Silicon Valley Valuations - Let it Be Real

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The Venture Capital (VC) landscape, for the past decade steeped in Silicon Valley culture, has fabricated hundreds of “unicorns” – startups with billion-dollar-plus “valuations” (why the quotes? Read on). The question is, are these valuations real? Are they merited or earned? 

My Dad, the great Marshall Loeb, told the joke of “this guy” (joke maker-uppers are evidently misogynists – or is the opposite the case?) and the $10,000 dog. Each day he goes to a bar, mangy mutt in tow. This guy is subject to unrelenting derision from his fellow revelers, which only intensifies when in defense of his pet, he declares ‘this dog is worth $10,000’. After a time, he has quite enough of the mutt-busting. “Ok, I will prove it to you”, he countered in defiance, “Be here tomorrow.”

The following day, like clockwork, he reenters the bar with a smirk wider than the gulf between Pelosi and Trump, and matching cats under his arms. “You see, I told you pagans that the dog you made so much fun of was worth $10,000 and now I have the proof”.  “Say what?”, asked the confused chorus. “I traded him for two $5,000 cats”.  

michael loeb quote how many of these mythical creatures will be more than myths

A Herd of Silicon Valley Unicorns

In 2016, the VC ecosystem echo-chamber fabricated 160-something unicorns. I asked two-dozen start-up CEOs, carefully selected for some gray hair wisdom, two questions:

How many of these mythical creatures will be more than myths? And; how much green ($) will the founders ever see? Answers: Few and little.

Fund managers are subject to a number of pressures, one of which is finding deals. On the spectrum of asset classes, venture is illiquid, risky and in theory, high returning. Committed capital from investors is ‘called’ over time as deals are consummated, requiring that funds are held in highly liquid, safe and therefore low returning instruments – in sum – the opposite end of the asset spectrum.

michael loeb quote fund managers are promiscuous always on the next fund

Investment outcomes are generally thought to be highly dependent on a specific asset allocation formula. Investors count on VCs to make their investments with alacrity so as not to, egads, wither in the wrong class.  And while not all entrepreneurs are serial entrepreneurs (and not all would-be entrepreneurs have the “entrepreneur’s gene“), fund managers are invariably promiscuous, always on to the next and bigger fund for the increasing fees – which investors are subject to shine (good returns) or rain (bad ones) – and marketplace juju.

In a low return world sloshing in cash, (why else would the Nets, a team that last ruled their conference during the Internet winter of 2001, be worth $2 billion?) startups are bid-up and are ‘marked to market’; that is, valued from the last overheated investment, often by another VC firm. This is long before the mutated unicorns become sickly, but in time for display on the VC-scoreboard to impress the big wallets for the next fund in the series.  

I know what you’re thinking: the government (oy vey) should do something about this. Watchdogs are obliged to protect the little guy, and venture targets the ‘sophisticated’ investor. You better know what you are doing to ski the black runs or you may just fall – hard. You’ve been served; fat-cats beware.   

michael loeb quote you better know what you are doing to ski the black runs

A case, from zillions of postulants, in point. A VC fund in which I have invested (does this make me a hypocrite?) marked-to-market a lipstick-on-a-pig startup (old product, pretty digital interface) for which revenues this year will drop by a predicted 1/3rd, will lose over $200 million, owns little unique IP, but has a brand-name VC money sponsor (hint: there is an intimate connection to the White House’s alpha male) to $2.8 billion. Huh? For a negative growth newbie? Oh, but management has projected revenues to triple in 2018 with a $300 million swing on the bottom line to profitability. And no, it’s not in cannabis so ‘eating home cooking’ doesn’t explain the hyperventilation.   

Real Growth and Real Time

‎There is a reason why Warren Buffett doesn’t touch this stuff – he takes a long-term viewTo be sure, the market puts a premium on innovation, novelty and first-in-market positions – that is where you find big growth and the big opportunity. Investor insanity is fleeting and corrections are violent: my founder’s shares in Priceline went from $16 at IPO to $163 in months to $1.28 months later at the nadir of Internet meltdown #1 (Nick Bilton argued in 2015 that there will be more). In the long run, the market values what is real: real companies inventing real solutions, real revenues, real profits, real value. Not unicorns, nor $10,000 dogs, nor two $5,000 cats.

michael loeb quote investor insanity is fleeting and corrections are violent

We live at a time of great transformation, in which every industry will be subject to wrenching disruption. As an entrepreneur, nothing could be more invigorating. There are great ideas – big and brilliant – which will be sown and burgeon in vast new companies.  The ones that will stand the test of time, the ones of which Keats would say are not ‘writ in water’, will be made of sturdier stuff.

