Tuesday, August 16, 2016

Should Founders Aspire To Build Unicorns or Blue Chips - Part 1





Being a unicorn company is now the underlying expectation from venture capital, private equity, founders, potential talents, etc because all eyes are on the superstars of tech. But mostly because of FOMO in life and financially. It’s almost like instead of appreciating the proven summer Olympics most just can’t help but talk about Donald Trump, who just sucks all the attention.

The exciting -entertaining -unpredictable content versus the proven universal content.. It’s like fighting to buy a well dressed cow that might produce milk instead of plain cow that has proven milk production. As for this article, my focus will be about figuring out whether founders pursuing unicorn status is a great endeavor or whether simply settling for private blue chip status is a lot better. I will begin, with part 1, by providing some general info and part 2 will be where I let it burn.


Define Unicorn Companies:


I’m sure many people already have a general sense of what defines unicorns. They are simply: always being private companies who have received funding that gives them an estimated market valuation of one billion dollars or more.

In my opinion, unicorns are either: good money burners, ways to prove business models, or simply performing a terrifying magic trick where few win big and most are left to clean the blood.

Define Blue Chips:


I’m not sure the term blue chip is still used or what the alternative would be. Blue Chip are common stocks of well known companies that have long record of profit, growth, quality products or services, quality management, that can withstand economic and social shocks.

What I mean when I suggest founders build blue chip companies like Walmart, Kroger, Boeing, Wells Fargo, Home Depot, Procter & Gamble, State Farm, UPS, FedEx, Caterpillar, Pfizer, Coca-Cola who’s fundamental business are selling goods and services that companies and individuals truly can’t live without. And to my knowledge have being leaders in their industry for years. I’m sure future disruption will topple some of them.

Let’s Look At Some Recent Past & Present Unicorns:


Instagram

“Facebook bought mobile photo-sharing app Instagram for around $1 billion in cash and stock in April 2012. At the time, Instagram was less than two years old and had no revenue. The deal was met with widespread mockery, including a segment on “The Daily Show.” But by December 2014, Citigroup analysts were saying that Instagram was worth $35 billion.” - - -Ellen Simon March 9, 2015 Investopedia.com

WhatsApp

“Facebook (FB) purchased WhatsApp in February 2014 for approximately $19 billion, and according to the 2014 Facebook Form 10-Q, in the nine months preceding September 30, 2014, WhatsApp generated revenue of $1,289,000.”- - -Vanessa Page December 29, 2015 investopedia.com

Slack

“Slack hit the ground running as the leader of enterprise chat platforms. In less than a year, it joined the tech unicorns as the youngest in the lot. A year later, it has funneled in investments leading to a most recent $2.8 billion valuation with over two million active users. Slack generates revenue from premium users, all while burning a relatively small amount of capital. Investors remain bullish on the future of Slack, which now aims to integrate new technology into its platform and make powerful alignments with third party providers.”- - -Shoshanna Delventhal January 26, 2016 investopedia.com

Let’s Look At Veteran Unicorns  & Decacorns:

(The figure source: McKinsey & Company)


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What It Takes To Build a Unicorn:

Everything you are reading prior or past this section will educate you with basic information about the world of unicorns. However my opinion about whether pursuing unicorn status instead of building a great sustainable lasting business will be in Part 2.

1.Having an exciting purpose other than simply making money is a start.. Just simply chasing money will become boring and make you feel empty quickly.


2.Get in business with quality people who you have worked with and know how they work, think, achieve, get excited. There’s always teams who have the following qualities like a vision of the future, business developer, operations, product developer, user experience / customer service, coder, marketer, finance, etc.


3.Getting in early on the latest platform like smart phones, self-driving cars, AR & VR, AI, disrupting incumbents, and developing an idea that address a huge lucrative pain that people are likely to pay for or other monetization methods could support it. Concepts that’s picking up traction really helps.

4.At least prior to starting, you’ve explored your business models and your needs and your likely challenges. If Napster had thought through the possibility of being sued by music companies, they might have not being attacked by the music studios. Might be the Apple Music of 2016. I think Uber might have saw the chances of getting sued by taxi companies was high so as a precaution raised a lot of money.

5.Be a part of diverse communities not just entrepreneurial communities because your future users, partners, team mates are in there.


6.If you are going to find out if you are on to something or not, quickly put together a prototype / concept / demo / minimum viable product . The feedback will tell you if it’s really a nice to have, like to have, must have, or have got to get my friends to use it too.

