This past Tuesday I was having dinner with a friend at Bistro Elan in Palo Alto when I ran into Y Combinator co-founders Paul Graham and Jessica Livingston. Paul, who has given up his day-to-day duties to Sam Altman, looked relaxed. We chatted for a few minutes and then went back to dining. Later that night I realized that I had not visited Paul’s blog and decided to spend some time reading his posts, which are usually long and full of nuggets. There was one that caught my attention and made me pause and think: “Default Alive or Default Dead.”
“If the company is default alive, we can talk about ambitious new things they could do. If it’s default dead, we probably need to talk about how to save it,” he wrote in his post. It is a Darwinian way to think about a startup and its life cycle. As he noted in the piece, “Instead of starting to ask too late whether you’re default alive or default dead, start asking too early.”
I would reframe that suggestion by posing (and answering) a question of my own:
Why do we end up at a place where we deal in extreme absolutes?
From my own experience, things become so stark when startups and founders focus on all the wrong things. But before we go there, let’s examine why people start a business. There are multiple motivations.
- You personally need a product or a service and don’t see it on the market, so you decide to do something about it. Some people call it “scratching an itch.”
- You believe in the mission so much that you don’t have a choice but to start something to make it a reality.
- You see a market opportunity and decide to go after it, even though the reasons aren’t personal.
Those are the three broad categories. Sometimes the mission or market opportunity becomes clear when scratching your own itch. Sometimes when you combine all three, you end up at a magical place of near-world domination.
This isn’t a perfect list, but thank god it doesn’t include some bullshit reason like “I don’t want to work for anyone again.” Trust me, we all work for someone, unless we are Richard Branson or Mark Zuckerberg. And really, what happens when your startup doesn’t work out and you get acqui-hired?
You guessed it: You end up working for someone.
The motivation to build a product and turn it into a company is to eventually evolve it into a business that makes money. Some people do it at a more natural pace, and some people decide to accelerate the process of building a business. You might have heard of that phrase “time is money.” You can invest your time and grow something. Or you can use money to buy (i.e., accelerate) time by raising venture capital and speeding in the fast lane, thereby turning your idea from a product into a company and then a business at a rapid pace.
Unfortunately, the current narrative in the tech industry is too fixated on fund-raising and valuations. What are the point of valuations if you can’t eventually build a business? What is the point of all that money when you can’t transition from a product to a business?
Companies celebrate valuations and the amount raised instead of concentrating on the right thing: building a business that is rapidly growing and can be (or is) profitable in short order. In other words, gross margins should be such that at a point in the future you are and can be profitable. And the sooner a business gets to a profitable state, the sooner it’ll be able to control its own destiny. In other words, if you have a business that is, well, a business (and not a project), you can at least avoid the “default dead” state.
I’ve learned this lesson the hard way — by losing something I truly and absolutely loved. And also, of course, by observing world-class entrepreneurs do their thing for nearly 25 years.
So how do you build a sustainable business? By focusing on basics like how good your product is, whether people will pay for it and, more importantly, how many people will pay for it. In the end that is the true value of a business, a real valuation, not some random number you got to from an investor or a competitor’s valuation.
Let’s take Uber as an example! Forget for a minute that it is valued at $51 billion. If Uber went away today, millions of people would groan and miss it. In other words, Uber is a product for which millions of people will open their wallets. I was around for the genesis of Uber, and no one was talking about $100 billion valuation. Instead there were very few believers in the whole idea.
A Bollywood version of that story is Airbnb, and as co-founder Brian Chesky has said time and again, he couldn’t find a backer for his idea for a long time. And even when he did, I remember the company struggling to get any press attention, except from my old publication. We believed in its concept of collaborative consumption, and at no point did Brian or Joe Gebbia or Nathan Blecharczyk ever talk about valuation. Valuation was the outcome of building a better way to find temporary shelter when traveling. While I find its political ad campaigns boneheaded and uncharacteristic, I am almost certain that if Airbnb went away, the collective groan from around the world would be so loud that even the gods above us would be shaken from their slumber.
I cite Uber and Airbnb as examples because they are also the poster children of the nonsensical obsession that Silicon Valley has with unicorns and valuations. But most people forget that they are outliers and have found success at web scale, which is as unparalleled as, say, Facebook or Google. To look at valuation and use that as a yardstick of success is a dangerous game to play.
That framework of thinking about valuations versus building a great business will lead to tears and will put companies not only at risk of being “default dead” but also of becoming dead fast. What every founder needs to remember is that in the end, they have to run a company that can not only survived but also thrive without raising more capital. That is the only thing that will keep the business from being default dead or alive.