At the End of the Day, Only Four Things Matter in the Valley
I met with a European journalist yesterday who asked me to describe what matters in the Valley. I don’t have a long history of being here and, therefore, don’t have much from which to draw, but in the few years I’ve been here, I do feel that every item that truly captures our attention has one or more of the four ingredients below. That is to say, amid all the noise of Twitter, of PR-fueled launches, all the tech and VC blogs and chatter, at the end of the day, the Valley Gods only respect the following four (4) attributes:
- Pure, Raw Technical Achievement: When the Lytro camera was announced a few years back, everyone stopped to learn more. Incubated at Stanford for years, the creators of Lytro made a significant breakthrough to allow cameras to capture the entire light field and enable post-capture focusing. Given how important digital images have been to the consumer startup culture here, a technical advancement like Lytro instantly captures the attention and respect of the Valley.
- Deep, Proven Industry Pedigree: Look at someone like Brett Taylor. In 10 years, he helped co-create Google Maps, co-founded FriendFeed (where he also created Tornado), and was acquired by Facebook where he was their most recent CTO. Now he’s starting his next company and you can bet every single investor was competing like crazy to get a chance to work with someone who had created so many products that touched so many people.
- Quality and Sustainability of Profit Margin: There’s a Series A “Crunch,” yes, but what is less discussed is that those startups who do make it into Series A have their work cut out for them to get to Series B, which is really about revenue. But, the way PR works on the tech blogs, we rarely talk about what Bill Gurley refers to as the “quality“ of that revenue, such as the difference between gross revenues and net revenues, or margins. Some investors, when negotiating valuation, prefer to model growth based on the net profits, not a run-rate of gross revenue. At the same time, there are other investors and founders who will get excited and pay those prices, but here, it’s simply not good enough to be booking revenue — the revenue itself has to be outstanding in form and shape.
- Rate of User Growth and Adoption: One word to describe this: Pinterest. 99% of people I know well in the Valley don’t use Pinterest at all, but that doesn’t matter one bit. Whether or not people “use” a product in the Valley can create a distorted signal. The news of Pinterest’s latest, massive valuation milestone is circulating and the company is serving so many millions of monthly uniques that they are in the driver’s seat for so many fascinating opportunities down the road. The main reason the Valley respects all of this is because of the growth. Grow or die, and very few products are growing like this.
That’s it. Pick any company over the last five years that has received great attention for a sustained period of time, and they’ll have at least one or more of these attributes. Instagram, Pinterest, Quora, SnapChat, Uber, Airbnb, and so forth. And, the tricky part is that even if a company has one or more of the characteristics, they don’t necessarily persist and last over time. In fact, they can be quite ephemeral. I don’t see many people using Lytro cameras around here (yet?). Maybe this isn’t the best time to leave Facebook and start a new company. Maybe gross receipts are good enough for valuations today, or maybe consumer products hell-bent on growth are only setting themselves to fall short of expectations given the fickle nature of making money from online ads. The truth is we don’t know, and when people don’t know, they tend to speculate or theorize or wax poetic or prognosticate (or pray!), and when it comes to what the Valley Gods truly honor, it all comes down to these four attributes. All else is noise. All the tweets are noise. All the VC blogs and tech blogger hype and banter is noise. This blog is noise. For companies and/or people that become truly great, the formula above must be met. Period.