Thoughts on startups by investors that
fund them & entrepreneurs that run them

Of Birchbox and Bricks

Without a doubt, Birchbox is one of the hottest startups on the planet right now.  They are mentioned in any print, website, or television content concerning beauty, startups, New York, great entrepreneurs, women leaders, or the next generation of IPOs.  So, its almost impossible to avoid them.

Obviously, that’s because they’ve done a long list of things right, most of which you can find in that endless press stream. The single most important lesson you can learn from them is so fundamental that it’s barely mentioned in all the hype.  Nonetheless, it’s the one you should take to heart above all the others.

Ready for this profound truth? Are you sure? OK, read the next two words slowly: generate revenue.   Sorry, yes, I know how retro this sounds.   The cool kids are off doing that new social network, the one that alerts you when there’s someone within 50 feet who shares your EYCL1 gene.  And after everyone on the planet joins it, a monetization scheme will emerge, certainly.  Of course, I fully appreciate that all these social networking things are very, very different from the wishful days of the 90s, when “aggregated eyeballs” were as good as currency (until the tech crash came).  Definitely, absolutely, today’s non-monetizing business ideas are not the same thing at all.

Nonetheless…. I just can’t help but worry.  My favorite story as a kid was the Three Little Pigs.  And when I look around at all the storms brewing in the world economy, I can’t help but think about that huffing and puffing big bad wolf.  Should things get ugly out there, you can be certain that today’s free flowing startup funding environment will freeze up in an instant.  The flocks of angels will fly away, and VCs will hoard cash to finance their existing investments. The only folks who’ll be able to raise money will be those who have a rock solid, proven revenue model that they’re looking to grow.

Again, I know how unenlightened this seems to all those who “get” the new…paradigms, is that still the word?  Worrying about revenues (or wolves) can slow you down.  Now, to be clear, I have absolutely no doubt that some of the users-now-and-revenues-later companies will indeed succeed (some already have, if you consider an IPO as the measuring stick).  But the risks are absolutely enormous, because, along with the obvious ones –- like, your great new platform/social network/app won’t be quite as popular and sticky as you hope -– comes the real killer: tolerance for funding more rounds of pre-revenue companies disappears before you ever find out.  At that point, like those other two pigs, you’ll be asking for an invite over to the Birchbox house of bricks.




All opinions expressed are those of the author,  and do not necessarily represent those of Gust.

Written by Bob Rice

user Bob Rice Managing Partner,
Tangent Capital

Bob is Managing Partner of Tangent Capital, a registered broker-dealer and merchant bank focused on alternative assets and strategies. He is the resident industry expert on early stage and other private investments for Bloomberg TV, appearing daily as Contributing Editor on “Money Moves.” Bob is a Director of asset management companies with over $2 billion in AUM. Bob began his career as a trial attorney at the U.S. Department of Justice and then became a partner at Milbank, Tweed, Hadley & McCloy, where his practice centered on financial products. He left the law in 1996 to found a 3D graphics technology startup that eventually became the publicly traded Viewpoint, provider of the web’s first “rich media” advertising platform. He has been an active angel investor and startup mentor since 2004. Along the way, Bob also served as the Commissioner of the Professional Chess Association and authored the business strategy book Three Moves Ahead.

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