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Startup valuations, patent trolls, creators and Americana
[99%Tech] The future of innovation is global. We discuss it here.
Dear readers and friends -
First off, wishing you and yours happy holidays and a lovely new year! This is my last round up of 2021 (or your first of 2022) depending on your timezone. Looking forward to a fruitful year to come.
Topic of the week: valuations
I often get asked what I think about the current state of valuations outside Silicon Valley.
As my readers will know, let me start by saying I am biased towards businesses with real revenue, measurable unit economics and a controlled burn (aka Camels).
But in a world that seemingly only rewards growth, how can startups appropriately be valued?
This raises the topic of the seemingly black ‘art’ of valuation. As the piece argues: “Seed-stage startups — companies that have not yet released a product, regardless of how many rounds they’ve raised — are probably worth less than zero using any rational valuation methodology. The only certainty at this stage is that the startup will keep losing more money until a product is released, at which point it’s possible that revenue may be generated. The chances of going out of business are high.”
The crucial element is that valuations drive alignment. “Investors must be on the same team as the entrepreneurs they fund. And this means that each party needs an opportunity to win and must demonstrate that they believe in common goals.”
Yet, any art can get out of hand. Especially if they reach ‘infinite’ revenue multiples at over billion dollar valuations, as one billion-dollar startup just completed.
Ultimately, one of the things that’s happening is that investors are waking up - seemingly all at once - to the presence of startups outside Silicon Valley. In Africa for instance, there has been an explosion of fundings and unicorns. The challenge is that there is over supply of capital relative to investable opportunities.
But is it a bubble?
Here is piece about the African ecosystem specifically. Its conclusion is where I ultimately come down as well: perhaps valuations are high but the potential is there.
There is “a groundswell of capital to deploy, and investors are finally realizing they have under-invested in Africa. All this foreign capital seeking returns is fueling the next fintech waves emerging in Africa. However, we’re still only seeing well-networked founders from the Big Four geographies (Egypt, Kenya, Nigeria and South Africa) receive funding…This is not a bubble. With population to match India or China, a younger workforce and large underserved segments, Africa has a potential VCs are just now waking up to.”
What do you think?
Everyone is seemingly talking about Web3 and its transformative potential of every industry, everywhere. But where are we today and what is its real potential? Excellent piece on the current state of the industry. “It is a collection of opinions from a pragmatic builder's perspective. It is focused away from economics and the financial mechanisms of the chains themselves. With so much noise and churn, it’s impossible for us to predict where the cards will land. But, in this post, we promise 50% less frothy rhetoric and 100% fewer Ponzi schemes than you’ll find in a typical Web3 tweetstorm.”
Some are calling bubble on crypto. Making this prediction is outside my purview but I thought you’d enjoy this datapoint:
The government has a role to play in catalyzing innovation. In the economy of ideas, the patent office has a role to play to protect property rights to reward efforts in research and development. But this can sometimes also go too far. “Patent trolls are shell companies — frequently backed by hedge funds or other litigation financiers — that buy unused, broad patents and then weaponize them against legitimate American innovators. Patent trolls never intend to use the patents they purchase to produce anything of value. Instead, they exist only to extort judgments and settlements for their investors from companies that do.” This of course was not the initial intent for patents.
What is the future of tech in 2022? Enjoyed this presentation outlining recent trends and future evolutions. Topics covered include web3/crypto, metaverse, and the new unbundling/rebundling.
Diving specifically into future of fintech, fun to do a podcast with American Banker.
In Out-Innovate, I argued that the best entrepreneurs are “Creators”, catalyzing new industries with their work. In emerging markets, many entrepreneurs are such Creators. But, multiple controversies aside, an entrepreneur I respect a lot in the US is Elon Musk. He was Time’s person of the year. “The richest man in the world does not own a house and has recently been selling off his fortune. He tosses satellites into orbit and harnesses the sun; he drives a car he created that uses no gas and barely needs a driver. With a flick of his finger, the stock market soars or swoons. An army of devotees hangs on his every utterance. He dreams of Mars as he bestrides Earth, square-jawed and indomitable.” Do you agree?
An ongoing challenge in tech is diversity, and the diversity of ideas that get funded. Good suggestion for venture capitalists to get closer to the communities they serve, including via proximity to accelerators. “Over the past year, VCs have been quick to commit to diversity, with 40% of firms putting D&I strategies in place. To give those initiatives the best chance of success, VCs need to expose themselves to the communities they want to empower. Accelerators are hubs for diversity. Most have quotas to ensure programs are made up of founders from all backgrounds, many pair with local organizations to support the communities where they’re based and some accelerators are specifically designed for minority founders…When investors spend time at an accelerator, they listen to brainstorming sessions, pitches and mentorship advice that includes a broad range of perspectives and opinions. They hear about the barriers that entrepreneurs from different groups face and learn what tools they need to overcome them. Likewise, they can take inspiration from the teams running accelerators, who are responsible for recruiting diverse founders, creating safe spaces and promoting equality through their programs.”
Earlier this month, I returned from an expedition to Antarctica. The age of explorers to the South Pole was in the 20th century, with storied names like Sir Ernest Shackleton, Roald Amundsen, and Robert Scott. In many ways, Antarctic explorers were entrepreneurs of their day, and their leadership lessons offer us some important wisdom for fintech and entrepreneurial leaders. First among them is Sir Ernest Shackleton, and particularly his experience on the Endurance (his ship). His mission was to reach the South Pole by foot. Spoiler alert: he did not succeed. But his feat remains one of the world’s greatest examples of leadership, perseverance and survival in modern history.
I had a chance to discuss the future of global innovation and financial services with Fintech Silicon Valley. Check it out below.
Book of the month
This month I’m reading the fantastic Americana: A 400-Year History of American Capitalism by Bhu Srinivasan. As the Economist reviews it, Americana is “is a delightful tour through the businesses and industries that turned America into the biggest economy in the world. Not only is the book written in a light and informative style, it is cleverly constructed. Each chapter has a theme—tobacco, cotton, steam, oil, bootlegging, mobile telephones and so on—and these themes are organized to lead the reader through a chronological history of the American economy.”