When I hear one of our CEOs say “everything is awesome at our company right now; the entire team is in a great mood” – my first thought is “uh-ho”.
Because at great companies things are happening so fast, things are being questioned all the time, things are so at / over capacity – things can’t possibly all be awesome. There is friction, there are disagreements. Great companies live at the edge and it sure as hell does not feel “awesome” – even as an outsider it can be painful to witness.
So when I hear everything is awesome, I know it isn’t.
In a day and age of valuations as score card there are in some cases extraordinary efforts being made to forcefully make certain milestone valuations happen (100m, 500m, 1bn etc).
The right way to make a high(er) valuation happen is of course to have someone just pay that price with fair and appropriate growth / later stage financing terms. Lots of companies can pull that off – even to the point where new later stage investors are just getting common stock.
But that is not what is going on in many cases. This is what’s going on:
New later stage investor: “Hey so I don’t think your company is worth $500m; maybe $200m – BUT if we can agree that I can get a 2x liquidation preference on my $50m and a full ratchet I would be ok with it. You should be fine with it because you told me next round will be $1bn+ – so we both win. You get your $500m valuation now, you don’t get a lot of dilution and I know I’ll make a safe 2-3x.”
Basically this means the new later stage investor will still make a 2x return if the company is sold as low as for $100m (!). And later stage investors typically are aiming for just a 2-3x. So the headline valuation nearly doesn’t matter – they’re happy to meet your milestone if they can generate their required returns through other terms (liquidation preferences and full ratchets) + some extra upside if the the company moves beyond the milestone valuation.
Now the bet that is not being made any more here is this: “I think the company is worth X today and I am going to price it exactly as that. I think it can be worth 3X in Y years – that’s the upside / risk profile I’m taking”. Basically the scenario above is close to pure financial engineering (although you do have to believe the company could be sold for $100m). It’ hedge fund style, not venture funding. It’s very different; I’m not saying it is necessarily a bad thing always.
This approach is working well for some companies. Maybe it’s OK – we’re all adults. Everyone’s knows what they are getting in to. However, in more than enough cases I am sure it will turn out to be a horrific house of cards on the way down.
We all know that folks increasingly prefer to use their favourite app from a specific developer / publisher for a specific use case vs. say using a wide range of apps from a single developer / publisher that is trying to cover all the bases. You can’t be great at everything and user experience on mobile matters so much more than on desktop – so that’s why highly vertical applications are winning.
Most of these vertical apps are freemium services and you can do a lot with them without paying. But once you want to go premium say with a whole bunch of these apps – that can get a little pricey on a per month basis and folks aren’t yet used to that (vs the old world where you paid hundreds up front to have MS Office etc. as part of your new PC).
So Evernote, Lastpass, Pocket and Wunderlist (a portfolio company of ours) teamed up to offer a pretty cost attractive bundle of their premium services for a limited amount of time.
Now these folks can do that because they have really high gross margins and are experimenting here with a beginning of the year promotion to see how bundles can work. I checked on twitter and I am seeing a lot of folks who weren’t paying for any of these services individually but now are paying for all of them through the bundle. Obviously this bundle made sense to them. It’s caused a little bit of a fuss in the media too:
This is not a coincidence bundle – folks are already using these services together. Also all these apps are clear category leaders in their space and are obvious choices. Now if we were to throw say a certain storage service in there – that would be somewhat harder because a lot of folks will use either DropBox, GDrive, OneDrive and if you don’t offer the service that person uses they will not buy the bundle.
There are of course at least a million other meaningful constellations you can think of.
Creating bundles isn’t going to be easy – you need a sensible scope, need to agree on revenue share, etc. On the other hand these days they can be created on the fly, for a limited time, in different variations, etc.
So I don’t know how this will go but I’m sure we are going to see more of these cross-publisher app bundle experiments. What do you think?