Dealing with a hangover
We have unicorns. We have other various animal-themed nomenclature for high growth businesses. So what do you call a software company with single digit millions in revenue and $100M in cash on the balance sheet? There’s been enough discussion on the volley of capital & funding in the private markets over the last couple years so I won’t exhaust that topic. But the fact of the matter is that there’s way more than one company that fits or somewhat matches the profile I outline.
The most fascinating part of these companies to me is the potential variance of outcomes, along with the historical uniqueness. Theoretically, the distribution of company outcomes is supposed to shrink as the business grows over time. On day 0 (and again, theoretically), it can completely fail or be a $100B+ outcome and everything in the middle. In its terminal state, you should know what it is. The consequence of yesterday’s private tech markets is that there is a generation of businesses that *look* mature on some dimensions (market capitalization, headcount, etc.) but could realistically go any which way over the next few years given the interplay of large cash piles on their balance sheets and their actual immaturity (how long they’ve been around, revenue scale).
The negative spin on this phenomenon is that the cash will just create room for long and painful deaths with companies in stasis for years. Growth stage limbo is not a fun place to be as an entrepreneur.
The positive spin is this – some of these companies now have a lot of embedded optionality. There are many investors now that look at some of these companies and comment that they have no idea how a company will “grow into its valuation.” But this is usually based on a somewhat linear extrapolation of the product line today. The best entrepreneurs get creative about becoming multi-line, architect their organizations in unexpected ways to unlock markets, etc.1 The beauty of startups is that they’re dynamic and thrive off uncertainty.
A lot of the advice that’s out there right now, especially around cutting burn and watching core economics, is actually quite good. This post isn’t a dismissal of that. But blanket advice is real, and the sentiment on this profile of company may be overly negative. I just think we could be surprised (and maybe pleasantly so) as we watch how growth businesses evolve over the next few years.
See: Amazon, Apple.