Monday Postcard #103 – Valuation or Impact?
In one of my “Let’s Talk Business” articles, I covered the topic of valuations for start-ups. I recently read “Bad Blood” dealing with Theranos, a former medical/tech start-up in Silicon Valley. This book reminded me of the hype about valuations in the start-up scene. When I started my own tech company in 2014, Theranos was one of the hottest names. This was when the term “unicorn” was coined, referring to start-ups with a valuation exceeding USD 1 billion. Theranos was one of them – at its peak in 2013 and 2014, the company working on tiny blood test devices was valued over USD 10 billion. Its founder, Elizabeth Holmes, became a figurehead not only for tech founders in general but for women in a heavily male dominated industry.
I remember when I first watched one of her interviews in late 2014. Holmes wore her signature black turtleneck and red mascara. Her “baritone-voice” was unusually deep for a woman. I remember how I felt when I watched the interview – uneasy. Holmes kept selling the company non-stop, at the same time dropping comments that start-up founders do not need to sleep much, do not need to socialise and do not need to invest in friends. Holmes was being hyped and praised by the media. This was 2014, the peak of the start-up boom and valuations over USD 1 billion were nothing unusual anymore. I found it hard to believe that such a young company would overtake all the other old players in the industry. But with such a high valuation, she was probably doing something right. Her story seemed solid: a product which was used in health centres across the US and even the military.
One thing I have never understood as a founder is the obsession within the start-up scene with valuations. My product, mission and impact have always been the most important to me. However, I quickly found out that this was not everyone’s focus in the industry. While I often tried to convince potential partners and investors by sharing our mission and impact, their focus often was only on one number: our valuation. Even industry peers seemed obsessed with funding and valuations and sometimes even equalled them with success of their businesses.
Due to my finance background, I was never naive and knew why investors focus on that number first. While founders want to create their baby, investors want to see fast growth, especially when it comes to numbers. I will always remember how I felt when I calculated my first business valuation. It felt like such a bogus thing to do. I had just started working on the project, so I had a concept. And according to mentors in the scene, I had to make that number big. They advised me to “dream big” (sic!) and this should be reflected in the numbers.
I personally found it difficult to calculate a valuation based on a mere concept. And I still find this today. Of course, any model can be calculated in a way to get to a certain number. But I found it not only annoying but also wrong when people said I should “blow up the numbers because everybody in the industry does it”.
When I then looked into a lot of startups, they had valuations in the millions (or even billions) without even being profitable. This was due to the fact that some of the big players such as the Venture Capital firm Sequoia used strategies of investing in companies which acquired millions of users quickly to later sell of the data acquired by their company. This means they aggressively went out into the market, very often not charging for their services to acquire users.
How could this work? Where we all just the cards in a big poker game? How could we calculate valuations based of users who did not pay?
For me as a founder, impact has always been more important than a bogus number. (On a side note: I am not claiming that all company valuations are bogus. However, I have seen so many start-up valuations which I find highly questionable.) I still find it hard to believe that companies with just a prototype could be worth more than companies which have been around manufacturing products for decades. Maybe I am conservative as one of my previous jobs was for an engineering company with over 170 years of history. I saw how much capital had to be invested to achieve big numbers, how long it took to develop products. Therefore, I always wondered how a Silicon Valley start-up like Theranos, working in a similar field, could achieve such a high valuation in such a short amount of time, surpassing all of the old players.
Fast forward to 2018, I heard about the news that Theranos went bankrupt and that its founder was indicted for wire fraud and conspiracy. Holmes had really managed to “blow up” their numbers: the company never had a functioning product, Holmes oversold their successes and misled not only investors and partners but also patients. (Note: This is not my personal opinion but the result of the 150 interviews John Carreyrou carried out for Bad Blood.) Big names like the former Secretaries of State George Shultz and Henry Kissinger sat on Theranos’s board. And everyone seemed to have bought her story. How could they have achieved a valuation in the billions otherwise?
I am not writing this postcard to judge the case or anyone involved but because I wanted to share that investors and valuations are not the sole indicators for a company’s success or failure. The case of Theranos is just one which has proven to me that my gut feeling about valuations was not completely wrong. Numbers are just part of the equation. As a founder, my mission is to provide great products and have an impact. And call me naive, but I think if we do this right, the valuation will automatically become a good one in the long run.