Expectations Reset
When I initially began working with startups, many of my clients said that they would be the next Google, Facebook, etc. In other words, the founder’s hope and expectation was to build a unicorn. I applaud the ambition; these founders are after all, usually big-thinking risk takers by nature. However, the reality for startups is mostly less triumphant – but not bleak. In virtually all of these situations, I had to level with these founders; the purpose of this post is to level with you, the reader. The goal is to help you more realistically think about and gauge your success - and your challenges – as founders or ecosystem builders or just reasonable actors. This expectation reset is about companies moving toward their highest potential, rather than wasting time and resources chasing untenable goals.
Consider that many companies are destined for capping out at $10-20mm in revenue. On a 5x multiplier – that is an exit valuation of $50-100mm. That is great. Or, the management may choose to run the company and then provide profitable distributions of cash to themselves, their investors, and their employees for a long time. That is great. Really, really, great. And yet, we don’t recognize the prize because it doesn’t have a beautiful name.
This distorted perspective hurts our ability to recognize and acknowledge when growth is occurring. Self-imposed defeat squelches justified celebration for reaching achievable milestones (rather than a fabricated finish line), whether it’s a $100mm exit or a $1B exit. Idealized, mythical milestones can be very damaging to entrepreneurs and the ecosystem because they erode reasoned assessments; over time, fanciful valuations (encouraged by the coasts) bias investors and customers against objectively successful and healthy companies. In many ways, it reminds me of parenting and only providing positive feedback when a child is “the best” or receives an “A”. Certainly, there is a need for providing positive feedback and encouragement to students so that they achieve – but the maximum grade or success for some is second best in competition.
In reality, the race to achieve relative success or come in at “second place” is actually healthy for the growth of a company. There is not a singular winner in most business endeavors – but usually many complimentary winners. For example, I spoke to a company yesterday that was disappointed that it was only producing revenue of $3mm with continued, significant growth and profits. This company’s rate of growth is actually a great start and signals not just perpetuation, but progress; the point is that there is cause to celebrate profitability with continued (and likely continuing long-term) growth.
Many companies can never achieve revenue of $1mm – much less $3mm. Even so, the company is worth between $10-20mm, that’s still noteworthy, and a real achievement for the management team and ecosystem. A $15mm exit is a building block for the ecosystem and a great wealth generator for the founders and potentially the investors and employees. A company generating $3mm in revenue is ahead of 400 companies on the Inc. 5000. That may not seem like many – but $3mm companies are the building blocks of our economy – not just $3B companies.
This lack of having reasonable expectations might explain why exits are not applauded at a meaningful level. In the last couple of years, companies – such as Solutionary, Hayneedle, Web Equity Solutions, Vendorin, and others have exited. And yet, little fanfare has followed because they are not unicorns. However, each has been significant and noteworthy – but where is the celebration.
I recently read two articles that have me thinking about the role of expectations in our ecosystems. These two articles are indirectly linked to my next two blog entries. First, there was a discussion in HBR about the role of unicorns in the overall public stock markets. It is very small. Second, we often see the grass being greener in other markets or we assume that our role in the economy is the MOST important. But, the truth according to research recently republished via the University of Minnesota Entrepreneurship and Innovation Exchange – is that companies founded near the home towns of the founders are more likely to produce the best results.
Stay tuned…