So entrepreneurs, summon your genius and courage to build something good that lasts, something that fuels the soul, something that will make you and your investors’ money and your Mama proud. Let it be real.  

The Entrepreneur's Gene

So… you want to start a business. And you want to know the most important thing? Forget capitalization, the right industry, the board of directors or the business model. Why, it’s the entrepreneurs’ gene, of course. For decades, scientists have been trying to isolate and replicate this elusive gene but have thus far been unsuccessful. The objective is to make the gene generally available so that anyone can be a Jobs, a Zuckerberg or a Bezos. (Note: in a free, democratic and fair society, why should only entrepreneurs be blessed with the entrepreneur’s gene? So elitist.)

Here is what scientists know about the Entrepreneur’s Gene  

Entrepreneurs have a number of unusual qualities. First, they are smart – unsmart entrepreneurs become un-trepreneurs real quick. They are indefatigable, accustomed to years and years of long, grueling hours. They inherently know that to be an entrepreneur the gene requires nurturing, fueling, and developing with continuous inputs of data, insight, and experiences.

And they persevere, Thomas Edison, one of their Gods, famously said: “I never failed, I just learned 10,000 ways how not to make a lightbulb”.  The devout have no understanding of failure, but they do understand how to try, try again. Not the same way every time, mind you, because doing the same thing over and over expecting a different result is endemic of insanity, according to Einstein, definitely an entrepreneur.  Freud, recently voted into the HOF by the Entrepreneur’s Writers Association, would tell you that the entrepreneur is delusional and perhaps insane (Van Gogh was reputed to have the gene, and yes, he was maybe crazy, but ohmygawd inventive – have you seen his stuff?)

Entrepreneurs have an unbridled audacity of belief. The audacity to believe they have an idea that no one in the history of human civilization thought of before them. The audacity to believe that their start-up (not just can, but) WILL work; that others will follow, that still others will invest and an army of others will buy.

The Entrepreneurial Personality

And here’s where the audacity crosses over into insanity: they believe the rules do not apply to them. Eight or ten new ventures fail? Not mine. The regulations don’t allow it? These will change. VCs will never invest? They haven’t heard the pitch. Turns out that the gene makes the entrepreneur hearing impaired. They can’t hear the words ‘no,’ ‘impossible,’ ‘this can’t work’ or ‘are your nuts?’

Similarly, the laws of physics and just plain simple rules that others accept and regard are ignored by these renegades as if they don’t recognize them. These qualities start to emerge in youth, as early as pre-school: ‘Why is Johnny not joining circle time but building a 1:24 scale replica of the Eiffel tower with blocks instead?’, or ‘Why does Jane doodle – her stuff complex, advanced, inscrutable – when the class is supposed to be learning about the famous clothespin decision of 1932?’  

Michael Loeb Quote being an entrepreneur has never been more important

Scientists have also discovered that the entrepreneur gene is closely identified with the pirate gene, the guerrilla gene and in particular, the MacGyver gene. Entrepreneurs have to make everything out of nothing and decisions quickly, assertively and without hesitation. Some of these are a matter of life or death (we refer here to the life or death of the company, not the entrepreneur or employees). Invariably these crucial decisions are made with too little data and MacGyvered interpretations of the evidence.

Captain Kirk was an entrepreneur. Un-trepreneur Spock, God Bless, would always share with Kirk the odds of surviving, say, a surprise attack on the Klingons with some new, unproven torpedo (has anyone ever called Roddenberry out for having a ‘torpedo’ in space?) which were as infinitesimal as Congress passing something useful this session. Kirk would smirk (earning him the moniker ‘Smirky Kirk’) and do it anyway. He sneered at the chances, cast aside the playbook, ignored the rules to save the universe, in a crazily creative, ridiculously risky, never-been-tried-before way each 50-minute episode. And it always worked out. Now that’s an entrepreneur. Except for the “always worked out” bit. That’s Hollywood.

I also find that the gene is inherited, and sometimes by osmosis. Many entrepreneurs grew up with entrepreneur talk around the dinner table, and entrepreneur-friendly parents. ‘Oh, she’s getting Cs but has an IQ of 145? I’m good with that’. Lest we forget, Einstein redrafted all the universal rules of physics as a Swiss patent examiner.  I don’t know much about Switzerland’s patent office, but I have to imagine that it’s a black hole for talent, and despite his prophecy to the contrary, Einstein escaped – but he was probably the only one. Like I said, the entrepreneur gene is irrepressible. Its genius ascends on canvas, in a light bulb, or in the stars… but it appears.

