Pando

Reality check: Gigaom wasn't a unicorn. We're not a unicorn. And likely, you aren't either

By Sarah Lacy , written on March 11, 2015

From The News Desk

Our most read story on the site yesterday was about the jawdroppingly ballsy terms that Snapchat CEO Evan Spiegel is proposing for his latest funding round, rumored to be in the $19 billion valuation range.

While it may be a new extreme in the frothy private funding market  -- offering just common stock with no downside protections-- it's really just an escalation of the recent deca-unicorn insanity.

As Slack's Stewart Butterfield described at our PandoMonthly, $1 billion valuations are totally arbitrary if you don't know the rest of the terms. But what they're great at is getting reporters lathered up comparing companies to mythical animals. It's a good way for a startup to get outsized press and to telegraph traction. In a war for talent and attention, that's meaningful. And it works every time.

But, hype aside, not every company is getting a $1 billion valuation these days. Those are the exceptions. You, me, and most of the other non-unicorn entrepreneurs you know are the rule, not the exception. Anyone working at a startup would do well to read two posts making the rounds: One by Danny Sullivan and the other by Josh Kopelman. (Disclosure: Kopelman is a personal investor in Pando.)

Danny Sullivan was writing in response to the sad news that Gigaom has shut its doors-- just a year after raising some $8 million. Tech reporters have been trying to wrap their heads around the news -- and the math -- for two days and details on what happened are still sketchy. In lieu of details, many have speculated this may be the beginning of a bigger content shake out.

Sullivan takes issue with that, pointing out that many vertical, niche publications are thriving for the opposite reason that Gigaom appears to have stumbled: They bootstrapped and focused on revenues.

From his piece:

Third Door Media has taken this SimCity natural approach, over the years. Our growth has continued. Two years ago, we were even able to take money out to return to some of our early employees, who have shares in the company. We’ve made the Inc. 5000 list four times in a row. We’ve done three hires this year and have several others planned, bringing our overall staff to nearly 50 people. This will all be funded by our own revenues, not because we had VC money pouring in. We also have a solid cash balance in the bank because our CEO Chris Elwell is dead serious (and right) on being conservative and being prepared.

I say these things not as a brag or a humblebrag but because, I suppose, it can be frustrating running a successful vertical and knowing what your company is doingand other companies like it— simply isn’t recognized. That’s not inspiring for newcomers. It also doesn’t reflect the overall publishing world.

He quotes Jonah Peretti-- whose Buzzfeed has raised nearly $100 million in capital-- pretty much agreeing with him about when to raise capital and when not to:

If you’re a budding entrepreneur who wants to start a business, depending on the idea and depending on your temperament, it might be great for you to take VC money, or it might be terrible for you to take VC money. It just depends.

And yet, it's far too easy to say say venture capital killed Gigaom. What seems to have killed Gigaom is too much venture capital with apparently no plan to build a profitable business. Poor senior management seems to have killed Gigaom. Not having a CEO for eight months seems to have killed Gigaom. Leaving itself vulnerable to lenders who could call in more debt than it could repay seems to have killed Gigaom.

Put another way: It's important to know what game you are playing, and the answer is not necessarily about funding vs bootstrapping.

I've argued before that the collective $1 billion that content companies have raised in the last year is encouraging too many new media companies to scary burn rates without considering how to make enough to support those companies. That approach makes sense for Peretti, and even Vox's Jim Bankoff. It certainly wasn't the right approach for Pando. Sure, we needed some seed funding to pay salaries while we were building something to sell. But now, we are laser-focused on getting profitable and in control of our own destiny first; growing steadily as we go. (Also have you seen what we write about many venture backed companies? We're increasingly radioactive to the venture community -- Even to our own existing investors.)

Last year we cut our burn rate dramatically, and as CEO I spend a lot of time focussing on building our business while Paul Carr runs the editorial side of the house. We had several profitable months in the second half of last year and we're already profitable for this quarter (with still a lot of the quarter left to go).

