

The dangerous allure of the “Billion Dollar Startup Club” - sethbannon
http://sethbannon.com/the-dangerous-allure-of-the-billion-dollar-startup

======
jusben1369
"there’s a disturbing trend developing of people deciding to found a company
simply to get rich."

\- ok I have to stop you there. This is not a new developing trend. It has
always been a part of tech startup lore. If there is any current trend it's
the democratization of startups. 10 years ago you needed $10 million in
funding to build something real. 5 years ago $3 to $5 million. Today that's
probably $1 -$2 million. The interesting thing about startups _today_ is that
you can build real, decent, 10's or 100+ people startups without having to
raise gazilions of $'s. Prior to very recently it was go big or go home
entirely.

Which is a good point. Has anyone done any analysis on the YC/500 alums that
fall in-between the Billion Startup Club and failing? My guess is there might
be literally 100's of Olarks that are really great places to work with
interesting teams doing millions in revenue that never needed to raise big
dough. That option didn't really exist 5 or 10 years ago. The option to strike
it rich though always has.

~~~
steiza
We (at Olark) are wondering the same thing. We just recently talked to Poll
Everywhere (S'08) - they are also bootstrapped and well over $1m / year in
revenue. Wufoo was as well (they were acquired in 2011).

If you're a bootstrapped company (let's say < $100k in outside funding) and
you have revenues >> $1m / year, we'd love to hear from you!

Does it count if you raise after you hit $1m / year in revenue? I'll let you
decide.

~~~
pbreit
You make it sound like raising is bad. there is absolutely nothing wrong with
raising and in fact it is a good thing.

~~~
coralreef
I wouldn't say raising money is necessarily a "good thing". Sure it gives you
a bit of validation that someone would take a risk on you/your idea. But the
data shows most companies will just burn through the money and never make a
return.

Making profit is a "good thing". Raising money is just this side process that
may or may not be necessary for your company.

------
pedalpete
Though I agree with the general statements made by the author, on a tangent, I
disagree with the 'solve a problem' advice which is constantly being touted.

I look at some of the largest start-ups or even companies, and they aren't
solving problems so much as creating opportunities.

AirBnB didn't really solve a problem, they created an opportunity for you to
rent your extra space, or find a place other than a hotel to stay.

This also applies to larger companies. Coca-cola didn't solve a problem, they
just made something people really liked.

Apple and Microsoft didn't solve a problem people had. They didn't have
computers, so what what problem could you have been solving by giving people
an operating system. At the time, people didn't know what they would use a
computer for, so what problem was being solved.

~~~
harmegido
Seems to me like all of these companies solved problems - they were just
problems that not many people knew they had.

Airbnb - I only use my place 90% of the year, but I pay for using it 100% of
the year. Coke - Water doesn't taste very good. Apple/MS - secretaries are
expensive. Can they be automated?

~~~
pbreit
If it's solving problem that you don't know you have, I would consider it more
creating opportunity.

~~~
Retric
Aging is a major problem everyone has, but few people think of it in those
terms.

Generally when people talk about 'creating opportunity's' they just mean
solving problems that people don't think of as problems.

In that context Google's quest to 'organize the worlds information' is really
just solving the gap between what humanity knows and what you know. EX:
Someone knows where the closest ATM is, but you have no idea. Someone knows
what error code 237b means and what to do next, but you don't.

------
pbiggar
I think the OP misunderstands the words "billion dollar company". Which is
actually completely understandable, since money is in the title you assume
it's about the money.

Typically founders are product people, they want to solve a problem that
exists in the world. But, to solve that problem, they need to make a big
impactful company, that grows to dominate a particular niche or industry and
disrupt the current way of doing things.

To these founders, "billion dollar company" is a shorthand for all these
ideals: to make a great and lasting company, to solve a real problem for a
very large number of people, and to make a real impact in the world.

It's not coincidence that this phrase is also important to VCs, for whom
"billion dollar company" may have a different meaning, that being "make back
the fund for our LPs". I say "may" because that's a simplistic view: many VCs
are looking to make the world a better place too, and in many cases they have
more money than they need already.

And to journalists, these mean "companies which we have to pay attention to".
And when you think about, they're not paying attention because of the value,
but because of the impact. Which is why journalists are always talking about
consumer companies, because they have much more impact in the world than more
successful enterprise companies.

Of course, that's not to say there aren't people in it for the money. But we
rarely need to worry about them, since they rarely succeed.

~~~
sethbannon
I agree that some use "billion dollar company" as shorthand for all the things
you mention (a great lasting company, solving a real problem, and making a
real impact). My point is that while it's often used as a proxy like this,
it's a dangerous proxy because it's easily disconnected from the company's
original mission(s). In this sense, it's an unhealthy simplification. Surely
there must be a better stand-in for a startup's hard-to-measure progress
towards achieving their mission than their valuation.

