To the tech industry, I am clearly an outsider.
I don’t look the part. I am old by tech standards. I don’t come from tech. I don’t live in a tech hub. And my startup, The News Funnel, is being built entirely the wrong way according to conventional wisdom in the Silicon Valley and Alley. That is, by raising the least amount of money I possibly can and scraping by until we have a real, sustainable business. And that’s by design.
I am 51. I come from the public relations side of the business where I was fortunate to build a top 50 firm from the ground up. I do not have a college degree. I work from home in my tiny town in NJ. And, I don’t know many people in tech. I can’t program, nor speak VC language. My friends are mostly the self-made, entrepreneurial type or they work for large corporations and enjoy a more corporate career. We all have different risk profiles professionally and I suppose I am more comfortable than most taking calculated risks.
My tech site doesn’t conform to the norms.
Whenever I scan the headlines on a site like TechCrunch or re/code or AllThingsD, I see the same type of stories over and over again: crazy amounts of money raised with no revenue or profits in sight. And the media gushes over these new-age geniuses that run the startups that are considered the next big “disruptive” thing. They use big, fancy words that I have no clue what they mean. They seem to follow a herd mentality all seemingly chasing the next big thing i.e. “gaming” “big data”, “VR”, “streaming”, “cord cutting” etc…
I realize I am fortunate to be able to be the largest investor in my own site. And also to have gotten investment dollars from a small circle of friends and colleagues who work in the field that my site was built for (real estate). I also know that my site will probably never become one of the notorious unicorns and that’s ok with me. Building a profitable and sustainable business that produces a solid return for my investors and a beneficial career path for my teammates is a worthy pursuit to me.
There are others (Gary Vaynerchuk for example) that also believe businesses should grow from the ground up the good old fashioned (hard) way. Take this Gary Vaynerchuk article for example: Why You Shouldn’t Take VC Money.
Every time I read the tech press I scratch my head.
There is so much I just can’t seem to get my brain around. I know the tech industry is a viable industry that creates enormous amounts of wealth and jobs. I also know that a large part of the tech sector is profitable and creates a real positive impact on society and makes business and people’s lives in general more efficient.
On the other hand, there are countless articles that discuss the same things I simply don’t understand about tech. Here is one perfect example of how a company achieved a crazy valuation and then had to come back down to reality eventually: Hudson’s Bay Is Said to Consider Buying Gilt Groupe for $250 Million.
Based on my limited experience in this business sector, here are the five things I will never understand about the tech sector:
1) What the hell is a valuation and why is everyone so obsessed with it?
Literally, every single startup I run into tells me what their valuation is. I met one recently that hasn’t even launched, has no users, and yet their valuation (according to them) was like $30 million. They gave me no explanation as to how they came up with that number other than by saying other similar companies had the same valuation. Again, there is that infamous “V” word again:)
In my world, a company would arrive at a valuation based on a standard business formula (i.e. a multiple of revenue, EBITDA, etc.), not by how much money they have raised and how they priced their funding rounds. An example of this is the crazy story surrounding Theranos. Another example is this article about how Foursquare, once one of NY’s hottest startups, is raising another round on a lower valuation than their last round. Or, take this example of a startup unicorn that sold to Blackberry at less than half of their $1.1 private valuation.
It seems like it is based on hype, speculation and which VC’s paid this much and when. It also seems very much about the guru founder and their “vision.”
2) Why doesn’t anyone ever talk about profits?
I can’t understand how raising money, round after round, without any profit in sight is a sustainable business model. I would never start or invest in a business that doesn’t have a plan from day one on how to generate revenue and ultimately make a profit.
3) What’s with the fancy offices?
Another thing I can’t understand is how companies with so little revenue (let alone customers or a significant user base!) spend so much of their precious capital on nice office space in the fanciest locations. In fact, my startup, which has revenue and hundreds of thousands of users, still doesn’t have our first office because I would rather spend the money on sales and marketing and control our overhead until we can be profitable.
When running my PR firm, we had to impress clients so we had to have nice offices. Makes sense. But who visits a startup? If I worked for a startup, I would rather be paid well with health insurance and good benefits than work in fancy space!
4) Spend, spend, spend.
I guess because I know how hard it is to build a business, I am really cautious and conservative with the way we invest our precious dollars. Too often I see startups burn through so much cash so fast without any sense of planning for the long term. When corrections come, and they always do, funding will dry up for most and then what? I have met so many founders who have such a chill vibe and say they don’t have to worry about making a profit or even discovering a business model because they have so much cash in the bank. NUTS! That’s a recipe for disaster in my humble opinion.
5) Exit, exit, exit.
Everyone likes to talk about their big, grand exit. I get it; it’s awesome to think big and dream of the huge payoff. But in reality, 90% of startups fail. 90 friggen percent! Thinking you are the next Uber, Airbnb, Facebook, Instagram, etc. is great but it’s NOT a business model. It’s a dream. Dreams are good, but proper planning and execution will ultimately distinguish between success and failure.
I am the first to admit that I have so much more to learn about running a startup and my team still has a ton of work to do to fully execute on our business plan. But, I feel confident that we are on the right path to building a sustainable business with a growing revenue stream… even with our limited resources. It may sound crazy but that’s how every single successful entrepreneur (outside tech that is) I’ve studied does it as well.
I am sure I am naive about how the tech sector actually works and I bet many tech insiders will suggest that I just don’t get it. But if you’re like me and scratching your head as to when the tech sector finally comes back to reality, maybe you too ask yourself…WTF!?!