Silicon Valley Review S3, Ep4: Valuations Compared to Competitors
May 24, 2016 | By Kevin Vela
I’d like to discuss two completely unrelated topics from Episode 4 of Season 3 of Silicon Valley. The first was glossed over, and the second was the crux of the episode, but both equally important for startups.
1) Design is about input, not output
The scene where the product designer wants to run Richard through a kumbaya exercise to set the stage for the design of the “box” is a classic example of the difference between a creative and a technician. In Richard’s mind, a box is just a “box” (which reminds me of the time my 12-year-old sister told my mom, “A mom is just a mom.” This still cuts deep around the holidays). But to the product designer, designing the box is a process and his job. There are meetings, and steps, and deliverables.
2) Just because a company who you compare yourself to is worth $X does not mean you are worth the same
In this week’s episode, Richard and his team’s dream for Pied Piper is to build out a full platform, instead of just a data storage box. Richard’s conflict with Jack peaks when Hooli acquires Endframe for $250M. In the episode, this solidifies the long-term value of Pied Piper as a middle-out compression platform, and the VC fires Jack Barker in hope of achieving a similar value by pursuing the full platform.
This is something I see all the time with founders: “We do X better than ACME Co., so we should be valued at the same or more.” This may hold true if you’re part of the Paypal Mafia, and the comparison is limited to a few select companies (i.e. Box.net and Dropbox), but unless you’re in a truly innovative and disruptive space with few competitors, you shouldn’t be tying yourself to recent acquisitions or investment valuations, purely on the fact that the acquisition or investment happened.
In all reality, you are going to be judged against ACME Co.’s traction, user base, revenues, and a host of other metrics. This is especially true in the North Texas startup scene where valuations are much more closely tied to fundamentals then they are to market potential and founder resumes. So tread lightly when you compare your company to the alphas in your space. This is not to say that it isn’t a data point, but just that it’s not the only one.