My cute niece wailed inconsolably as I tried to cuddle her. Nothing, including a whole carton of caramel candies from Ghirardelli, could convince her that this short-haired brunette was indeed her once upon a time long-haired aunt.
Life in the Silicon valley, with all the distractions offered by the disruptive tech environment, made coping with a less ladylike face far easier for me than it was for my little tyke. In this part of the country, engineers unwind by coming up with business models for startups. I decided to spend my Friday night studying business models of successful tech startups instead.
Build something
There is no dearth of innovation in the tech valley— be it self-driving cars, drone delivery or connected homes. Just add more intelligence, make it as real as it can get, and we have a winning product right there. Conceiving an idea and engineering a working prototype is a task by itself; pitching is a completely different ball game. While coming up with a compelling story and some numbers to support the story are key to a winning pitch, optimising the design life cycle, surviving the market competition and constantly striving to improve user experience are key to a sustained market share. The game is up when the users know what they want sooner than product owners do.
Let’s sell our stuff
Business models, says Peter Drucker, are “the assumptions about what a company gets paid for”. Oftentimes when people see products or features in existing products that they never knew they needed until then, there is an increase in addiction or ‘user engagement’. In order to retain their ‘daily active users (DAUs)’ companies, especially tech companies, need to keep coming up with more addictive features soon enough. Consumers pay with personal information and generated content and companies make money by serving ads.
Further down, where the actual engineering happens, a bunch of techies might be butting their heads trying to figure out a solution to a feature that might improve the user experience but might not directly contribute to the engagement factor or see an increase the number of daily active users. Like technological problems such as cacheing or indexing, coming up with a business model is easy to solve but difficult to perfect or fixate on.
Our worth
Well, now we have a business model, a working product and a reasonably sized audience for our product. Here comes the fun part — valuation. Market valuation methodologies have always been hazy, especially when the market sits on a bubble. Being no expert myself I queried the Internet and it came up with a little something from Bill Gurley, one of the investors at SnapChat: “At some point every successful tech company will trade at normal earnings multiple say 20x - 25x earnings.”
Since the statement is based on projected earnings, companies valued more than 25 times might not be overvalued if the projections are conservative? With some products being valued close to 84 times the earnings, the current market situation, according to some Bears, appears ominously similar to the financial crisis of 2006-2008.
The wailing had stopped. My niece had got accustomed to my androgynous disguise and was curled up comfortably on my lap. Maybe those bearish premonitions were the after-effects of reading Peter Elkind’s A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers ? The Bull within perhaps wants to believe that things are just going to be fine and that all of this is just going on in my head.
An uncomfortable silence follows as I look into the child’s eyes and recount one of Dumbledore’s quotes: “Of course it is happening inside your head, Harry, but why on earth should that mean that it is not real?”
(The author attended graduate school at the University of Pennsylvania and lives in the Silicon valley. vidyasridharan@ymail.com)
