I was recently speaking to a class at a local university and the topic of valuations came up. One student asked me what our valuation was. I gave her the honest answer: I haven’t a clue.
How is it possible that a successful software company today doesn’t know its worth? A valuation is what other people think your business is worth. I’ve only ever been interested in what our company is worth to us.
Startups these days are bantered about as if they were in a fantasy football bracket. Did you hear Lyft raised another $150 million at a $2.5 billion valuation? But Uber got tossed another $2.8 billion at a $41.2 billion valuation! Then there are the companies barely off the ground getting VC backing with 25x valuations, despite having no product or business model.
Entrepreneurs by nature are competitive. But fundraising has become the sport in place of the nuts and bolts of building a sustainable business.
The last time I considered Basecamp’s valuation was nearly a decade ago. We’d been approached by dozens of VC firms looking to invest. But with a solid product, a growing consumer base, and increasing profitability, we didn’t entertain any offers.
Then, in 2006, I got an email from Jeff Bezos’s personal assistant. Jeff wanted to meet. I’d long admired him for what he was building at Amazon, and how he generally sees the world. I took the meeting.
After a visit to Seattle and a few more calls, Jeff bought a small piece of our company. I didn’t take the cash out of some fantastical desire to turn Basecamp into a rocket ship. Instead, his purchasing shares from me and my co-founder took a little risk off the table and gave us direct access to the brain of one of today’s greatest living entrepreneurs.
In the years since, we’ve been approached by nearly 100 private investors, VCs, and private equity firms. They want to put money into our company, but we don’t want it. It’s not hubris; it’s the cost that comes with the cash. I want to deliver a product that our customers want, not one that our investors want. I want to grow our company according to our timetable, not one dictated by a board. For many startups, funding has worked to their detriment — unnecessarily raised stakes, a path to unnaturally rapid growth. Venture capital is not free money.
Years ago, during the investment discussion with Jeff, we had to place a financial value on our company. The process of constructing a valuation was pretty silly, to be honest. We drew up charts, made some educated guesses, negotiated back and forth, and ultimately came up with a figure. We made it up, as everyone does. Let’s just admit it right now: Financial projections are big, fat guesses. They are best-case scenarios. Since they’re hypothetical, why not pull a number out of a hat?
Jeff knows this. All investors know this. Yes, you can look at revenue and profit and multiples, but so many tech company projections these days aren’t based on anything real. They’re based on fantasy. And too often, the more profit you have, the lower your valuation is. Because nothing pops the valuation bubble like reality.
My not knowing how much our company is worth doesn’t affect our business on a daily basis. I know our revenue and our profit. I know how fast we respond to customer service inquiries and how many people signed up for Basecamp last week. Those are real numbers to me. A valuation is an invented number that ebbs and flows on the basis of how much someone else thinks you’re worth. It’s nothing more than a distraction.