7.Get the foundation process and infrastructure right before you scale or duplicate. It’s almost like a Chinese restaurant before it franchises itself . it had to understand it’s suppliers, traffic cycles, traffic demographic, differentiation factor, labor supply, etc

8.Use technology and automation to improve efficiency and speed. For example if you are running a small dangerous goods delivery service…you might want to eliminate paper work, built in knowledge resources that inform driver how to handle it, automate dispatch, automate personnel management, etc  So this means you free your work force to focus on other crucial things.

9.In casino terms, it’s a lot better to be the house. In sports terms, it’s a lot better to be Michael Phelps then a spectator. What I’m trying to to say is be the queen bee and every drone strive to keep you alive as long as you stay relevant. Developers build most apps for iOS and Android OS not Ubuntu OS. Be the platform. Be the standard.

The PIPO (Private Initial Public Offering):

In the past the only way to raise more funds was to issue an IPO which came with some scrutiny. In private company status, you don’t have to disclose every single transaction such as revenue or net profit. Now we are in a time when funds are plenty and those cheap funds are looking for a place to earn a return.

Over the years came PIPO for investors who wanted high risk and high reward emerging ventures and for companies who wanted to get their scale, business models perfected, expand, or just because they could delay going to public markets for funds. The pros and cons will be touched in the Part 2.  One take away is that the more attractive you are the more likely to get money cheaply. The terms though may vary.




How Tech Companies & Unicorns Make Money:

I might go into a lot of depth about typical ways to make money because when these unicorns enter their fourth or fith round, it]s do or die. One question I’d like to ask  is, if your unicorn can’t prove it’s business model with $100 million in founding should it not be called something else?

So Lets Get Into Making Money:

From the very beginning of your idea you should at least be thinking how will we sustain it. Our first unicorn, Spotify strives to generate recurring revenue. And it makes logical sense to be in a business that as historically demonstrates a willingness by people to pay for it's products. Well the reality today is that certain goods, from the consumer perspective, should not me paid for when many free alternative exist.

We are in a digital age when major music streaming companies haven’t found a viable business model that generates significant revenue and pays artist well.

SoundCloud just became a unicorn when it put its self up for sell for a $1 Billion, I guess. It has managed to acquire 175 million users but never developed a proven system to make money. So all that fancy unicorn office, cool advertisement, TechCrunch Disrupt event could be nothing but an illusion of success.

Some unicorns do find a way to prove their business model and make money. Facebook found a way however their very existence depends on staying relevent, and attracting the next generation.

“According to a report from The Wall Street Journal, Xiaomi missed its sales target of 80 million smartphones for the year, resulting in investors beginning to question its $46 billion valuation as of its last round in April 2015, which was based in part on unrealized plans to generate substantial revenue from Internet services.” - - - Unknown Source


EventBrite has raised close to $200 million in funding, with the latest round valuing it above $1 billion. Prior to the unicorn title, the founders used basic fundamental. Build up you MVP,  get feedback, then sale value people are willing to pay for. Their model is a freemium model. Free event listings cost nothing and paid events listings were dinged 2.5% of sales (fee).

Not sure their profitability status but from all the paid events on it’s site, I’m sure they at least have revenue.

When It Comes To Making Money From Apps & Other Digital Business:

The following tips about pros and cons of app monetization was originally published by a different author.

Different Author. [Here are the pros and cons of some of the most common app monetization methods:

Premium/Paid Apps

The most familiar method to monetize apps is the premium model (a.k.a. paid apps). Under this strategy, the user purchases your app directly from an app store for a one-time fee.
Though this strategy results in a higher average revenue per download, premium is not the most profitable model.

One problem with paid apps is that, even with plenty of positive reviews, users are unlikely to purchase an app that they can’t try or preview before paying. There is such an abundance of free apps available, why purchase?

Of course, the likelihood users will take the leap and pull the trigger on a paid app depends on your product and audience. The more compelling the content or service you’re offering, the more likely they are to give in to premium apps.

Freemium and Free-to-Play

The freemium strategy (and more recently free-to-play model) has been proven to be the most way effective way to monetize apps.

In the freemium model, users can download an app for free, but they cannot access the full set of features without upgrading to the paid version.

Freemium apps typically make more money than paid apps, but it may take more time to build profits. If users choose to keep using the free app version, you can still earn some revenue by offering upgrades and premium content.

