During the first tech bubble, I was going to retire by 30. I had stock options in a successful startup, a great career, and new opportunities seemed to be popping up every day. I knew a lot of people in the same boat. The potential of dotcom businesses seemed endless, and you could barely walk a block without tripping over a wheelbarrow of venture capital.
But then came the crash of 2000. Businesses that had been making headlines as game-changers, industry disruptors, revolutionaries, and visionaries, suddenly exploded. Even household tech companies we know today, like Amazon (AMZN), saw shares drop from $107 to $7. Cisco’s (CSCO) stock dropped by 86%.
Today, whenever a new startup surpasses a $1 billion valuation, it’s hard not to think back to what fundamentally went wrong during the first tech bubble. And it’s hard not to wonder if—or when—things could go wrong again. Of course, this era of tech is different than the bubble of 2000, as venture capitalist Marc Andreessen has pointed out. He’s gone as far as saying that there is no bubble.
I agree. While these things come and go in cycles (and I’ve lived through two of them), the landscape this time around is much different. Billions of people around the world use the Internet. Entire digital ecosystems have come to life across mobile devices and changed the way we live our day-to-day lives.
What really throws people off today are the sky-high price tags of some valuations. Right now, more than 100 startups are valued over $1 billion. Some are warranted. Uber, Airbnb, and Spotify, for example, are all fundamentally changing markets. But sometimes, both investors and companies alike buy into a hype cycle that can inflate the valuation beyond what’s realistic.
The challenge now is to make sure that the hype of the valuation doesn’t completely outpace the business model. That’s how you can build long-lasting, innovative companies.
Hunting for unicorns
The word “unicorn” is often used to describe any startup that reaches a valuation of over $1 billion. No matter what service or product the business provides, a valuation that gets that high often invites skepticism.
But it’s important to keep in mind that there are some big winners. When Facebook (FB) first went public, there was a lot of skepticism about whether the magic would last. The IPO was one of the biggest in tech history, with a market capitalization that reached $104 billion. But, after going public at a share price of $38.23, the company’s shares are worth more than $90 apiece. Analysts have raised Facebook’s stock target to $120.
So unicorns—and dreams—do come true. It just isn’t easy. Venture capitalist Fred Wilson says that the expected batting average for early-stage investors breaks down to “1/3, 1/3, 1/3.” That means one out of three investments gets totally lost, one out of three returns the investment, and one out of three provides the bulk of the return.
Given that reality, it’s understandable that investors try to hunt down the big unicorns with big valuations. That’s also part of the reason why valuations start to spiral out of control as investors and attention follow “hot” companies. If you’re raising valuation based on hype instead of a true business model, that’s when it can spell trouble for investors, employees, and customers alike.
Growing between hype and high valuation
Every startup that depends on venture capital to stay in business is at the whim of the market. And the market is notoriously unpredictable, especially when it comes to the tech industry. New competitors can emerge literally overnight, or a new device or app can render your startup more or less obsolete.
If a valuation is based on hype, that’s when the music stops. Once the hype dies, the business has to stand on its own two feet.
That’s why, at Bitly, we don’t chase unicorns. Instead, we’ve focused on creating value and a sustainable growing business, with the belief that good things, including increased valuation for our shareholders will follow. It’s worked. We’ve built a loyal customer base ranging from artists and entrepreneurs to enterprise marketers and agencies. And our customers have helped us add immeasurable value to the business. We’ve doubled growth year over year and, at the same time, reached profitability as of this year.
That commitment to value and sustainability has put us in a good position. We can recruit the top talent we need and innovate on our product offerings without constantly looking over our shoulder worrying about things out of our control. At the same time, we can keep focusing on growing our business at a fast pace as we keep scaling.
Our investors and employees alike know that we’re building our business for long-term success, not just short-term gains. The same goes for our employees: Everyone knows that they’re going to have a job, regardless of whether we raise more money or not.
And, when you’re not always worried about funding, you can focus on what really matters: building a great product and providing an unforgettable customer experience.
Mark Josephson has been CEO of Bitly since July, 2013. He was previously CEO of Outside.in, a hyperlocal media company that was acquired by AOL in 2011 and merged with Patch.com, where he then served as a senior vice president. Prior to that, Mark was president of Internet marketer Seevast, and before that, he was general manager and executive vice president of About.com.