Valuing a company is always a mix of science and art, especially for startups. Historically the science has been pretty simple: Find comparable companies and do a multiple of earnings or revenue.
However, three drivers of startup valuation have emerged that are changing the game. “Acquihire,” is the act of buying out a company for the skills and expertise of its staff. It has become so well-known that it is even listed in the Oxford English Dictionary. When Facebook buys a company like Hot Potato, it’s not for the revenue stream or products — it’s for the employees.
February 2014 will go down in history as a month with two huge startup exits: Nest (acquired by Google for a whopping $3.2 billion) and WhatsApp (acquired by Facebook for an even more whopping $19 billion).
If you haven’t caught the startup bug, there’s a good chance you will have caught it after this. What’s everybody waiting for? Let’s all go start companies!
Lest everybody get carried away with these success stories, let’s look at some statistics. In May 2013, Paul Graham, founder of Y Combinator—arguably the most prestigious incubator in the U.S.—tweeted an interesting piece of data: 37 of the 511 YC companies to date had valuations of, or had sold for, $40 million or more. That’s great for the companies in the list (which includes Dropbox). But what about the 474 left off the list?
Not to be a wet blanket, but this statistic basically says an elite startup, incubated by the best of the best, has a less than 1 in 10 chance of becoming a big success.
This is the story of Nate, John, Chris and Tyler, who started a company while attending MIT and decided to stay in school while working on their startup at the same time.
I first met Nate Robert and John Reynolds in March 2013. Nate (then 22) and John (then 21) were seniors studying Mechanical Engineering at the time. In the previous semester, Nate and John took a mechanical design class (MIT 2.009), where they became intrigued by the problem of delivering beer to pubs without elevator access. Traditionally, beer distribution companies use dollies that cost around $300 each. Delivery personnel would stack two kegs on each dolly, then bend over and bounce 320lb of beer up and down flights of stairs. Not only does this destroy the dollies, but repetitive back strain for delivery men results in a high injury rate, costing these companies millions of dollars every year.
During my recent visit to Seattle with MIT Sloan’s Technology Club, the city impressed me as a vibrant, outdoorsy town with a dynamic technological ecosystem. And man, do Seattleites love their teams.
As a native of Boston — a city famous for its rabid sports culture — I have to hand it to Seattle, whose fans regularly cause earthquakes by cheering for their football team. (According to seismologists, Seahawks fans shook the ground under CenturyLink Field during the recent playoff game against the New Orleans Saints, causing the second Seattle fan-generated earthquake in three years.) Respect.
Fervent fans aside, what I found most striking about the city was its entrepreneurial spirit. Sure, I knew about the creative work done by Seattle’s blue chip behemoths: Microsoft and Amazon. But I hadn’t appreciated the city’s thriving startup culture.
For many “born-on-the-Internet” companies, slow growth isn’t an option. These are companies that started on the Web with a global marketplace in mind, and many are finding that it’s either scale or be irrelevant. They work hard to achieve market leadership, to realize economies of scale and economies of scope, and to be recognized as the brand leader. A few examples of these ventures include Dropbox, Evernote, Fab, Etsy,GrouponGRPN +4.15%, LinkedInLNKD +0.84%, Pinterest, Stripe and Square.
These types of businesses often start fast and never let up, which stresses a startup financially and can leave its owners emotionally drained. To maintain advantage, they need to have the proper building blocks in place in order to go full speed ahead with the best chances for success.