This VC Has A Simple Message For Unicorns: Build Real Businesses

 Rich Wong was late to get on the call for our interview. A General Partner at Accel, Wong had just finished a board meeting with Sunrun, a solar energy startup that he saw through the IPO process in 2015. Sunrun's stock dropped some 20% immediately after it went public, but Wong feels that the IPO was successful overall. 
 
The timing of Sunrun's board meeting was fitting, given the topic I had called him to discuss. In the last five years, private investors have thrown $362 billion into startups, with a whopping 173 now valued at $1 billion or more. A few of these so-called Unicorn companies are thinking about exiting the private market just like Sunrun did, a move that some predict will be disastrous for the startups and their investors alike. These predictions are fueled by Wall Street bringing the hammer down on tech stocks like LinkedIn, Tableau and GoPro due to lower-than-expected guidance and global market fear. 

Wong has been through this before: On top of his experience with Sunrun, he also sits on the board of directors of Atlassian, which went public last year. So I wanted to hear his thoughts on what the future holds for the growing stable of unicorns in 2016. In an interview, we discussed how these unicorns are valued, problems they may face in the IPO process and the mega-unicorn Wong would bet on. 

Edited excerpts: 

Caroline Fairchild: Does the amount of private capital going into startups worry you?
Rich Wong: There is a lot of apples and oranges going on. There are things to worry about in the startup universe, but any one number doesn’t represent what is going on. Companies are staying private longer. The numbers are inflated with what was formerly public capital becoming private capital. That said, there are some things to worry about. The froth of the last three to four years has caused there to be a weaker discipline to run real companies that follow unit economics. There is no question that there are going to be some scary moments for some of these unicorns that have been funded in the last three to four years.

CF: Of course, not all unicorns are the same. When it comes to these high-valuation startups, how do you separate the wheat from the chaff?

RW: The perfect answer is only known in hindsight. I don’t think most people would have guessed that Facebook would become a $300 billion company or that Google would either. That wasn’t obvious when they were private or when they went public. One of the things that has been part of the frothy environment is that things are “easy” when it comes to raising capital and there isn’t a need to prove out a truly sustainable business model. Companies that are much more speculative, maybe they lose money for every delivery that they make, will be in trouble. 

CF: Startups talk about hoarding a lot of cash to get through any impending rough patch. What do you think about that strategy?

RW: If you are going to raise a bunch of capital to protect yourself from a downturn, that is a perfectly viable approach. You just want to make sure that you are spending and burning that money intelligently. The first thing you want to spend time thinking about is what is core and critical to your business versus what is context and discretionary. In frothy times, there is a lot of hiring that goes on that might not be necessary. Also companies might attempt to expand into multiple geographies at once. Even the best of companies are not going to get it right. You tend to want to be more thoughtful about how many things you want to experiment at once. You should also closely watch your customer metrics in terms of your cost of acquisition and how much it costs to acquire new customers.

CF: Is the path to an IPO too onerous?

RW: The JOBS Act passed in 2009 and really does make things a lot easier. It softens some of the regulatory requirements of IPO. There are other really important provisions which allow you to file a confidential S1. You don’t have to share all your numbers with your customers until 10 months before you actually go public. You can wait even until four to six weeks before you go public to uncloak all of your numbers. One of the fears you have as a private company is that you’ll have to share all this stuff publicly when you would rather not expose yourself. This makes things a lot easier for startups than they were before.

CF: How would you advise private unicorns who want to enter the public market?

RW: Some of these so-called unicorns haven’t built what I would call real businesses. Many of them have revenue, but does the revenue come in a repeatable form? Are they in control of their gross margins and spending levels? Can they articulate what it costs for them to acquire a customer and the payback time? Getting those fundamentals down pat is the first thing I would advise. Also, not all companies are destined to become public companies. Some of them might be appropriate to be bought out. If you are a startup CEO or on a board, it is true that not every company is destined to be standalone and you want to be thoughtful about that choice. [Wong recently wrote on LinkedIn about SwiftKey, an AI investment of Accel's that was acquired last week by Microsoft for roughly $250 million.]

CF: If you had to bet on one unicorn company that would have a successful IPO this year, which one would it be?

RW: I don’t know where Airbnb stands in its IPO process, but I really admire and respect Airbnb. They are creating a new market and solving a problem that no one has really solved before. They are the classic example of creating net-new value. They are not a me-too company. They have a very clear revenue model.

CF: Lots of people are talking about a downturn soon. What does it feel like on the ground to you?

RW: I would equate the sentiment to the weather in San Francisco: It depends on where you are in any particular moment and what it feels like right there. In other words, it very much depends on what company you are talking about and what sector you are in. I think we are very much on record for the past two years that some of the froth was not based on fundamentals and was likely to reach super high levels because of that. The froth was over-stated before and if you are in a company that is operated with discipline and has the right fundamentals in place, I think that the doom and gloom is becoming over-reported and over-heated... There is clearly a change in the seasons and for companies that don’t have their discipline right, it is going to be very difficult to survive.  

CF: So it's not all doom and gloom?

RW: The world has woken up to reality that you have to have the right discipline and fundamentals when raising large chunks of capital. For the entrepreneurs who have the excitement to build a great business, we are still on the early innings of some exciting long trends. This is the first year that over 50% of the world’s population is going to have access to a mobile phone. That is a big deal. That creates a huge opportunity for anybody who is building a mobile application. The great companies of the earlier era were all about building big data centers like Cisco and EMC. All of that is now shifting to the cloud and that is a transition that is really in the first or second inning. So I wouldn’t overly buy into the doom and gloom because there still are some incredible companies with incredible innovations to be built in the next five to seven years.

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