Unicorns Are Awesome, Unless You Pick the Wrong One!
I keep reading in the trades about valuations and the notion that the market has too many unicorns. That is, start-ups that have $1B plus valuations with little to no revenue. This includes companies like SnapChat, Pinterest and others who have raised massive amounts of equity financing solely on the basis of user growth and potential revenue.
The funny thing about unicorns is that they all sound great. Huge executive teams, massive user growth, tons of cash and what appears from the outside to be a bullet proof plan on how to execute. In some cases this adds up to massive success like with Facebook, Tumblr and others. However, in many instances it equates to massive failure. Determining which bucket your unicorn falls into is the hard part.
I worked back in the day at what was by many accounts a unicorn, a company called Ning. They had a great executive team, a rock star in Marc Andreessen, huge user growth (at least that is the story they told) and had raised tons of cash. If I recall correctly the last round raised at a $750M valuation put us at $150M into the business.
I don't think anyone would argue that the idea behind Ning was spot on. The notion of creating your own social network based on things you care about is and was a great idea. However, there were some fundamental problems with that business that simply weren't being addressed. The problems in large part can be blamed for what most would consider a big miss from an exit standpoint. Remember, Ning had a huge advantage over platforms like Tumblr which saw a $1B plus exit when acquired by Yahoo. They had tons of cash, really strong engineering, a strong idea and a massive PR machine behind it. Of course having Marc as chairman also helps.
As head of business development and revenue for the company I had great insight into the opportunity and the challenges. I can also tell you exactly how we missed and how others can learn from our mistakes.
“A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.”
- Wayne Gretzky
This is a quote that I love in the context of business. In the case of Ning, this was really applicable. We had a strong idea but didn't see where the business was going, mobile. We were building product experiences based on a desktop user. Social is fundamentally mobile and when we designed our products and technology we didn't address how we could scale beyond a PC experience.
We certainly tried to pivot and create a new product that could support both but we were so far down our existing path that it would have required a complete overhaul. That was something that unfortunately just wasn't going to happen. We were so singularly focused on people building Ning networks that we didn't focus on what our real job was, building an experience that became a part of peoples daily life.
The fact of that matter was we saw tons of people creating networks but our churn was huge. Reason for that was simple, being a content creator is hard and basically a full time job. Without great content on your social network users will visit once and that is it. This is what has made Facebook so successful is that your content stream is people and things you self select as being important in your life. This can be sports teams, family, friends, business colleagues, publishers or media companies. We put 100% of the responsibility on the individual network creator, that is a burden that was simply too challenging for most to tackle in a scalable and repeatable way.
The second major issue was strategy. We build a product and encouraged celebrities, musicians and other notable personalities to create their own networks. We were very successful in this area. However, what we didn't plan on was how to effectively monetize this technology in a way that would support our business. Our network creators loved it because they out of pocket expense was around $50 per month. A very cool and scalable solution for them but it left us standing in the rain from a monetization perspective.
What we should have done was either competitively price our product just under an enterprise SaaS offering or made it free and control the environment like Facebook. Had we gone the route of charging a fair month service fee we could have scaled the business. Or we could have gone free and actually controlled the environment to monetize via advertising and other premium services. In our case we started with a super cheap subscription model and it was impossible to pivot and convince our large network creators to let us help them monetize or to charge them more. The backlash would have been so big that it just wouldn't have worked. People would have left (which they ultimately did anyway) and used Tumblr, WordPress and Facebook as their solution.
The third major issue we had was oversight. The board was made up of Marc and Gina. In theory this sounds great, if the board members are active in managing the company day to day. In our case Gina was CEO and Marc was Chairman. Its worth noting that Marc is one of the greatest visionaries that I have ever had the pleasure of spending time with. The challenge was he was starting Andreessen Horowitz, raising capital and doing deals was his primary focus. That left the day to day management to Gina. She is also a wicked smart entrepreneur but running a company of our size and with our burn rate requires a skilled operator or a very involved board. We didn't have either of those really necessary ingredients. As a result we hired people at a rate that wasn't sustainable, we had a massive burn rate and largely were operating like a company that was hugely profitable. This is very applicable to the unicorns of today that are spending like drunken sailors. Run your business like its your money. Invest in areas that will help you grow even if its beyond what revenue will support but be diligent in managing how you grow. But hiring simply to hire for a product that has fundamental challenges which haven't been solved for is irresponsible.
The fourth major challenge we had which I have addressed at a high level was monetization. By the time we tried to create a media model it was simply too late. Our large Ning networks which had big traffic and usage were either ad free environments or were controlled by people that weren't interested in sharing the revenue. The free Ning networks we actually could monetize had major challenges with inappropriate content. Needless to say, monetizing these in any way other than remnant AdSense or via other networks was impossible. It proved to be challenging to even monetize that way. We were constantly getting notices from Google and others that they were pulling ads due to the huge volume of UGC that was in violation of their terms of service. You can fill in the blank, P**N.
Finally and I think this is the most important issue we faced was culture. It was a constant battle between the executive team and Gina to pick a plan. She had a vision that she was trying to execute against but was unwilling to relinquish control to other executives who were experts in their fields. As a result we would bring in highly skilled and sought after people to run teams who would get frustrated and quit. A revolving door in terms of talent at a high growth company like Ning equates to death. There was a lack of trust and clarity around what was truly important. This is why for any start-up and particularly a unicorn making great hires and have a cohesive executive team is really, really critical. The setbacks from making poor hiring decisions or people leaving can be huge and in some cases you cant recover.
I look back at my experience with Ning with gratitude. I learned a ton in a very short period of time. I learned a lot about myself, I learned a lot about running a business, decision making and the importance of building a strong culture. While the end result was not what any of us were looking for it was valuable nonetheless. I now take all of these key learning's and apply them everyday to how I manage and run my start-up #HASHOFF. Its a daily grind to stay focused on the big picture while not losing sight of managing cash, strategy, execution and people. However, its a requirement that you be able to do all of these things if you have any hope of being successful.
I wish all the unicorns out there nothing but success. Innovation in our industry changes the world and the way in which consumers connect, share and consume. I love Snapchat, Pinterest and many of the products that are called unicorns today. I am cheering for all of them to be wildly successful. Their success will drive future innovation in our industry for years to come.