Michael Loeb quote entrepreneuring is a total-brain full-contact sport
Entrepreneuring is a total-brain full-contact sport. Be shy and die; delay – you’re the prey; you can’t be polite and fight. Both brain hemispheres are tingling with firing synapses that meld into… analytical creativity. Oxymoron? Jay Walker, friend, genius, founder of Priceline talks about the difference between data… and information. Data are numbers, plain (very plain) and simple. Information is numbers animated. DNA is a string of amino acids, the building blocks of life. But these do not a life make. Entrepreneurs turn data into the blood, vessels, muscles, and heartbeat of a company. The best of the lot can look at columns of numbers – thousands – and select the one or two that are aberrant. Seen through the right lens, new worlds appear … and the difference between success and failure. Without creative application numbers are symbols on a screen signifying nothing.

Entrepreneurs have visual acuity, both high and low. High – the big picture, a perspective from 35,000 feet. Low refers to the unit economics – the single customer.  If the unit economics don’t pencil out, no amount of scaling will a business make. After a talk with an adoring crowd, the 16th President of the United States was asked ‘Mr. Lincoln, why such a long speech?’ ‘Because I didn’t have the time to write a short one’ came the rejoinder. Entrepreneurs appreciate the elegance of concision and it’s power in communication. The best can put both the high and the low on the back of a business card. An entire business vision and unit economics in little more than a bumper sticker; a sound bite. Catch-phrases are repeated; speeches are read.     

Bobby Fischer, in his time the greatest chess player on the planet, was famous for playing two dozen games at once, processing billions of options in nanoseconds. His game was bold, inventive, and defied conventional wisdom.  But Fischer was no entrepreneur. Fischer could astonish, inspire… but he could not lead. And this is yet another quality of the gene, leadership. You see, the entrepreneur’s belief system is infectious. It is enveloping and passionate, and the best of them evangelize with the conviction and erudition of a Churchill, a Kennedy, a King. They dazzle; they mesmerize; intellectual shock and awe. They can flip the stubbornest of minds, the most jaundiced of opiners, into a legion of followers.

If you trawl for advice about the most important thing you’ll find plenty – too much actually – as though there were thousands of most important things, which is someplace between a paradox and a contradiction. But for my money, it comes down to this: the entrepreneurs’ gene.

What is Loeb NYC's "Company Factory"?

Michael Loeb, Entrepreneur and CEO of Loeb Enterprises

Michael Loeb, a serial entrepreneur, is the Founder and CEO of Loeb Enterprises, a New York City venture capital firm. He and Richard Vogel (COO/CFO, Loeb Enterprises) used their expertise and legacy of success to create Loeb NYC, a privately funded lab. Loeb NYC builds and grows startups from inception to exit. Here Michael Loeb describes his concept for a “Company Factory” and Loeb NYC’s unique Shared Services model.

Michael Loeb quote michael what you have at loeb nyc is uniqueLoeb NYC’s Company Factory

Swinging by Loeb NYC’s Midtown Manhattan office not long ago was a brilliant and remarkably successful entrepreneur, Jonathan Klein. Jonathan and Mark Getty were founders of the eponymous Getty Images. All that company did was revolutionize the stock photo, editorial photo, and film business. With his work largely done – Getty was sold years back to Carlyle for $3 billion-plus. Jonathan serves as Getty Images Chairman, has sat on the boards of two other unicorns since their relatively early days (Etsy and Squarespace), works with various non-profits and advises multiple VC businesses, all while traveling the world to seek out great companies and investments. To be sure, Jonathan has seen a thing or two … but not our model, not once.

“Michael, what you have here is unique, isn’t it?” Jonathan is South African but has lived in England for 20 plus years, so he can be British in tone. So, the quizzical “isn’t it” is at once charming, colloquial, rhetorical, and by turns confounding.

His words were high praise. Our model – a self-funded Company Factory – is, I suspect, accurately referred to as unique. It’s what my partner, Rich Vogel, and I envisioned a decade ago when we concluded that for us Synapse was not the last chapter but the opportunity for a bold new one. What was then a germ of an idea is now burgeoning into full flower.

helen rothberg quote loeb nyc vision

Accelerator vs Incubator vs Company Factory

When described, our factory model sometimes draws comparisons to an Incubator, or its cousin the Accelerator. I describe these as ‘pieces in the middle’: desk space where cohorts of startups or young companies, filtered in by type (adtech, health-tech, fintech, whatthehecktech) are paying tenants for 3 to 12 months, and enjoy, ostensibly, the benefits of sage advice from some grey hairs and community.

What a traditional Incubator is not, is the pieces in the beginning – the ideas, capital or talent. Nor is it the pieces in the end – more and more capital and the exit. For its trouble ‘the house’ gets a sliver of equity and may or may not write a check for a modest $50k or thereabouts. The true value of the incubator model for the entrepreneur? Connections to capital. Famously, Y-Combinator, la creme de la creme, has a queue of VCs – the likes of Andreessen, Sequoia, Greylock – lap up its graduates like Skittles at a Halloween bash.

