Everyday, it seems, a new startup (that I’ve never heard of) has raised money for a service I did not know existed. Some startups are doing great things. KissMetrics and Moz are services I have personally use that profoundly shape the way we are able to understand our customers. Coincidentally, they both raised large amounts of money last year. To them, tip of the hat. They have an awesome scalable business, their teams are headed by intelligent people and their product timing was just right. And then there are other startups that I can’t for the life of me fathom their intrinsic worth. What alarms me is that these startups are able to raise money AND/or get acquired.
First, some startups that are getting funded/acquired, make no money – frankly they’re not building anything worth using let alone owning. Second, how are the valuations for these startups being determined and justified. Third, how your company might be hurting as a result. Those are very broad generalizations and moot questions, so let me explain.
These Companies Make No Money
As long as I can remember I’ve been a motoring enthusiast – Bavarians know how to build cars. Naturally, I was fully aware when Audi purchased Ducati for $1.16BB.  Ducati, a formerly-Italian owned motorcycle company is famous for building super bikes. Their bikes are considered the Lamborghini of the crotch rocket world. These bikes are not only known for their beauty but also for their power, acceleration, handling and safety. Over the years Ducati’s motoring accomplishments in the cycling world have been unmatched. 
In 2011, Ducati sold around 42,000 motorcycles and generated revenue of some €480MM, employing around 1,100 people.  Here’s the problem.
I use Instagram. I like the novelty of what it does. But when it was launched, I could not understand how it was ever going to make money. Henry Ford said, “A business that makes nothing but money is a poor business,” but I wonder what he would say about a business that makes no money and gets acquired for an astronomical amount. Even by the current Silicon Valley bubble standards the Instagram purchase was an eye-popper.  Instagram had a revenue of $0 when it sold to Facebook. I understand the reasoning why Facebook needed/wanted to acquire it, but is the amount Facebook paid, justified? So, how is it that Audi is able to buy a company that generates €480MM (roughly $656MM) selling 42,000 units for $1.16BB and Facebook spends the same amount on a company that monitizes nothing? Is Instagram that good? Is Audi that much better at negotiating? Or are we asking the wrong questions? Maybe it’s our market value for products.
How Are the Valuations Determined and Justified
Soccer holds my heart, namely the Brazilian national team and Real Madrid C.F. from the Spanish La Liga. I’ll use Real Madrid to emphasize my first point. I grew up in the Netherlands and football was my life – And I’m known to kick it like the captain of a soccer team. Real-Madrid entertains billions of people every year. To date, they have developed and retained some of the best football talent in the world. They have made millionaires out of thousands of players, coaches, owners, investors, etc. Amid the world’s most popular sport (there is no argument for this), in popularity, Real Madrid ranks at least in the top 5 teams.
Domestically, Real Madrid has won a record 32 La Liga titles, 18 Copas del Rey, 9 Supercopas de España, 1 Copa Eva Duarte and 1 Copa de la Liga. Internationally it has won a record nine European Cup/UEFA Champions League titles and a joint record three Intercontinental Cups, as well as two UEFA Cups, and one UEFA Super Cup. 
In 2013 Forbes estimated their net worth at is a mere $3.3BB. Here’s the problem.
Snapchat was apparently being courted by Mark Zuckerberg himself. Facebook reportedly offered Snapchat $3BB, and Google countered the offer at $4BB.  Granted, nothing has been confirmed by Snapchat, Facebook or Google. All this could be an amazing PR campaign for Snapchat’s next fund round. And to be fair, there are strategic business cases that can be made for Facebook and Google to vie for Snapchat’s users, IP, trademarks, patents, technology stack, talent, etc. But for one moment compare the accomplishments, history, influence, future viability of a Snapchat to that of Real Madrid. Ought we, as business community, place higher value on Snapchat than Real Madrid?
How Your Company May Be Hurt As a Result of All This
Over the last 4 years we’ve been quietly and **sustainably** rebuilding our company. The sustainable part is hard! Sustainability is at the top of our list of must-have’s when prioritizing projects. This is hard to achieve. It’s even harder to run a competitive business with slim margins and no outside funding in a shitty economy while maintaining margins (and integrity).
@randfish It’s all good. Agree sustainable growth is what matters. Few know as much about it as you. Thanks for sharing tips!
— Sean Ellis (@SeanEllis) January 28, 2014
During the same time, sales have grown year-over-year. We have strategically added incredible people to key positions. We have introduced new products and new sites. We are successfully maintaining a [paid] mentorship program to benefit local college students. We have designed and built beautiful offices for our employees to enjoy. We have indulged in highs and lows of a small, scrappy startup. Never-the-less, we have not really made a fuss over this. No major PR pushes. No major outreaches. We have not touted ourselves or yelled from the mountain tops about our feats. Perhaps because our accomplishments are not worthy, or perhaps because we are building for the long term and not drinking from the alluring vanity-metrics-well. Or as Muhammad Saleem puts it, we are not building an exit strategy.
Great call with @OmarSayyed. Love talking with people focused on building businesses rather than exit strategies.
— Muhammad Saleem (@msaleem) January 21, 2014
I suspect, there are many companies like ours out there – yours included. Here’s the problem.
If we change the units of measurement by which we judge companies to be objective, constant, and relevant then some companies may NOT be worth their sticker price. Those companies while good, are not great. The variables by which we measure their success then become an entrance criteria and not an excellence criteria. As a business community, if we’re not honest and open in that vanity metrics is a poor indicator for creating a viable business, then we’ll always have a Snapchat that will be valued higher than Real Madrid.
Focusing on how many Facebook likes you’re getting or other arbitrary metrics is misleading. As an investor, why do I care how many followers you have for your e-commerce site, especially if that growth has been fueled by paid campaign and NOT organic? As a business person, why should your company hit the front page of every major blog or new site for building nothing of real value?
That’s why your company is better than Instagram and Snapchat.