
Disruptions: With No Revenue, an Illusion of Value - rvcamo
http://bits.blogs.nytimes.com/2012/04/29/disruptions-with-no-revenue-an-illusion-of-value/
======
pg
I was going to ignore this article as just another piece of nonsense in the
same vein, but then it occurred to me that because it's in the NYT, startup
founders might actually try to base decisions on it.

So founders and would-be founders, beware. This article is full of mistakes.
In particular this one:

    
    
      most venture capitalists... are not interested in 
      building viable long-term businesses
    

If you do the math of VC returns, they are dominated by the big successes--
the companies that go public. Those generate much higher returns than the ones
that get acquired, and you can't go public without revenues in at least the
tens of millions.

His list of startups that got acquired before they had significant revenues
refutes rather than supports his point. It's a short list, and even so, many
of the startups on it generated only modest returns for VCs.

YC knows as well as anyone what VCs want, and any founder we've funded can
tell you that we tell startups the best thing they can have on Demo Day is a
hyperlinear revenue graph.

~~~
amirmc
> _"... a hyperlinear revenue graph"_

Everything else makes sense but you lost me here. Even googling the term
brings me back to this page.

I assume you mean a revenue curve that 'goes up and to the right' (since that
appears to be the simplest explanation) but if it means something else, or
something more specific, please do clarify.

~~~
brlewis
Simplest explanation is "hyper"=above/beyond and "linear"=straight line. So
the revenue should do better than a straight up-and-to-the-right line, i.e.
curve up. He could have just said "exponential" except some HNers would pick
nits about whether that was the only acceptable curve.

------
nutanc
A million guys walk in to a Silicon Valley bar. None of them buy anything. The
bar is declared a rousing success.(Ref:[http://www.quora.com/What-are-the-
best-_____-walked-into-a-b...](http://www.quora.com/What-are-the-best-_____-
walked-into-a-bar-jokes))

------
DanielBMarkham
I used to think that SV startups had sort of a rock-band quality to them. It's
a beauty contest for the team, eyeballs are all that matters, and they are
managed and treated like "talent", not businesses.

That's still mostly true, but looking at it some more, it's more of a Burger
King problem.

When Burger King started out, presumably, it made a lot of money and expanded
quite a bit. But what they found out (along with other fast food businesses)
is that customers are fickle. Unless you mix it up now and then your customer
base will slowly melt away to go to Five Guys Burgers, or some other new fast
food place that everybody thinks is cool this week.

So what they and other restaurants started doing was launching these short-
lived, heavily advertised changes to the menus. Miniature burgers. Mexican
burgers. Burgers on a stick. Whatever. They kept a bunch of ideas on the back
burner, rigorously A/B tested and used trial markets, then launched something
new every now and then. There was always something new and different enough to
keep folks from drifting off to the shack down the street.

Startups are now forming a somewhat similar function for these huge tech
giants. A startup has some catchy idea, gains millions of addictively faithful
users, then sell out to McGoogle (as an example)

Works great for everybody. Google gets new talent with a proven record of
coming up with ideas that capture eyeballs, they get an instant boost in
eyeballs for their services, and, better still, later on these features can be
rolled into the code base. Maybe. Maybe they just buy a startup up to keep the
other guy from having it. Works the same way.

I'd also note that this is at a much higher level than the "lifts" restaurants
get. It's entirely possible that the next eyeball catcher has no kind of long-
term value at all; but is still worth tens of billion in lift to some acquirer
over a period of a decade.