Add to this the disadvantages of this common startup model. They don’t tell you this in entrepreneur’s school, but founders spend half of their time raising round after round of money, and then more time keeping the money happy. Other hours are spent coding bills, planning payments, nudging receivables, pouring over leases, contracts, and the like. Alas, what about the business building? Um, well, not so much.

Another thing they don’t tell the newbies: the game is kinda-sorta rigged. VCs know that the universal rules of construction apply: the business of building a business takes longer and costs more than the business builders presuppose. Starter-uppers are optimists who ask for too little at first, and upon the re-ask, VCs often invoke the ‘down round’ edict; that is, more equity for less. Ever hear of Waze? A friend and founder Uri Levine told me he owned just 3% of his company when it was it was sold to Google after the VCs had their “waze” with him.

Greedy? Attribute more to odds and probability. Most VC’s will candidly tell you that only 2 startups in 10 have an appreciable return. A little verity from a shot of Casamigos and they will confess to less. Moreover, they are counting – banking actually – on the performance of a rare winner (the most profound of which are fancifully referred to as Unicorns) to pay for all the losers … and their wood-paneled offices, partner mortgages and a long list of green fees.

Shared Services – a Turnkey Solution

By contrast, our model spans the business lifecycle from ideas-to-execution-to-exit. We are self-funded, so our starter-uppers spend not their precious time soliciting investors, but rather soliciting results. Our Shared Services are world-class talent in tech, digital business development, accounting, finance, analytics, data science, promotional design, manufacture and a dozen direct-to-consumer marketing sources, which allows small startup teams to punch way above their weight and have access to capabilities other companies can only dream of.

We think our model is also a magnet for talent. With so many companies in the factory, the odds of collective failure are markedly reduced, and the work is more varied and interesting. The net effect: the chances of success for each company and its rate of growth is markedly increased. The #1 cause of death for a start-up is not the lack of a good idea, it is the lack of capital. But not at our shop. #2 cause of death is dismal execution. But all the less likely with our accomplished and experienced practitioners. I say of us today that once every 5 years we start 10 companies. In truth, it could be twice that number at this very moment, depending on how you count ’em.

‎Another promise of an incubator is a community. But inasmuch as all startups in a conventional incubator are more than a little bit competitive – they share the same physical and metaphysical space after all – not much is collaborative. And that is also part of the dream that Rich and I had: the making of a bonafide entrepreneurial community. A band of start-up pirates, all sharing best practices, and best resources, all participating in the spoils.

michael loeb quote time

Loeb NYC Speaker Series

We believe in giving our staff every tool they need to grow professionally. One of the opportunities for enrichment comes in the form of our Speaker Series. This is a program where “persons of excellence” in any and all fields (from high net-worth business people to actors and dancers), are invited to Loeb NYC to speak. The Speaker Series ramps up in frequency in the summer months, with a weekly guest speaker. This is so that our cohort of paid summer interns can benefit from learning from the successes, failures and philosophies of inspiring and motivating personalities.

Speakers have included Carolyn Everson (Facebook Head of Global Marketing), David Blumberg (Blumberg Capital, one of Silicon Valley’s most prescient Venture Capital firms) Tim Blake Nelson (actor/director), Katie Meyler (a Time Magazine “Person of the Year”) and Damian Woetzel (famous ballet danseur and president of Juilliard School).

When Dr. Helen Rothberg, Intelligence Strategist and Corporate Consultant visited,  she “got” the Loeb NYC vision right away,  “This whole place feels like one big, buzzing vision to me. I was in the “rainforest” and that place is pretty amazing. As an outsider who’s walking in, who’s been to many different companies over the years; Fortune 500, small tech startups, there’s a buzz, there’s an energy, there’s a vision here.” 

The “rainforest” refers to the floor of Loeb Enterprises where all of our startup portfolios are based. The theme was chosen deliberately, as rainforests have the fastest growth rate and highest diversity of species. It is a fertile environment which fosters life, evolution, and renewal.

katie loeb quote shared services

Loeb Enterprises Paid Summer Internship

One of the programs that we are most proud of is our paid summer internship program. In 2018 we received over 1,000 applications and hired 40 interns. The interns gain immersive, hands-on experience in New York City startups and are matched with portfolio companies with which they share a mutual interest and passion. We welcome the contributions, ideas and drive offered by the enthusiastic interns. Many go on to gain full-time employment at Loeb NYC, and have attained positions at our startups like AllTheRooms, Thnks, 3×3 insights and more.

At Loeb NYC we still have much to do. Unique is hard, unique takes time. But we are getting there one groundbreaking startup at a time. And for that, I thank you – our community, our merry, exceptional band – all.