We favour the sensational and extremely visible. This affects the way we judge heroes. There is little room in our consciousness for heroes who do not deliver visible results or those heroes who focus on process rather than results, writes Nassim Nicholas Taleb in his book—The Black Swan: The Impact of the Highly Improbable.
Such human behaviour bias to favour and celebrate “visible results” over everything can perhaps best explain the last decade of the startup landscape—where young tech companies were fuelled by a wave of venture capital-funded excess, which encouraged fast growth above all else. The “sensational” bit explains why we are overawed with the likes of Elon Musk and theatrics involving fast fingers on Twitter, or a 25-year-old founder’s overcommitment to his loss-making startup by over-leveraging himself, or a larger-than-life vision of seeing flying cars.
But some of the recent disasters of the startups especially at the public markets are having VCs to question such biases or upend their playbook—to go for “boring” instead of “sensational” and increasingly focus more on the “process” than “extremely visible” results.
There are concerns being raised largely on three factors:
1. Making a strong case for gross margins: Public market investors value visible margins. A look at the numbers and picture will be clearer. Consider three tech unicorns with widely varying gross margins: Zoom, Uber and WeWork. Zoom, which can boast of exciting gross margin of 81%, is trading at over 15% premium. Uber, in comparison, with suboptimal gross margin of 46%, is trading at a 27.52% discount and WeWork with an abysmal 20% gross margin was expected to get listed at 68% to 78.7% discount, before its initial public offering (IPO) plan was shelved. These statistics are not aberrations but represent a close correlation between margins and valuations.
Price discovery in public markets is a lot more rational, and even though there could be temporary speculations, in the long run valuations in public markets boils down to time tested metrics of ‘margins,’ than an obsessive focus on ‘growth’. This essentially goes back to boring entrepreneurship 101 which says that without some consistent growth and improvement, your business will probably die and decline. And without profits, you have more of a lottery ticket than a true business.
3. Cult of personality culture: VCs are faced with a dilemma—rein in the charismatic founder to avoid any mistakes or allow him full rope to innovate, experiment, fail and succeed. In the past, VCs have tilted towards the latter, because charismatic unbound founders, such as Elon Musk, Mark Zuckerberg and Steve Jobs, have delivered results.
Feld tries to differentiate between personality cult and thought leadership. Quite often former may masquerade as the latter, making it difficult for outsiders to differentiate. While, thought leadership is about experimentation, feedback, curiosity and analysis contributing to perfection in leadership, cult personality is about reinforcing one’s ego by proving his vision and ideas are always correct, and it contributes to god complex.
At times it is hard to differentiate between the two, but the high profile exits of Adam Neumann and Travis Kalanick tells us that it is a skill that one has to nurture.
Shrija Agrawal is Mint’s associate editor. Due Diligence will cover issues in India’s venture capital, private equity, deals and startups space.
This article was first published on livemint.com.