Startup One Stop

Bill Gurley wrote an excellent post last week on Why the Unicorn Financing Market Just Became Dangerous…For All Involved. It’s a must read, as the investing landscape has changed dramatically, courtesy of the outrageous number of unicorns, many of whom are still functioning under old paradigms: traction over profits; marketing/perception uber alles; too big to fail. Gurley warns about a new twist in the landscape: sharks with dirty term sheets, whom he defines as “sophisticated and opportunistic investors that instinctively understand the aforementioned biases of the participants and know exactly how to craft investments that can exploit the situation. They lie in wait of these exact situations, and salivate at the opportunity to exercise their advantage.” It’s terra incognita and definitely not for the faint of heart – or the young and inexperienced (ahem). “Dirty term sheets are a massive problem for two reasons. One is that they “unpack” or “explode” at some point in the future. You can no longer simply look at the cap table and estimate your return. Once you have accepted a dirty offering, the payout at each potential future valuation requires a complex analysis, where the return for the Shark is calculated first, and then the remains are shared by everyone else. The second reason they are a massive problem is that their complexity will render future financings all but impossible,” Gurley explained.

One of the problems that led to the first tech bubble was inexperienced investors throwing too much money at startups that didn’t make business sense or were just stupid. Some people did get rich and the idea of sudden and easy money was intoxicating. These unicorn valuations have led to a different problem, as Gurley points out. The inexperienced investors are back, but now experienced investors (not to be confused with the sharks) – who invested heavily in unicorns and are tapped out – are approaching novices. “Perhaps the biggest mistake untapped investors will make is assuming that because there are branded investors already in the company, that the new investment opportunity must be of high quality. They use the reputation of the other investors as a proxy for due diligence... You are not being invited to a special dance, you are being approached because you are the lender of last resort…

It wasn’t the best week for startups. In case you missed it, Beacon, the all-you-can-fly travel startup that raised $8.5M, and which promised to transform aviation, was permanently grounded last week, as was Shuddle, the Uber for getting kids around, who had raised over $12M in hopes of, we guess, disrupting soccer moms.

Then there’s Theranos, which, we believe, is the only female-founded unicorn, and which promised better, faster lab tests, supposedly using revolutionary, proprietary blood-testing technology that the company said required only a few drops of blood, instead of the usual vial. And speaking of drops, while the company was valued at $9B at one point, Theranos may well reach zero in not too long a time. The company’s troubles started a few months back, with a Wall Street Journal expose (Hot Startup Theranos Has Struggled With Its Blood-Test Technology, which claimed that the company exaggerated the precision of some of its diagnostic tests, and used machines from other companies rather than its own technology for many of the tests. Now regulators may bar CEO Elizabeth Holmes and the company's president, Sunny Balwani, from the blood-testing business for two years, for having failed to fix the problems.

Cockroaches, Unicorns, Startups. Enough Already!, said Om Malik. “I get really annoyed by these dumb labels that are put on startups…These made up words represent a limited grasp on vocabulary of those who are seeking cheap attention. As an investor, what I don’t look for is startups that come with dumb labels, popularized by reporters who don’t know what the hell they are talking about and are looking for cheap slogans to put on their click bait bullshit headlines.”

Truth be told, that whole startup lexicon is rife with misleading terms – beginning with the term ‘startup’ itself.

There’s no simple math for startups, and if it were up to us, ‘startups’ would be used much less, and banned in the tech sector completely. Read More...

Back in the pre-bubble days of Web 1.0, we wrote a piece called, “How to Get Rich in Silicon Alley – The First Wave.”  We still have it, for those of you who’d like to see it; it’s too long to include here – and part of it was a ‘guide’ to how to keep employees chained to their desks by incentivizing them with anything but money, which, of course, as founders, you wanted to keep for yourselves.

That was then and this is now and not much has changed in all quarters of technology, except for company names and maybe a slightly different lexicon. ‘Millenials’ is a new one and we’re actually not attacking you all here, so calm down. This is meant to be instructional. Millennials are being dot.conned by cult-like tech companies, said this New York Post piece about “Fake Steve Jobs” Dan Lyons, a former HubSpot writer who now writes for “Silicon Valley,” as in the HBO show, and his experiences in the tech world – specifically, at HubSpot.  “A huge chunk of potential compensation at tech startups comes in the form of stock options, which could turn out to be worth nothing but are certainly worth nothing if employees get so burned out that they leave before the options vest,” reads the piece. “This is part of the plan. Tech firms basically operate like South African gold-mining operations, with confident young Tame Impala fans being the bodies thrown into the pit to break their backs digging up nuggets. All of the IPO gold, though, goes straight into the pockets of their masters topside.”

You know how it goes: unless you’re the lead dog, the scenery never changes. Read More...