Investors Follow the Pied Piper Again & Again
Every so often we have companies make the news for their incredible implosions. This week it’s crypto currency’s Sam Bankman-Fried (is that really his last name or did he have a name change?). Over the past few years, it has been Elizabeth Holmes with Theranos and let’s not forget We Work’s Adam Neumann. They join a long list of fraudsters like Bernie Madoff ($64 billion Ponzi scheme) & Enron ($74 billion in shareholder value lost), to name a few.
Silicon Valley and investors have a real share of the blame. As a start-up, we know how this game is played. You do not get attention if you cannot show “billions and billions” as your market size. Folks will look at how scalable you are etc. All good metrics, but they sometimes will totally ignore basic business principles.
There is tremendous pressure on all start-ups to compete for limited resources, investors, and capital. That pressure tends to warp how start-ups behave, how they work, and what they justify. Add to that the fact most investors have the attention span of a goldfish, and you have a toxic mix. It’s like a junior high popularity contest, but with rich people.
Having started my career in investment banking and now doing our own start-up, I have seen a lot of companies and pitches and have seen where some of the funding goes around the country. Here are some things that I believe should be considered by investors:
1. Skill Set. If you are investing in bio/ life sciences and the founder of a healthcare/ medical tech start up, has neither a Masters or PhD in the field they are addressing, you are likely wasting your money. Elizabeth Holmes is a very good cautionary tale of a very charismatic founder with no idea of how her chosen industry functions at a scientific level. This goes for crypto as well.
2. For Profit, not just For Social Good. If you are looking at a for-profit startup, the Go To Market and Product/ Market fit better be there. Recently I have noted a real trend for investors to invest in “social purpose” companies which is fine, but oftentimes that is all they really have (a mission to help them raise or gain grants). We do believe every company can do good things, but those are only possible if you are profitable, so the start-up you are investing better have a real product and a real plan to earn money. If all you see is pitch contests and grant seeking, beware.
3. Experience. You often hear “team matters”. But does it? Founders can be very young and untested. Groupon and Uber founders are good examples of what can go wrong. How large a company has the founder, or founders, managed? As CEO, COO, CFO, Sr. VP, or Assistant Manager? What kind of Revenue? Human Resources? Field/ Industry? This is an area where there could be a lot of risk. In short, what has your Founder done previously? First time entrepreneur is one thing, first time executive is another and both should be baked into the decision. Quantify that risk and ensure your returns or oversight is appropriate for the level of risk.
4. Popularity. As we mentioned FOMO is a real thing. Most, if not all Founders, are charismatic. You must be to survive in this environment. Many are very good at making an impact and driving their messaging. Just remember the adage, “Actions speak louder than words”. That old common sense saying will not lead you astray. How do the founders act over time, have they moved their company forward, are they honest? Do they tend to do what they say?
Hopefully these are helpful, just our view from the pile of start-ups you all see from time to time. Our only comment on the news on companies like Theranos, is that investors need to take responsibility for the inconsistent way they invest. When you disengage your due diligence process, you end up following that Pied Piper and that always ends the same.
For us, there are times when we discuss how cool it would be to have a nice angle, some overarching “feel good” message. Jaime, our co-founder, and I will sit around and talk about how to save the Whos (from Dr. Seuss) and how people would rally around that. This is not to make fun of companies that are fortunate enough to have that overarching purpose, but to get a chuckle at how dumb we are that we cannot think of anything (we can be hard on ourselves from time to time). It is a few minutes of goofing off to help us handle the stress and the lack of “awesome” we seem to have.
Then we come to our senses. We are what we are: an unapologetic for-profit company focused on helping the hotel industry and their guests have a much better experience all around. We intend to dominate our space worldwide. I am very sure our founding team is the “team” for this mission. We do not need some grant to do that, although it would not hurt, but what we do need is the belief that we can, and the actions required to make that happen. Last I checked our own actions are a zero-cost exercise. That we have and that we do every day.
For us what we do is not boring, but we can see how it may not be cool like crypto, or AI, etc.But I do know one thing: we know EBITDA, cash flow, and how to drive profit.We drive the living “you know what” out of real metrics in the real world.We know that because we have done it- again and again.$830,000 in revenue per employee in manufacturing! That’s rock star level numbers for a law firm, let alone a manufacturing entity. We are anxious to see what that number will look like in SaaS.