We're in good shape, but we're not out of the woods. Raising only a relatively modest amount of venture capital (around $4m over three years vs GigaOm's $20m+ and Business Insider's $55.6m) means we have a thin cash cushion so have to keep hustling until we have a full profitable year. We can still fuck it up. I can still fuck it up. But I'll put it this way: We started 2014 way, way more dysfunctional on the business side of the house, and if we merely equal last year's revenues we'll be profitable in 2015. Our run rate is way ahead of that.

To put this in perspective: We don't have the traffic that GigaOm had, we don't maximize social or page views like other media companies. We don't have a paywall. We are just over three years old. And no one on our team has ever run a successful business before. Journalism isn't forever broken. You can do this. But, as Sullivan says, you have to have a plan beyond amassing capital and figuring it out later. You have to prepare for the worst.

I still want to build a large company, and I believe we will. I just don't have a clock on that. I don't need to do it in three to five years because I don't have a flip in mind here. We have our own playbook that matches our business goals and our mission.

That said, I'm not one of those haters on mega-new media companies like Vox and Buzzfeed. I think we need both mega pubs and focused, deep pubs as we remake a media landscape that's still dominated by hundred year old giants. But --as Peretti and Sullivan says-- way too many people get seduced by venture funding and the "go big fast!" mentality of the Valley, particularly in an insanely frothy period like the one we are in. That approach isn't right for every business or every founder.

But while Gigaom's surprising collapse seems to be mostly about problems at Gigaom, it also shows something important: A rising tide doesn't raise all boats. This is the frothiest I've ever seen the funding market around content. The tide isn't gonna get much higher for us. And to boot: Gigaom founder Om Malik is even a partner at True Ventures and is as widely respected as it's possible to be in the Valley.

Gigaom isn't alone in struggling amid frothy times.

Josh Kopelman has an equally sobering piece that could have been written a year ago. He writes about how a crush of seed companies are going to have a rude awakening when they go to raise their series A. We've heard it before: Seed deals are up some four times normal rates, but there aren't more Series As getting done. That can't help but create a game of startup musical chairs.

What's interesting about Kopelman's post is the rude awakening he describes when companies who shrugged and raised a seed round feel assaulted with questions going in to raise their As. The ease of a seed round sets false expectations for what "real" fundraising is like. New founders cannot read this post enough, because most tech pubs are not realistically setting their expectations.

From his post:

I recently worked with a team of talented, young founders who had raised their Series Seed financing without breaking a sweat. They had their choice of investors (I’m thankful they chose us) and their seed round was oversubscribed by 2x. They set out to raise their Series A round six months later — and they were in for a rude awakening. They ended up raising money, but not as much as they hoped for, it was much much harder than they expected and took months to cross the finish line. In the CEO's words, “Our seed round was super fast and hyper-competitive, and then we went into the A and started getting interrogated about our data. It was like graduating from elementary school straight into college.”

I advise everyone to raise more than they think they need in a seed-- and Kopelman makes the same suggestion. It's advice that Marc Andreessen (Disclosure: A Pando investor) gave me when I was raising my seed round three years ago. Michael Arrington told me the opposite. If I hadn't listened to Marc, Pando would have gone under. We just wouldn't have had enough time. Trust me: Take advantage of the fact that seeds are easy right now. Unless you are Snapchat or Uber, no other round will ever be.

I'm concerned that the press' endless talk of ever escalating valuations has set a false sense of security that money is free and easy in the Valley. There are only two places where that's the case: At the seed level and if you are one of a handful of breakout hits in the thousands of companies funded every year. Remember: Y Combinator companies frequently get term sheets the second they walk off the demo stage. But even with some single digit unicorns like Stripe and Instacart in the mix, the portfolio is still dominated by two companies: Dropbox and Airbnb.

Everyone else is in the middle: Thousands of companies are still going to be mired in a brutal struggle for dollars, relevance, audience and -- even in this era -- hype. No matter how many unicorns are on covers of magazines, this shit is just not easy.

[illustration by Brad Jonas]