  Engagement is good because it reduces turnover.

Joel's insight is that we need the courage to treat our values as an ends, not a means.  Values are what you choose to live by, simply because you believe they are right, not because you believe they impact the bottom line (though hopefully you don't pay too much of a "righteousness tax" to live up to your values).

Once you try to justify values with utility, you leave yourself open to the pressure to abandon them when the pattern changes.  One of the reasons that Tony Hsieh sold Zappos to Amazon is that some of his investors were spooked by the 2008 crisis, and demanded that he "get serious" and dismantle the culture he had so lovingly built.  They saw his values as a means, or even worse, as a luxury, rather than as a fundamental part of the company.

Valuation Multiples Don't Matter If Your Startup Is Growing Exponentially

Jason Lemkin has written an excellent post pointing out that a major drop in public market valuations is about to affect SaaS startups:

Lemkin points out that major SaaS players like Workday and Cornerstone have fallen by nearly 50% since February 2014, and predicts that early-stage startup valuations will plummet.

Bad news?  Maybe.  But I prefer to focus on a paragraph tucked in amongst the carnage:

"We’re still just in the second inning of the migration of all business process to SaaS.  It’s just getting good.  Even if valuations fall 50% … as long as you grow 10x in a few years … you’ll still be up 5x by then.  For SaaS start-ups, falling valuations, at least on paper, really only mean it will take a little longer to grow into your next target valuation."

Ultimately, multiples do affect the value of your company.  But there are two factors in the Price/Sales ratio that drive the value of your startup--the multiple is one, but the actual sales is the other, far more important factor.

If you build a profitable company that generates $100 million in revenues, the final multiple isn't that important, especially if you're building for the long term.

So let the fund managers worry about the multiples--you should worry about the business.

How To Use Portfolio Theory At Your Startup

Famously, VCs take a portfolio approach, betting on numerous startups, while entrepreneurs bet the farm on their single startup.  This fundamental difference helps explain many of the conflicts that arise between entrepreneurs and their VCs, because an entrepreneur is focused on the success of a single startup, while a VC has a fiduciary obligation to maximize the returns of her portfolio.

But entrepreneurs have portfolios too.

The concept of a portfolio is a powerful mental model that can be applied to any resource allocation problem, not just startup investments.

For example, Joel Gascoigne writes about how Reid Hoffman's concept of "Core," "Expand," and "Venture" projects helped Joel allocate Buffer's product resources:

"I think the idea here is to try and shoot for a good balance between these 3 areas, and to always be working on all 3. It feels like a useful framework to follow. For us, it is probably going to be a 50:30:20 ratio right now."

Reid/Joel's portfolio approach solves the key problem of startup management, which is how to best allocate scarce resources.  Just about any startup--even one as successful and powerful as LinkedIn--could expend 300% of available resources just working on "Core" projects.  Deciding on an optimal blend and sticking to it helps you invest your scarce resources more intelligently.  It might be unwise to invest 100% of resources into moonshots, but if you don't invest in them at all, you're unlikely to achieve a breakthrough.