In February of 2008, I became the CEO of MenuPages. On the surface, MenuPages was not an obvious choice. I thought it was a food delivery service with a Web 1.0 website and only a couple of million visitors a month. When I peeled back the onion at MenuPages I discovered some amazing things about the company and its founder Greg Barton. Specifically I learned, that they owned the market for maintaining the country’s menus online and that they had a defensible, scalable business model. There were a number of reasons I thought the MenuPages assets were under-leveraged, but I took the job because they had competitive advantage in a big market and could be a big company. Period.
Before we could even start the process of building out the company, New York Magazine swooped in and bought MenuPages. Nice event for shareholders, but I certainly think more value could have been created with more capital. I hope that value accrues to our buyers at New York.
Meanwhile, I return to a startup market that has become obsessed with hitting singles. The IPO Window appears permanently closed due to Sarabanes/Oxley. The financial crisis and waves of consilidation have made it harder to get attractive multiples via the M&A market.
And I have fallen prey to the new thinking. I’m the one who has become obsessed with the Ycombinator efforts to create high IRR, lower absolute returns with great capital efficiency. That’s the original thesis behind forming TechAviv. I have financial projections that estimate a meaningful percentage of its exits from companies that sell for less than $20mm. But intellectually, exiting with singles has become a kind of conventional wisdom. At best, it removes some of the romantic obsession with scale that comes with developing revolutionary ideas. At worst, it’s not a good way to invest early stage capital.
All of this is relevant, because I’m currently spending time with a company (let’s call it Eureka) that has massive, massive potential, but has struggled to articulate and execute the right strategy. Eureka has suffered from numerous direction changes and a variety of other problems. Yet they are working on an idea that could create enormous revenues. I’ve been asked to join several companies that could have huge size, but I don’t see how they have a huge and defensible business model like MenuPages or Eureka.
I’m not a professional investor, but it seems to me you should think less about whether a certain investment will return “10x” ( a commonly head multiple in the VC world) and more about whether this company will fundamentally change the world in which we live. Are you an incrementalist or a revolutionary? If you are both what’s the right balance in your portfolio? Eureka is a connudrum for investors. Do they take the opportunity to invest inexpensvely with a chance to own a big piece of something that could be huge or should they pass because they can’t check all of the boxes for a typical investment?
Filed under: early stage |