So articles like this get it wrong. There's absolutely real innovation and
value, but at least to me it doesn't seem like the same kind of innovation and
value you get when you cure the common cold. It's more like making a cool new
kind of french fry.

~~~
nextstep
I don't think this theory can fully explain the large valuations of these
small companies at acquisition. Couldn't the McGoogles get that same publicity
and pay a price that better reflects the product they're buying, even of that
product is basically advertising as you're describing?

Also, I don't think the McGoogles are having any trouble keeping users (or
even attracting new ones).

------
RockyMcNuts
Bilton is channeling Eduardo Saverin, who pushed for early revenue at
Facebook, clashed with Zuckerberg, and got squeezed out with a mere $2 billion
or so for his trouble ( <http://www.forbes.com/profile/eduardo-saverin/> ).

Look at YouTube. It seems to be doing pretty well for Google now, with more
intrusive pre-roll video ads and popups during videos. Google also gets
strategic benefits, good placement on iPhones, a better seat at the table for
its so far not very successful TV products.

If YouTube had started off with those annoying ads, would it have seen off the
competition?

A lot of digital startups are in winner-take-all markets. The conventional
wisdom is, push for revenue if it helps you deliver a better product, through
revenue relationships that also bring content, users, and lock out
competitors.

If the market doesn't value revenue, but values users and the aura of
hypergrowth and the next big thing, and it can be fatal to allow space for
imitators and competitors, entrepreneurs are being strategic and rational to
push for growth at all costs.

It's a perfectly valid strategy to build an innovative product that may be a
proverbially two-legged horse that doesn't stand on its own, seize a dominant
position, and sell to one of the massively cash-generating platform companies,
Google, Apple, Facebook, Amazon, Microsoft, that need to maintain their
position.

Or if you're in the right place at the right time, that's how Facebook and
Amazon became platform companies.

Where would Facebook be today if Zuck had pushed for revenue and organic
growth, instead of charging for growth and dominance at all costs?

And that hothouse atmosphere is why the US startup ecosystem is dynamic, and
beats competitors around the world flat.

------
davidu
It's worth pointing out that some business models only work at scale, which
isn't a reason not to try and start those kinds of businesses.

That's one reason to not try and squeeze nickels out of a growing business
when you know you'll get quarters or dollars later from greater opportunities
that were previously unavailable.

Had Instagram focused on trying to be ramen-profitable early on, it's possible
it would have impacted their meteoric growth and successful Android launch.
Moreover, at massive scale, their revenue potential and avenues to generate
revenue change dramatically compared to what they could do when small.

------
siavosh
This made an interesting connection between two discussion threads I've
noticed on HN recently: (1) is there a bubble?, and (2) why is there so little
innovation in SV?

I think the article made this claim:

Innovation is risky business but hyping a social CRUD app is less so. Hence a
disproportionate amount of the money and (VC manufactured) media is focusing
on the latter. And these less/non-innovative companies can only match the
returns of a successful innovation based business in a bubble/greater-fool
environment. So both the lack of innovation and the bubble are being caused by
these financial firms.

This seems plausible to me (as an outsider). I would say more that we are
seeing this as a direct result of the money looking for returns post real-
estate bubble burst. Smart money doesn't seem to chase bubbles, but create
them.

The lack of innovation becomes simply the opportunity cost of an investment
bubble.

What's unfortunate is that I bet there are 10's maybe 100's of people like
Elon Musk looking to get funding for their ideas but are being over looked by
these same firms.

------
rabbitonrails
Options have value in finance and in life. Instagram possessed the option to
turn on advertisements inside the app, and the option to sell virtual goods,
and the option to implement any number of other revenue schemes, which would
have immediately generated significant free cash flow. The fact that they did
not exercise any of these options does not mean that the options themselves
are valueless.

~~~
georgemcbay
A very significant open question, IMO, is could they have enabled any of those
revenue streams without decimating their user base? I don't think they could
have because their product is relatively easy to duplicate.

Given that Instagram was free, there was little incentive for anyone else who
is serious about getting in front of people to bother duplicating what they
had, but had they started in-app ads or anything else that would have irked
users, that would have changed very quickly.

tl;dr -- Millions of users can be monetized in a number of ways, but not if
your service can be duplicated fairly easily.

~~~
kunle
For something so easy to duplicate (40m users) I see frighteningly few
duplications (photo services with 40m users after 18 months.).

Making a camera app that has filters is easy to duplicate. Aggregating an
audience of 40m users on no advertising is not. Period.

EDIT: "on no advertising" should read "on no marketing".

------
j_baker
I find it telling that the only data point given in this article is the
purchase of instagram and a few other debatable acquisitions. The rest is
conspiracy theories against VCs and speculation.

~~~
olefoo
The opacity of the market for shares in speculative ventures is the perfect
breeding ground for conspiracy theories of that sort. Remember that most of
what even the interested parties knows about any given deal (even the big ones
like Instagram) is hearsay. There is no standard reporting format; nor any
mandatory disclosure of ownership for startups. So even people who are
involved in the process do not have a clear view of what is actually going on
across the broader market. Everything that even experts 'know' about the
startup funding environment comes mostly from press releases which are not
objective in any way. The 'startup bubble', could be entirely the result of
inflated numbers and bullish hope.

------
jarek
What was left unsaid in that article is that it's also a lot easier to get
acquihired or patent-acquired or competitor-extinguish-acquired when you have
no concrete commitments to any paying customers and can shut down anytime.

------
tomasien
I'm sorry, but this is just ridiculous. It seems to completely misunderstand
the nature of "venture" capital: (potential value + progress toward that
value) x risk = valuation. 40 mm users and growing for Instagram (the example
du jour) WITH revenue model would have been worth 2-5 billion, but since they
weren't making money, they sold for 1.

Come on NYT!

~~~
ontoillogical
You're saying that if Instagram had a revenue model, each user would be worth
on average between $50 and $125?

~~~
tomasien
Let's pretend they can only monetize per user what Facebook can. With only
40mm users, that'd be $100 million in revenue per year. However, their user
count is continuing to explode, and could easily be 100mm in the next 18
months. At $10 per user, $1,000,000,000 revenue per year represents a market
cap WELL in excess of 5 billion. No doubt.

