VC Cliché of the Week

You often hear entrepreneurs and VCs say that they want to "build a billion dollar company". It's the goal of anyone serious in the company starting business.

But there are sveral ways people define "billion dollar company". Some want to build a company that gets taken out for a billion dollars or more. Others want to build a company that will trade in the public markets for a billion dollars. And some want to build a company with a billion dollars in revenues. A few brave souls want to build a company that has a billion dollars in profits.

In my experience, while everyone might say they are attempting to build a billion dollar company, very few will get there. In the late 1990s it was shockingly easy to build a company that would trade on the public markets for a billion dollars or more. We did it five or six times in less than three years with Geocities, Sina.com, Starmedia, IXL, ITXC,  possibly Multex (I don't recall it's high water mark).

But as we wall learned, trading at a billion dollar market cap doesn't always lead to a great outcome. Only Geocities ultimately cashed out north of a billion dollars. Sina.com trades at a market cap of $1.4bn. The rest were sold for hundreds of millions or even went bust.

These days it seems almost impossible to get a company public and trading at a billion dollar market cap unless it is a very solid business. Some would argue that Vonage (which trades at just over a billion dollar market cap) is not a solid business. I am not entirely sure where I come out on that, but I do think there has been significant value creation in Vonage which was not true of some of the billion dollar public companies in the late 90s/2000.

Getting sold for a billion dollars (what Facebook wants right now) has been easier to get done. Skype did it last year. If you are very strategic and have built a business of some scale, the billion dollar exit is possible.

But building a company with a billion dollars in revenue or profits is much harder. That requires a lot of patience, committment, and a bit of luck.

There may be a billion dollar revenue company in our portfolio right now, but I don't think I can tell you which one it might be. Some companies break out, catch a wave, ride it well, and get there. Most don't. That's why the venture capital business is a bit easier than being an entrepreneur. We get to take the portfolio approach and it's more likely that we'll catch a wave with one of our companies.

But if you are really in it to build a billion dollar company, then being an entrepreneur is the role to choose. The VCs, even the most active ones, are passengers along for the ride. The entrepreneur and the management team drives the car.

Building a billion dollar company is a great aspiration to have. We look for it in everyone we back. But we also recognize that few, if any, will get there. And it's hardly a failure to sell out for hundreds of millions of dollars. In fact, its a huge success. So recognize that the billion dollar target is a stretch goal for everyone in the deal. And when it happens, recognize how special it is.

Comments

[Steven Krein]

Great post Fred. I attended a talk last week given by author David Thomson and hosted by VC Steve Brotman on exactly this topic. David wrote an entire book called "Blueprint to a Billion" on specifically 'what it takes to build a billion dollar company in sales.

He's distilled down through extensive research 7 things that 387 companies that have reached $1 billion sales have in common, 100% of the time.

The 7 things are:

1. Sustainable Value Proposition
2. Exploiting a high-growth sector
3. Marquee Customers
4. Big Brother Alliance
5. Master of exponential returns.
6. Experienced Management Team
7. Board with a $1 billion entreprenuer.

The book is heavy on research and data but light on the "how to" for the startups. It's an important read, however, for any entreprenuers or VC's. It's hard to argue with the data.

[steve]

fred, i wonder about your saying that "Getting sold for a billion dollars (what Facebook wants right now) has been easier to get done. Skype did it last year. If you are very strategic and have built a business of some scale, the billion dollar exit is possible."

in the end, for a company to be bought for a billion means that the acquirer has to have a very very large market cap -- otherwise the ownership dilution and earnings accretion/dilution are unacceptable.

to wit, when geocities was acquired, it was very dilutive to yahoo's earnings but that wasn't a big deal back then (as it is now,) and more important, back then yahoo had a market cap of what, $200 billion, so the geocities acquisition was not only barely dilutive to shareholders, but at less than 5% dilution it wasn't even a blip on the (then) regulatory/disclosure radar.

ditto eBay and skype -- though ebay did take a lot of heat about the earnings dilution and shaky proposed scenarios for future earnings accretions. but even at $1 billion skype deal barely diluted ebay shareholders.

but in the end there arent that many companies with that big market cap, and that little worry about effect on earnings, to do a $1 billion deal.

[adam]

"There may be a billion dollar revenue company in our portfolio right now, "...

thats a huge deal...

I think it maybe Tacoda, through process of elimination:
1) Etsy- Ebay revenue is approx $3-4BN... dont think etsy will reach a quarter of that
2)Indeed- US job posting/listing market is $1-$2BN so thats out as well
3)Instant Information- Bloomberg revenue is $3-4BN so not likely to be quarter thier size
4)Oddcast- Dont know the specifics of the avatar market but if Oddcast's model is enterprise based.. trying to rake in billion dollars in enterprise sales is a huge ask

Less Likely candidate:
5)Feedburner- Really depends on RSS adoption. Feedburner could become the Ad Sense of the RSS world. SO for comps sake...Google Adsense is 4BN/year. Dont think that RSS based publisher could reach a quarter of that...especially since the comparison is between Webpages versus RSS

MOre likely candidate:
Tacoda Network: I can see them being one of the largest advertising networks and with the overall ad market growing I think Tacoda is in a good place. Two more things 1) The way ad networks account for revenue is probably on a gross basis instead of a net basis (i.e. the full CPM is considered as revenue instead of the commission that Tacoda makes) will help hit the $1BN mark and 2)The $12M raise In march is probably the only one in your portfolio is probably the largest in your portfolio pointing out the maybe its the one with the largest opportunity.

COmplete Unknown is Bug Labs... Not sure I get the concept or how it will make money

[Mitch]

The goal of anyone serious about starting a business is growing it to a billion dollar company? It seems to me that the few people who have got there have done it by creating something that they felt passionate about, not by planning to be in the tech hall of fame. That applies to Google, facebook, youtube and myspace.

“Building a billion dollar company is a great aspiration to have. We look for it in everyone we back.” So if someone came to you with a solid idea that could realistically grow to a $200 million dollar business you would turn them down?

Here’s what I take away from your post:

1. The goal of any serious entrepreneur is to create a billion dollar company
2. Very few entrepreneurs will every succeed at reaching this market cap
3. You learned that trading at a billion dollar market cap can lead to bad outcomes
4. You will only back entrepreneurs that have this goal

True entrepreneurs create businesses because they are passionate about an idea and believe that there is a market for the product/service; not to wind up on the cover of Time magazine.

[Dimitar Vesselinov]

I would focus on education. Education on demand. Who could build the Education 2.0 platform? Academic education doesn't work well. It's boring, it's antiquated, it should be fixed. There is a huge market all over the world.

Wikipedia + blogs + Facebook (social networks) + podcasting + videocasting + Flickr + mobile (cell) phones + gaming + IM + VoIP = Education 2.0

"Rather than spending 4 years of your life taking a bunch of courses that may or may not really matter in your life once you graduate, you can choose your education on an 'as needed basis,' based on your unique interests and talents."
http://ben.casnocha.com/2006/09/college_admissi_1.html

[Joe White]

Fred: Interesting post. Steven -- book sounds helpful, thanks (can I say I am not surprised that Brotman wasn't additive to that talk?)! Joe

[ARLAN DEAN]

What a world we live in when nothing less than a Billion will do! What next? Multi-billions or years of therapy due to feelings of failure because the sale was only a $Gig?

By the way, I suspect that the comment from Dimitar Vesselinov is on point. Education is ripe for a revolution, and entrepreneurial possibilities abound for whoever can achieve a meaningful synthesis from the concept of a tech-enabled Open Source Education.