Startup, Valuation and WeWork
Stuck in the infamous Manila traffic see if I can write an entire article while sitting in snell like traffic.
Unless you are under a rock WeWork is in trouble from a valuation of $47 Billion to now less than $10 Billion (although this not is speculation). So how did we get here? This situation reminds me of a conversation I had with a startup founder at my co-working space, kinda read like this:
Me: Nice to meet you I am Rick, seem like you have startup going
Founder: I am Bob, my start up is xyz and it does xyz.
*Insert small talk here
Founder: One reason I got into startup is because there are startups that has unicorn valuation(valuation @ +$1 Billion)
Me: You do know that these are private valuation, by no definite means that it will be sold or IPO at that valuation
Founder: But the VCs valued it at that valuation
Me: Sure, best of luck
I feel like above is the mindset of too many start up founders, drinking the valuation cool aid from the VCs and from the news, thinking that the game is to get +$1 Billion in “valuation” and don’t understand the end game is for the investors to cash out. Thus, your business is truly valued once it has experienced a liquidity event.
Your business is only truly valued once it has experienced a liquidity event.
So what is liquidity event? Basically is when someone has purchased your business at the price you set or you get your company IPOed in a liquid market, that would be the true barometer of what your start up/business is worth. It is an event where you get money in the bank, it is end game for the investor as previous mentioned.
A very basic example is having your house listed for $100,000 but the market is only willing to over $70,000. So is your house worth $100,000 or $70,000? In WeWork’s example by posting $47 Billion valuation IPO and having it rejected by the public just to show you that internal/VC valuation is more to do to the Greater Fool Theory than to any sane fundamental valuation. It also signal that the jig is up where the market will not accept anything that is marketed as a “Startup”, “Distruptive” or “Tech” with a valuation that has no bearings to any business fundamentals.
So how does all the above ties to the start up? Firstly, start up founders need to understand that it is a business first and foremost. Their number one priority is operate a business where the unit economics works out to an eventual profit. Secondly, ignore the the private valuation of your start up or any other startup for that matter. These valuation is no true barometer of how well you are doing, getting to X valuation should not be your true objective and definitely should not be the reason you have want to be entrepreneur.
By flipping the mindset to more of a fundamental way to think about your start up, the business will be better off and everthing else valuation wise will take care of itself.
