You know them, entrepreneurs. The spark in their eyes, the electricity in their minds. They are so devoted to their work, not just because they have built their companies, but because they believe in creating new solutions for common problems, or maybe it is the creation of a whole new industry that is leaning on their skinny shoulders. That is why when asking them to describe their companies; they speak with the same devotion found in churches or temples. Success is always around the corner; it is just a matter of time, engineering years and money until they find it.
We can’t say that they don’t tell the truth. We can’t blame someone who is so devoted to their mission that they become a little biased over time. A believer. An evangelist. After all, entrepreneurs take on a mission to change their worlds, betting not only their job but also other people’s money. And sometimes it is a lot of money.
That is why we think that getting the full picture from the entrepreneur or the CEO of a private company is almost impossible. Remember that when you watch companies’ presentations, surf open and user generated databases, or even read articles in the general media, which are usually fed by information supplied by the subject company. The need for an objective, unbiased and didactic source of information is on the rise today as more and more investors look to invest in the private and tech industry.
In this article, we decided to present you with the ten biggest stories the companies would never tell you, taken from our experience in analyzing private companies:
“We don’t have competitors, We’re pretty alone in the field… Facebook is doing something similar, but not exactly. Google will never get into our space just because it doesn’t belong to their DNA of making money”.
Reality check: oh c’mon. It’s either you don’t know, or you don’t want to tell us that you have three more competitors doing the same thing, two of them have raised more money from top investors, are already in the market, and one of them is getting some excellent traction. Even if you guys are looking to raise only $2 million to become profitable, it doesn’t help that three competitors had already raised $15M each a year ago and two of them are already profitable.
Figuring out who your competitors are is an easy task. Ask your customers. Read where journalists who cover the market are pointing, search the web as if you’re a customer and see the results you get. The best way to find about your competitors is to conduct an independent research process. You can use services such as SimilarWeb or order a Zirra spotlight report.
“We’re experiencing a rapid growth”
Reality Check: Well, let’s see what tools like SimilarWeb, Google trends, or LinkedIn have to say about your company. SimilarWeb says the traffic was increasing and then arrived at a plateau; Google Trends tells that over time people are searching your company’s name more than ever but look at your competitors, some of them are more trendy according to Google. LinkedIn shows that your total employee count has been reduced lately, although we can’t explain why.
- Real and Paying customers:
“We have a few dozen customers”
Reality Check: Fine. How many of them are full and PAYING customers? Please tell us how many of them are just in a trial/ proof-of-concept/ pilot stage, how many of them are customers who are getting free service, and how many of them are already paying customers? Also, we’d like to know what your customers think of your service after trying it. How many of them are recurring customers? Did you meet their need, and do you think they will tend to recommend your service to others?
- Work Environment:
“We offer an equal and collaborative work environment”
Reality Check: Well, not according to your employees and former employees. Most of them talk about bad work conditions, long hours and a lack of leadership. Use Glassdoor to check out reviews of employees and former employees on subjects such as leadership, work hours, salaries, and bonuses.
- Equal Partnership:
“We are three founders in the company, each with an impressive background”
Reality Check: Nobody told you that the three guys sitting in front of you are not in fact equal partners. The CEO and co-founder holds ten times the shares in the company that co-founder number two holds, and twenty times that of co-founder number three. This asymmetry between the founders might hint at future disputes, as each of them is committed to the company in a different way. That’s not a real team. A one-man show might be a better description of the management in this case.
There are other companies in which executives join the company and receive the title of co-founder, even though they weren’t part of the company’s original founding team and joined later. In some instances, original co-founders leave and those that join instead get their titles. In other cases, disputes with a dominant CEO cause executives to come and go like a revolving door. Therefore, it is important to check the stability of the core management in sources such as LinkedIn or Glassdoor and to order a Zirra spotlight that can give the whole picture about the company.
- Experienced Team:
“We’re a group of seasoned entrepreneurs who sold two companies to international corporations”.
Reality Check: Yeah, but you ‘forgot’ to tell us that the first company went bankrupt and sold its IP and that the second company was sold for a few million, causing massive losses to the investors who invested dozens of millions. You guys desperately need a third exit.
- Growing Valuation:
“We raised $20 million and we’re growing”
Reality Check: Yes, but by what valuation? Was that an up round or a down round? Lately, growth companies raise large amounts of money at the expense of valuation as a sign of the cooling investment atmosphere in Silicon Valley. Founders who were used to having their companies infused with large amounts of money, pulling up the valuation, now agree to a down round (decreasing valuation between financial rounds) to continue to raise funds and not lose momentum.
