Say you’re a Silicon Valley unicorn with a gazillion dollar valuation, more money in the bank than Warren Buffett, and venture capitalists eating out of your hand (or hoof, I guess) just to get in on the next mega-round of funding. What do you have to fear?
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Wait, that was last year, when money was literally growing on the trees lining Sandhill Road in Menlo Park, Calif., aka VC central. Maybe cash wasn’t literally growing on trees, but you know what I mean. In any case, that was before the fall.
Ever since global venture capital funding fell off a cliff late last year, tech startups have plenty to be afraid of, whether they’re $1 billion mythical beasts with horns growing out of their foreheads or not.
VCs regaining their sanity
Taking a quiet drive through downtown Mountain View last week, I could swear I heard a barely audible hissing sound, like air being gently let out of a balloon. Sure enough, it was the overinflated private equity bubble finally releasing some pressure, losing altitude and sailing back down to Earth.
One by one, it’s slowly beginning to dawn on VCs that their wild ride on the backs of the legendary white creatures is coming to an abrupt end and the specter of real repercussions for bad business decisions has indeed returned to the Valley.
On his Above the Crowd blog, Benchmark’s Bill Gurley provided a masterful recap of all that’s transpired, lo these many months since he first sounded the alarm that all is not well in the land. The well-respected VC shared his unique brand of sage advice with everyone in the entrepreneur – venture capital ecosystem.
“The reason we are all in this mess is because of the excessive amounts of capital that have poured into the VC-backed startup market,” the oracle of Menlo Park wrote. “The healthiest thing that could possibly happen is a dramatic increase in the real cost of capital and a return to an appreciation for sound business execution.”
It was interesting to see Gurley refer to WSJ Pulitzer Prize-winning reporter John Carreyrou’s brilliant takedown of Theranos as “the seminal bubble-popping event” of 2015. That was indeed a wakeup call for the mainstream tech media, who were as mesmerized by founder Elizabeth Holmes’ Steve Jobs-like reality distortion field as investors who bought into the technology sight unseen.
Then again, not everyone got the call. In an interview yesterday morning, I watched legendary VC Tim Draper stand firmly behind Holmes, despite news that federal regulators may ban her from the laboratory testing industry and revoke the license of Theranos’ California lab amid concerns over the efficacy of the company’s proprietary finger-stick technology.
Draper was the first investor and a family friend of Holmes, but still; this is not an app or a gadget. It might be a good idea to step away from the Kool-Aid when lives are at stake.
In an era of over-the-top media hype for entrepreneurs and their startups, it’s comforting to know that a single investigative journalist had the courage to take on an iconic wunderkind, her $9 billion unicorn and a team of high-priced lawyers to save who knows how many patients from potentially inaccurate blood test readings.
Uber and Lyft (valued at $51 billion and $5.5 billion, respectively) shut down their ride-sharing services in Austin, Tex. over a city council ruling requiring fingerprint-based background checks for drivers, something taxi companies routinely do. This isn’t the first time Uber has used such a tactic to bring local officials to the negotiating table over regulations it believes are onerous.
Not to draw an equivalence between transportation and healthcare, but the famously secretive Theranos long avoided biomedical peer-review and investor scrutiny of its claims under the pretext of needing to protect its proprietary technology. And it fought to pass legislation in Arizona so individuals could obtain blood tests without a doctor’s prescription.
We’re seeing more and more of this as disruptive innovation clashes with age-old industries, especially regulated ones. Never mind that entrepreneurial zeal can all too easily override common sense.
The growth imperative
High-flying HR software startup Zenefits ousted founding CEO Parker Conrad when it was discovered that employees were skirting state licensing requirements and selling medical insurance policies to businesses.
Perhaps the greatest threat to unicorns is the common dogma that growth trumps everything. That they need to scale as rapidly as possible to justify lofty valuations, even when that means breaking the rules and burning cash at a torrid clip. But then, that was yesterday’s wisdom, before the fall.
Today, entrepreneurs would be well advised to follow Gurley’s sage advice, “Buckle down and do whatever it takes to get cash-flow positive with your current cash balance,” he writes. “Achieving profitability is the most liberating action a startup can accomplish.”