~~~
softdev12
I couldn't agree more with your full post. It's almost become so obvious and
cliche that people have forgotten why business exists. It's as if all the
media hype puts the focus on the riches of the founder and not the value
created by the product.

Every once in a while you see a publication do a retrospective of a failed
startup. And every once in a while you see a blog post from a startup that
exploded. But the statistics are completely skewed with distorting the reality
of startup success. Mentioning that there are now X number of billion dollar
startups masks how many startups are simultaneously failing. I would love to
see a study that showed the total number of inflation-adjusted billion dollar
startups as a percentage of the total number of startups started over time.
This percentage may actually be decreasing, even though the media seems to be
suggesting that there's a tech bubble.

------
pbreit
This article is just stupid. Pretty much any billion dollar company is
meaningful by definition. You can't just manufacture something like that out
of thin error. And what's the scary danger?

~~~
adventured
The only scary danger I'm familiar with from it (for businesses and
entrepreneurs), is the potential for mass delusion and altering behavior based
on believing the good valuation & funding times will never end. Falling into
that trap is very common.

I've seen two large stock market / tech implosions in my relatively short
lifetime, the 1999/2000 bubble and the smaller 2005/2007 pre-great recession
era.

In both cases there was a lot of hubris around the notion that because you
acquired a massive valuation, you had a business that was really worth that,
and really had that sort of potential. It's a failure to separate the
financial atmosphere at the time, and the reality of business when it comes to
generating the sales and profit that it takes to support a given valuation
over time.

You most certainly can manufacture a billion dollar valuation out of,
essentially, thin air - it happened frequently in 1999.

------
j_baker
> there’s a disturbing trend developing of people deciding to found a company
> simply to get rich

I understand what the author is getting at. But the purpose of a business is
to make money. What's wrong with starting a company to get rich? My suspicion
is that the author means something more along the lines of "There are too many
people starting companies simply to make a quick buck."

All things considered though, I agree. There are simply too many people in the
Valley chasing huge valuations and quick exits and not enough building
sustainable companies.

~~~
UmDieWelt
I don't see it as something morally wrong. I think the point is more that
you're less likely to succeed if you're just doing it because you see other
start-ups getting rich. So you start a company just to start a company,
instead of having an actually good idea that you're passionate about.

------
Flux159
The author seems to be trying to dissuade founders who are only in it for the
money from starting startups solely for that reason.

On that note, I would suspect that a company whose primary interest is making
the founders money wouldn't necessarily have their customer's best interests
in mind and would probably never reach a $1B valuation.

------
acgourley
"but the core purpose of these founders is clear – to make boatloads of
money." This is false. If someone merely wanted to build wealth there are many
options with a higher expected value and higher chance of producing life-
changing results.

The stated billion dollar goal has several reasons behind it, the least of
which is money. Diving into those reasons one by one could be very
interesting; it could expose and analyze our core beliefs (both noble and
less-so). Instead the author wasted the chance to do that and left us with
something both simplistic and wrong.

------
chadmaughan
It was published by the Wall Street Journal. The opening sentence incorrectly
attributes Forbes.

"Yesterday Forbes published a piece on 'The Billion Dollar Startup Club'.”

[http://graphics.wsj.com/billion-dollar-
club/](http://graphics.wsj.com/billion-dollar-club/)

------
sp332
That footnote seems very unlikely to me. I would guess that there are far more
companies valued at $900MM than $1B.

~~~
sethbannon
Notice how there are 7 startups at the $2B mark, only 1 at the $1.9B mark, and
none at the $2.1B mark. To me this strongly implies that entrepreneurs are
indeed trying to hit these big round numbers.

~~~
pbreit
What's wrong with that? Why would you raise at 1.9 or 2.1 instead of 2?

~~~
rgbrgb
All things equal, 2.1 gives slightly less dilution to current shareholders but
the same positive "optics" as 2. Likewise, 1.9 gives slightly more equity to
the VCs but a lot less prestige to the company their investing in (so arguably
they get less value).

The same psychology comes into play when pricing anything else. We price
things at $1.99 rather than $2.00 because there's an irrational feeling that a
price starting with a 1 is much less than a price starting with a 2.

I think the OP is just making the point that a lot of these $1B companies are
priced as such because it gives some extra legitimacy, thereby increasing
their chance of success and increasing the value of the VC's share. The
question is whether this is speculation or whether investing at that price
actually makes the company worth that price.

------
fiatmoney
It takes a peculiar kind of narcissist to convince themselves that the point
of a business isn't making money, but rather to self-actualize themselves.

~~~
pyrrhotech
exactly. there's nothing wrong with making money legitimately. If the purpose
were theft or exploit to make illegal gains, criticize away. But to make money
legitimately, you have to create value for society. They are inseparable

