Howard Lindzon recently spoke at the Startup Empire event about why it’s not a good time to start a company. Thankfully and importantly, his presentation was very practical in nature, answering specific questions that many startup entrepreneurs should be asking right now.
Howard touched on three things that are critical:
During Howard’s presentation I asked him to tell the audience what pre-money valuations he’s seeing in the market for early stage startups. Howard is an active angel investor. He answered, “Between $1.5M and $3M.” I think we’ll see a lot of $1M pre-money valuations as well, which might depress a lot of entrepreneurs. Go to raise $500,000 and your company is only worth $1,000,000. Post-money is $1.5M so for $500k you’ve given up 33% just like that. But it’s a reality people need to understand.
Lower startup valuations are not all bad.
It just means you need to get traction faster and show more success faster. It means you can’t raise as much money and need to stretch your dollars effectively. It also leaves open the opportunity for quicker exits. Imagine, for example, if you raise money with a post-money valuation of $20M. Exiting at $30M or $40M won’t be considered a huge win. But if you have a post-money valuation of $3M-$5M then an exit at $30-$40M is still quite a good return, especially if it’s done fairly quickly.
Howard said that early startups with a business model based on freemium, advertising or eyeballs will be in serious trouble (raising capital.) I’m a big fan of the freemium model, but I’ve never been a fan of the eyeballs / advertising model. The call to action for startups and investors today is definitely around revenue.
Howard suggested that you might have to shelve your current ideas if the timing is really not right. It might not be a fault of the idea, but timing is critical.
Don Dodge, who also spoke at the event, reiterated Howard’s points about using advertising and eyeballs as a business model. He recommended that you figure out the amount of traffic and CPM rates you need to make $1,000,000/month. Even $1M / month is a small business, but the data is shocking. CPM rates are dropping (and they’re impossibly low on social networks), and traffic is being scattered to more and more sites. Advertising is a very hard model to scale.
This was Howard’s most important point. He spent a good chunk of time talking about the importance of social leverage. I’ve never seen anyone speak about it properly. Essentially, Howard’s talking about being strategic in your social networking efforts and use of social media tools (like Twitter, etc.) Building connections online – real connections – and being able to leverage those connections is critical for any startup entrepreneur. I couldn’t agree more.
Too few people really use social media and social networking strategically. They “just do it.” That might be good to get started, but if you don’t have a goal in mind, a focus, a strategy, you’ll just “be doing it” and getting nowhere. The people that complain about the time-suck of social media and social networking are those that aren’t using it strategically. So kudos to Howard for focusing on social leverage.
Networking is critical for startups. In-person is essential, but you can get a lot of traction online as well. Hubspot has a Twitter account with 1,800+ followers. I’m not quite there with our Standout Jobs Twitter account, but we’re getting there!
As a final note, here’s a more extensive write-up on Howard’s presentation.