Another issue concerning new financial rounds is not just how much money you raised, but also how much money you will have to raise in the future? Sometimes a company looks efficient when it is claims it only has to raise a couple of million to be profitable. But when looking at the competitors, you see bigger companies who have raised much more funds to satisfy their customers, who appear to have greater needs than what you thought in the first place. If you raised $20 million, that’s very good, but without knowing when will you stop raising more money or how much you have to raise to satisfy all the needs defined by your potential customers, it doesn’t tell us a lot.
- User Engagement:
“We’ve got a few dozen million downloads but we can’t say exactly how many”
Reality Check: That’s ok, we don’t want to know exactly how many million downloads your app had because that’s not what matters. We need to know your engagement data. How many monthly active users (MAU), the standard in the mobile and web industry for measuring basic user engagement, preferably your daily active users. It is impossible to measure engagement data independently. Services such as SimilarWeb measuring the mobile traffic and AppAnnie or the app stores can tell you vaguely about the ranking of the mobile app or roughly how many downloads the app has.
As we’ve learned at Zirra, momentum is a highly important factor in a company’s growth. Any indicator that can tell something about that, including customer reviews on Google Play, eBay, or even a brief, direct talk with a business customer can give you a great indicator of whether the company is going in the right direction.
- Conversion and profitability:
“We have 100K monthly visitors, that’s a 100% increase on a year-on-year basis”
Reality Check: Good for you. But what if I tell you that your bounce rate is 90%. It’s never enough to know how many people you bring into your service. We bet you pay huge amounts of money in ad campaigns or PR to create this traffic. But how many of your visitors turn into prospects? And of them how many become customers? That leads us to the question of profitability: entrepreneurs are boasting rapid growth in revenue, but generally aren’t close to profitability. Being unprofitable is not wrong. Facebook has been unprofitable until very recently. But you need to have a concrete map to profitability.
- Growing the Company:
“We don’t want to sell the company. We’re patient enough to grow it and to make it a large and successful corporation, acquiring other companies and aim for an IPO”
Reality Check: We’ve heard this statement too many times right before an early exit to believe everyone who shoots this into the air. For real, if we had a dollar for every time we heard this, we could cover our ski vacation in the Austrian Alps this Christmas. First, there are so many factors that can interfere with the dream to make your company another Apple or Google, that chances are somewhere down the road, you’ll vote for an exit. Your business can bleed money without real user engagement or adoption for long enough that an acquisition offer from even a medium-sized startup can be a redeemer. Even if you manage a growing and successful startup, a great offer at the right time can create significant returns to the investors, make you rich for a lifetime, and still allow you a certain level of independence in managing your acquired company.
Every time you hear this statement remember that the founders and the CEO usually have a higher tendency to agree to an M&A offer.
There’s nothing wrong with that. Accepting the right offer at the right time is something a team should be prepared to do. Entrepreneurs should objectively compare offers with other companies in the industry, conduct deep interviews with experts in the market and have some consultations with IP experts and business development people who might have an opinion about M&As in the field.
Consult with Zirra
We presented here ten stories that together tell the whole story of the company. Each of the ten points is just one angle in a bigger story, and looking at only one of them will resemble the story of the blind men and the elephant, a story in which each blind man touches a different part of the elephant, and they can’t agree on what it is.
Much of the information not disclosed by companies can be retrieved from public databases and open services such as LinkedIn, SimilarWeb, Google Trends, Glassdoor, SEC, customer review sites, academic researchers, Bloomberg and the general media.
Zirra, a startup that has developed AI and machine learning technology to effectively analyze the private tech market, extracts data from 85 different data sources, some of them presented above.
After processing the data, using state of the art algorithms, Zirra provides insights on startup companies, including estimated valuations, competitor lists, estimated time to exit, risk and success factors, as well as ratings of the team, product, momentum and execution. Based on its technology, Zirra serves investors, entrepreneurs and even executive job-seekers with spotlight reports on companies, that help them learn more about companies they are engaging or competing with.
If you want to try our inclusive way to look at private tech companies, simultaneously using several sources and data points, calibrated by our human network of experts and teams of analysis, click here. You can also learn our 10 steps to company analysis and valuation here.