Billion Dollar Startup Club: Separating Winners From The Losers

The Billion Dollar Startup Club

It’s pretty easy to predict which companies will succeed and which will fail. For example, it was obvious – a startup once valued at a billion dollars in early 2013, only to recently liquidated for $15 million in a fire sale – would fail. They sold physical goods, which tend to have much lower margins than digital products, and they advertised heavily on Facebook, the later which is very expensive and could not have possibly generated a positive ROI. I saw the Facebook adds constantly in 2013, and I knew with each click they were bleeding cash that they had little likelihood of ever recovering. Now look at the biggest successes like Tesla, Uber, Snapchat, and Dropbox…how much advertising have they spent on Facebook? Zero. Groupon advertised heavily on Facebook to build its initial email list, only to crash and burn shortly after the IPO. Groupon is still worth north of $4 billion, but but only a shadow of its former hype and valuation.

So once you eliminate all the companies that deal with physical goods and or advertise heavily, you are left with a much smaller pool of companies, and these are the mostly likely to not only retain their lofty valuations, but become even more valuable. Past examples include Twitter, Instagram, and Facebook, none of which which advertise nor deal with physical products.

Ubiquity is major factor. Imagine if the company suddenly ceased to exist; would there be a major disruption or would a similar company/service simply fill the void? As popular as Jawbone or Spotify (both on the list) are, they don’t provide an irreplaceable service. There are dozens of companies that do what they do, and if Spotify went away a another music streaming company, such as Pandora, would fill the void. Some people would be irked, but it’s not the end of the world. There is nothing unique about streaming music or wearable fitness devices, and the margins tend to be thin due to the commoditization of the industry. Apple is a notable exception, but the odds of a hardware company inventing something as revolutionary as the iPhone are slim. Usually what happens is the fad dies down, inventories built, losses accrue, and the valuation plunges. Tesla is another example a company that while it sells physical goods, like Apple, it caters to a high-end demographic, and there is no obvious replacement to fill that niche should Tesla hypothetically vanish. That’s why Ford and GM’s electric cars are a non-issue for Tesla because the people who buy Tesla are buying it for the superior performance and as a status symbol, not affordability.

‘Unlocked potential’ is another criteria. If a company is only growing slowly but is barely profitable, where is the incentive to invest? I would rasher invest in a company that is voluntary delaying revenue generation in exchange for user growth, such as Snapchat or Pinterest, than a company that is trying to squeeze every last dime out of a stagnant user base.

based on my criteria Jawbone, Skullcandy, and Fitbit will be on the chopping block.