Startups have had it pretty easy these past few years. Venture and corporate investors have flooded young tech companies with cash at wildly inflated valuations. Not surprisingly, founders and CEOs have been more focused on achieving unicorn status ($1 billion valuation) than managing their burn rates and becoming profitable.
Those days are so over.
Earlier this week, wearable device pioneer Jawbone and location awareness app Foursquare both completed major down rounds of funding. In other words, they raised capital, a good thing, at far lower valuations than in previous rounds, a not-so-good thing.
Jawbone, a San Francisco company that pivoted from headsets to fitness trackers in 2011, raised $165 million at a valuation of $1.5 billion, less than half of its $3.3 billion value just two years ago. Its new fitness tracker, UP3, missed the critical Christmas season. It’s also involved in patent infringement litigation with market leader Fitbit.
New York-based Foursquare raised $45 million, mostly from existing investors, at a $250 million valuation, give or take. That’s a huge step down from the $650 million it was worth in 2013. It also announced that COO Jeff Glueck would replace co-founder Dennis Crowley as CEO. Wonder why?
Meanwhile, Square went public two months ago with about a $4 billion market cap, versus its private valuation of $6 billion. Around the same time, Fidelity wrote down its investment in messaging app Snapchat by 25%, just as Blackrock had done with its stake in Dropbox earlier in the year.
Those are all signs of the times. After solid growth for nearly four years, a new report from KPMG and CB Insights reveals that global venture funding and the number of deals fell off a cliff last quarter. The biggest pullbacks were in North America and Asia, particularly China, and late-stage mega-rounds – a hallmark of this technology cycle.
And with public markets fairing just as poorly, IPO exits will likely remain on the decline through 2016. In other words, things have just gotten a whole lot tougher for startups. For founders, CEOs and the boards that stand behind them, it’s time to get back to fundamentals and …
Quit overreaching. Call me old-fashioned, but I don’t really see the point in pursuing unjustified valuations if it means there’s a good chance of eating it later. No matter how you look at it, down rounds are momentum killers. Major business milestones and increasing valuations should go hand in hand. When they don’t, it’s dysfunctional and both startups and investors will pay for it sooner or later.
Feel the burn. Burn rates at tech startups have been way too high for way too long. When money’s cheap and lofty valuations are easy to come by, you can always raise more, but that’s over now. It’s time to get back to basics and bring your burn rate and capital needs in line with legitimate product, revenue and profit milestones. That is, if it’s not too late. I’m afraid a lot of unicorns will go the way of the dinosaur in a back-to-basics financing climate.
Focus. Whoever came up with the concept of “focus” must have worked at a Silicon Valley startup. It’s all about focus and discipline. First you focus on demonstrating a concept, then developing a product, gaining customer traction, growing market share and finally achieving profitability. It’s all about putting your head down and working 24x7 to achieve crazy milestones on fumes if you have to. It’s actually remarkably intoxicating … if you’re into that sort of thing.
Remember IPOs. Rushing to an IPO without predictable business growth and at least a plan for profitability is always a bad idea. There’s nothing harsher than the bright lights and intense scrutiny of Wall Street. But late-stage mega-rounds are not necessarily effective substitutes. Now that private financing is beginning to normalize and down rounds are a reality, a lot of unicorns may wish they’d gone out when they could.
Build resolve. Startups are marathons, not sprints. They’re about building companies for the long haul, not just to get to the next round. It takes tenacity to overcome a myriad of challenges on the way to market leadership and business success. And guess what? Things are going to get a lot worse before they get better, so buckle your seatbelt, the ride’s about to get pretty bumpy.
Of course we’re going to see a lot more down funding rounds and valuation write offs. Private funding will flip from a seller’s to a buyer’s market and startups around the world will all have to tighten their belts to survive. And that’s as it should be, at least for a while … until the cycle turns again.