In-App Purchases

Although offering in-app purchases (IAP) is not a stand-alone model to monetize apps, it can be combined with free or paid apps to generate increased revenue. In fact, the dominant business model in the mobile space is currently free apps with in-app purchases.

Keep in mind, however, that in-app purchases are not a guaranteed money-maker. If implemented poorly, they can lead to bad reviews, frustrated users, and customer service nightmares. Consider these potential drawbacks before pursuing this app monetization strategy.

Advertising

Some entrepreneurs choose to make their mobile app completely free by using advertisements to generate revenue.

Like in-app purchases, advertising is a monetization model that is often combined with freemium or free-to-play apps. In general, users are willing to deal with ads in exchange for accessing your service or content at no cost. But this is usually contingent upon the way ads are integrated into the app.

Subscriptions

Subscription apps offer users access to a particular service or content for a weekly, monthly, or annual fee.

Subscription apps haven’t gained the same popularity as other options, but they do offer significant revenue potential. Subscriptions offer the benefit of a steady stream of income, but this model only works well for apps that continually offer fresh content.]

According to a recent article about the tricks of IAP (in app purchase) basically provides some psychology manipulation app developers use to get people to spend.

Different Author. [How to make money on the App Store: How to sell more in-app purchases

1. Waste people's time, then sell it back to them. This is the classic (and most irritating) of the F2P strategies, but it seems to work. Make a game that's fun, and then impose artificial delays. "Want to skip the wait? That'll cost you 20 fun coins!"

2. Learn the value of curiosity. Many F2P apps black out or otherwise obscure some of their higher-end unlockables until you reach a certain point in the game, thereby increasing their mystique and perceived value.

3. Make more expensive bundles of IAPs a 'better deal'. Pay 79p for 10 fun coins. Pay £2.29 for 50 fun coins. Pay £3.99 for 200 fun coins! Watch the money roll in.

4. Give half a story away for free, then end on a cliffhanger. A lovely adventure game called [blanked] uses this technique: it's free, and you get to play a solid half of the game without paying a penny. By the time you hit the paywall you're hooked.

5. Get rid of the clock. This article has some great (evil) tricks, but this is the most depressing of all. Like a Las Vegas casino, a clever IAP-selling app will hide the clock: in other words, removing the status bar and its clock so you don't realize how long you've been playing.


Raising Funds:

The following tips about raising funds was originally published by a different author.

“Start-up fundraising is hard. Despite ubiquitous headlines about unicorn valuations and how it’s never been easier to raise money in Silicon Valley, the process of raising capital can be grueling, unpredictable, and non-transparent. “ - from TechCrunch Article

[What milestones does an entrepreneur need to hit after raising each round of capital?
EF: The A round is about achieving product market fit and traction. The B round is about achieving revenue at scale. The C round is about profitability and unit economics. It’s really hard to raise rounds ahead of reaching those milestones. Those are the key inflection points everyone needs to be cognizant of when going after different rounds of funding. ---Article from TechCrunch]

[How much capital should entrepreneurs raise at a given time? Do entrepreneurs need to raise more than they think they need? Is there such thing as raising too much money?

EF: I would advise entrepreneurs to reverse engineer the end state. As a rough rule of thumb, each funding milestone should last two years. One full year to put heads down on building the business and then pick up your heads to fundraise with the intent of closing six months after. That way, you’re never within six months of being out of cash.

RK: I think there’s a big danger in raising too much money in many companies, particularly seed stage companies, because it allows the entrepreneur to ignore the market feedback and continue to believe what they want to believe for too long. I’m a big fan of raising only enough money to get through the core risk reduction in that round, whether it’s product market fit or proof of revenues. Then add something like six months onto that runway for each one of those rounds to account for uncertainties.

EF: There are two dangerous stages where having too much capital can actually be a detriment to the company. The first is before a company finds product market fit because it takes off the sense of urgency. You can ignore market feedback. You can chase the wrong opportunities because you have just too many resources. It leaves you unfocused.

The second is when you are at max revenue growth, but don’t yet have good unit economics because you can get in the trap of continuing to burn your excess capital to fund for the revenue growth whereas if you had more constrained capital, you would start to think about converting that revenue growth to actual unit economic growth. ---from TechCrunch Article]

Also check out the full article: All your questions about startup fundraising for KPCB… Asked and answered. Posted Aug 2, 2016 by Aviv G


Checkout: Should Founders Aspire To Build Unicorns or Blue Chips - Part 2? (My in-dept insights)

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