------
randomStuff
I'm not entirely sure if I agree with the author that we are in a bubble. Many
of the big companies in the valley such as Google, Apple, Facebook, Amazon,
etc ... are flush with cash. The fact that they are buying smaller companies
for a lot of money a bubble it does not make. The share prices for Apple and
Google at the moment may be very high but the share prices do represent
revenue. Look at Facebooks deal with Instagram, it was $300 million cash and
$700 million in options. That is a huge difference from an entirely cash deal.

------
tlogan
One very smart VC once told me that it is bad that startups have
profit/revenue before asking for money. Because, if you have profit/revenue
they can predict your future growth, while if you are without revenue you can
have wild predictions about future growth and convince investors into that.

And also if you have profit/revenue very early you are immediately marked as
lifestyle business.

So the entire system is pushed toward wild and big bets without any space for
relatively small things.

But I don't think this is bad ...

------
ecocentrik
The article completely fails to recognize the value of the acquisition of
technology, the elimination of competition and any number of other factors
that account for the valuation of a business.

If a successful company with massive earning potential decides to pay what
seems like too much for another company with no visible revenue and it doesn't
make sense to you, it's probably not a great idea to flaunt your ignorance by
writing an article for a major publication.

------
viscanti
There's a difference between a product and a feature. Both can be valuable,
but they don't both make money directly. A product can be sold, and can lead
to a profitable business. A feature can be profitable if paired with a
currently successful product.

From the perspective of a potential acquirer, a feature might be a more
valuable acquisition than a new product (especially one that might compete
with it's current product). The problem with building a feature company rather
than a product company is that your only real chance for an exit is to get
acquired.

There's 2 different routes to the finish line. A product could be acquired or
go public, but a feature probably can only be acquired. If a company is
building a feature, it probably needs to grab as many eyeballs as possible to
increase it's valuation. If a company is looking to go public, it's ability to
generate profit is a much more meaningful metric.

------
trotsky
Mark to mystery is a pretty amusing term but I've never once heard it before -
is it really something that gets said?

~~~
digisth
This seems like a new sense of the phrase, which has appeared intermittently
in the more bearish end of the financial reporting and opinion spectrum. It
used to be a synonym of "mark to make-believe", which was one of the popular
"methods" during the events leading up to the 2008 bust:

[http://www.economonitor.com/blog/2009/09/mark-to-make-
believ...](http://www.economonitor.com/blog/2009/09/mark-to-make-believe/)

The new usage does seem quite an apt term to describe what's being discussed
here (whether it's correct or not is obviously up for discussion.)

------
noduerme
Before I launched my startup with no outside funding, I went looking for $250k
on the basis that it did _not_ require large scale to turn a profit, it would
turn a small profit immediately, and that there was no sense in asking for
more money than we could use at the beginning to acquire a few paying
customers and code the next iteration.

Turns out I had it all backwards. Several investors, declining, confirmed to
me that the amount I was asking for was frighteningly low. I showed breakdowns
of what would go to hiring and equipment, what would go to advertising, and
what was the emergency fund - ($100k) - and how we really wouldn't need more
because it would start paying for itself quickly. That wasn't satisfying to
them.

What I also didn't know was that turning a profit was the last thing on their
minds. It took me awhile to piece that together. I have to thank HN for
opening my eyes to it.

The problem with speculative investors is that they aren't producing anything
of value. They aren't building the software, they aren't in the trenches
trying to acquire users or running customer service.

So I launched with a couple of friends who threw in some very, very small
investments of a few grand, rented the equipment I would have wanted to buy,
and ran it myself. And I haven't been able to grow it nearly as fast as I
would have wanted to. But y'know what? It's making a profit. I just paid a
12.4% dividend on investments for the first quarter. Average time on the site
is 45 minutes. We convert 1.5% of users at an average of $75 each. And I hold
81.5% of the company.

So... are investors looking for massively overhyped, vaporous, disruptive
monster-IPOs wrong? No, but it's kind of like going to the track and only
betting on the longest-shot horses you can find. The whole game would cease to
function if a majority of cooler heads weren't making wiser investments with
better chances of pretty-good payouts, in companies that actually turn a
profit. Of course, the whole game _might_ cease to function pretty soon;
things right now look an awful lot like 1998. But people with good ideas and a
shoestring budget will keep finding ways to turn a profit that keeps the
lights on; and for that I'm glad I didn't find an investor, and did it my way.

~~~
ScottBurson
Sounds like you have an excellent lifestyle business there. Which is great for
you, but wouldn't necessarily have done that much for an investor who put in
$250k. (I'm sure your friends who put in a few grand each will do just fine,
relative to the amount they put in.)

I don't think it's irrational on the investors' part. People with larger
amounts to invest want to see a potential for larger returns. Larger returns
require faster growth which requires more money up front.

