Technology media is very similar to fashion media. There’s a lot of hype, there’s a lot of noise and everybody follows whatever trends the media dictates. The “hot” startups set the trends, in the same way the “hot” labels dictate what we’re all gonna wear next year. The big difference is that deciding to start a daily-deal site because Groupon is the fastest growing company ever has much bigger implications than, say, deciding to wear pink.
Twelve months ago, Groupon was the sexiest thing in tech media. Analysts loved it, the media loved it, we all loved it. Six months ago, it was Facebook. Soon, it’s gonna be Square. And so on. Investors jump on these stocks at crazy revenue multiples, startup founders follow the trends and start companies in the sector hoping for the same crazy multiples, and the media praises them all. They’re all geniuses and billionaires before they’re 30. It’s a SoLoMo world, after all. And then – the stocks don’t perform. Or better yet, they don’t perform at the crazy revenue multiples everybody was hoping. Which, by the way, is normal. No matter how sexy you are, it’s crazy to trade your stock at 15x revenue multiple. Even Apple, one of the most important companies of our time is trading at a mere 4.5x revenue multiple.
But the biggest implication of all this hype is much more painful than meets the eye. When sexy stocks fail to meet expectations, it’s relatively ok for them. They have enough cash to figure it out. But when the stock starts getting shorted and the media starts bashing the company, investors stop putting money in that industry. Which means that all the startups hoping to ride the wave and get crazy multiples in that space will find it much more difficult to raise money, so they run out of cash. Of course, this doesn’t mean that startups shouldn’t ride trends. They totally should. But they should also raise money at reasonable valuations, raise just enough to reach the next milestone rather than as much as they can, and make sure they focus on the fundamentals: product, revenue and margin. Everything else is hype.
It’s very easy to give up a pair of shoes because it’s been 12 months and they’re out of style. It’s much more difficult to shut down a company because you bought into the hype and didn’t think about the fundamentals.