“A concept known as the ‘Founder’s Dilemma’ reveals the importance of making some hard choices before even approaching VCs for investment. As startups grow, entrepreneurs face a dilemma. On the one hand, they must raise resources to grow their business. If they choose the right investors, they can outperform.

In fact, HBS research shows that founders who gives up more equity to attract good people and investors, build a more valuable company than ones who part with less equity. The founder ends up with a more valuable slice, too.

On the other hand, in order to attract investors and executives, founders must give up a degree of control over decision-making as a quid pro quo.”

Chris Corbishley

Have you noticed ?

This is the only male blog in the world where we incorporate music and or playlists into the posts.

There are a lot a cautionary red flags for you VCs and investors, and as I’ve been saying for some time: there’s a lot of them like that.

How many red flags ? Too many…

“The founders openly favored signing up the most physically attractive designers, saying they would be more appealing to clients.”

Courtney Rubin

“What had more important ramifications for the company’s future was Santos’ singular focus on press, with nearly all profits — at least in the early days — going to marketing.

CR

Yep…”design for all ethos.“

How “secretly” they get…

“Several months after the [VC] funding, Santos also stopped sharing details about the company’s health. According to five former employees, stats like how many hours were sold and how many designers they had signed up had been shared at weekly all-hands meetings. (In one of the company’s early offices, they had even been written on the wall, near the company’s core values: “Be the Solution,” “Dream Smart,” and “Keep It Fun.”) But according to ex-employees, this stopped suddenly in 2016, and the all-hands meetings themselves became much less frequent. “Everything got a lot more secretive,” says one ex-employee.

CR

Sure, seniority counts…backwards.

“Soon, not a single staffer from the early days remained.

…By employee estimates, 75% of the leadership team that started in 2018 didn’t end 2018 with the company.”

CR

Nothing wrong with laying off staff while you’re living large…

“On June 21, Santos — sitting alone under a crystal-accented chandelier in the office — put three-quarters of the company on what was supposed to be temporary unpaid leave, maybe two weeks, he said, according to former employees who were there at the time. (The other quarter of the company stayed on for minimum wage.)

By July 22 [2019], most employees had gone a full month without pay — meanwhile, Santos’ husband Instagrammed a photo: A six-bedroom, $1.6 million home the couple had just bought in East Hampton, complete with two ponds, a tennis court, and a Jacuzzi.”

CR

“Design for a client’s workspace,” [Santos] wrote, adding that he always did his best thinking in nature. “For all my obsessive planning, preparing and orchestrating, life unfolds as it will,” he wrote. “Almost entirely out of my control.”

CR

WWID ? What Will the fleeced Investors Do ? That money ain’t coming back…

The academic world took the lead at it

Those hyper valuations appear more hype than science, in fact as Professor Ilya Strebulaev of Stanford Graduate School remarked at SVOD, fair market values may be 33 to 70% lower than the advertised (purported) post money valuation unicorns love to taut.

The San Francisco Chronicle already in May 2015 first wrote about those +1Bn valued companies, citing a Fenwick & West study:

• in May 2015, 35% of the companies Fenwick &West analyzed had valuations in the $1-1.1 billion dollar range,
• in the 4th quarter of 2015, 50% of the unicorns were in $1-1.1 Bn range

, indicating that the companies may have negotiated specifically to attain the unicorn level.

It’s Barbarians at the Gates with these rhinos.

That study also found investors were given 100% protection for subsequent down rounds if acquired, while only 30%  were protected for post-IPO down rounds. Thus it can be reasonably inferred the unicorns were lowering investors protections for going public scenarios, knowing they could easily go public at lower valuations, given their unrealistic valuations.

Next, Prof. A. Damodaran of NYU Stern School analyzed Uber’s considerable cash burn. You can’t burn through cash forever.

“The cash flows stay negative over the next ten years. In this [malignant] scenario, it is very unlikely that Uber will make it to year 10 or even year 5, as capital providers will balk at feeding the cash burn machine?” Well, Uber has made it through Year 7, and burned through at least $1.2 Bn the first part of 2016

After discounting the PV of negative cash flows (dilution effect) today, Prof. Damodaran finds the value of Uber’s operating assets to be $21 Bn (assuming Uber has a zero chance of failing).
Prof. Damodran re-valued Uber from last year at $28 Bn which takes into account Uber’s 20% ownership in the Chinese ride-sharing giant Didi. A long way to go to $62.5 Bn (Uber latest valuation raise, Dec. 2015)

Understanding its limited options, Uber wants to eliminate drivers and eventually replace them with self-driving cars. Is Uber a ride-sharing (logistics) company ?  A software company ?  What multiple does an investment bank (i.e. Goldman Sachs) use to value Uber, which is clearly a hybrid logistics company ? I’ll answer that next.