I guess "lifestyle business" is a dirty word to investors, but it needn't be
to the rest of us. I think we might see a lot more of them in the coming
years, now that it has gotten so cheap to build and operate a Web app.

Anyway, kudos on your success. Bootstraps can be quite rewarding, as you see.

~~~
noduerme
Thanks, I think. Oddly, I never thought of it as a lifestyle business. The
main thing it's done to my lifestyle is to prevent me from getting a good
night's sleep for the last 3-4 years of coding, beta testing, launching, and
finally managing it.

If that's what it is -- ok. But as I understand it, the thing that stops
lifestyle businesses from scaling up is that the owner prefers having a
business that works around their schedule, suits their lifestyle, and prefers
to be hands-on in operation rather than delegating. To the point that it makes
little sense to scale, because the person _is_ the business, and vice versa.

So if what stops lifestyle businesses from being good investment vehicles is
the founder's unwillingness to scale, then I completely understand why larger
investors would shy away from them. But if an owner of one -- I mean, it could
be a bakery or a doggy daycare or anything -- builds out a framework for
growth, wouldn't it be logical to pick one that was trying to grow at a slow,
responsible rate?

Maybe stretching it here, but why would an investor choose someone who makes
great at-home pizza and wants to open 50 restaurants next year, over someone
who's run a pizza place for awhile and wants to open two or three more, when
the investment needed for the latter is half or a quarter that of the former
on a per-restaurant basis?

Is it that VCs won't stoop for pennies? Because - I've always thought it was
kinda stupid when people said they wouldn't stoop for pennies. That's money.
Why would you leave it lying on the ground.

~~~
creamyhorror
If you have tens of millions of dollars to invest, it's not easy to find
enough businesses to invest in. For every business, the investor has to do
some research and due diligence, and there's a non-negligible cost associated
with that. Finding 10 big-bet companies is easier than finding 50 small-bet
ones. It's analogous to how a fund-manager friend has trouble finding enough
businesses into which he can put $50m a pop - his bank simply doesn't make
smaller investments.

> wouldn't it be logical to pick one that was trying to grow at a slow,
> responsible rate?

Wouldn't it be more logical to find one which had the potential to explode,
and which they could own more of with a large investment? These guys don't
want small bites of a small-to-medium business, they want big bites of a
potentially massive one. And they're willing to take big losses on the losers
in order to get the big winners.

> Is it that VCs won't stoop for pennies? Because - I've always thought it was
> kinda stupid when people said they wouldn't stoop for pennies. That's money.
> Why would you leave it lying on the ground.

Because there's a cost in picking them up, and the value of a penny is too low
for many people to bother doing it. I certainly wouldn't stoop for a few
pennies on the sidewalk - they just aren't worth the effort. It's the same
with VCs, I'd guess.

~~~
lusr
There's also a practical limit to how many businesses you can be involved in.
If they aren't stooping for pennies, and they've been around investing for
some time, then it's clear they're making good returns on other businesses and
don't feel a need to stoop for pennies.

------
1527890435
If you are VC who cares about revenue if investors are willing to give you
millions up front? You have made your money. Game over.

The rest is just "try". This is acceptable because outcome is unpredictable
and expectations are reasonably low. It's a gamble, and anyone contributing
funding knows it.

If you can make money for your clients, great. If not, you are liable for
nothing.

It's a good feeling for VC if they can make money for their clients. But VC
still make good money either way. That is just how it is.

This is true to some extent in other professions as well. For instance,
lawyers, on whom VC closely depend.

If lawyers advising startups can help their clients, it's great. But even if
they don't, they still make good money.

And like with VC, clients recognise little is "guaranteed". Often they do not
even know what to expect. Expectations are reasonably low.

What matters here is reputation. If someone's reputation is enough to convince
others to give them money, with little expectation of "results", then that's
abusiness.

There was an op-ed in the NYT a month or so ago called "The Zuckerberg Tax"
written by a tax lawyer.

Read it.

Consider that the question it raises may not be how much the kid is "worth"
(and his accompanying tax liability), but how much others are willing to give
him, with no real expectation of return. Be they Microsoft, Russian investors,
advertisers, ..., or his bank.

He no doubt has great "credit". He, through the popularity of Facebook, has a
reputation. He may not be able to produce a billion dollars in cash, or even a
fraction of it, but he surely can borrow it, the act of which amounts only to
a change in a bank's computer database somewhere. We need not see the cash
itself. People are willing to give him money. With no expectation of return.

And that my friends - "credit" - is the cause of most of America's economic
problems. Spending money we don't have. And assigning large dollar values to
things when it's unlikely the physical currency itself could ever be produced.
"Show me the money." The real money, that I can hold in my hand. Not the funny
stuff that is just the subject of talk... and op-eds.

