Skip to content

The formula behind the success of the San Francisco startup

--Advertisements --

Why has the San Francisco start-up generated so many businesses over the last decade?

That's the question we've been asking in recent weeks by analyzing San Francisco startup funding, release and unicorn creation data. After all, it 's not as if the founders of Uber, Airbnb, Lyft, Dropbox and Twitter were to have offices a few miles away from one another. other.

We did not think that our data-centric approach would produce a clear recipe for success. San Francisco's private and newly-public unicorns are a diverse group of over 30 people in areas ranging from car-pooling to online lending. Surely the path to valuations of over a billion would also be varied.

But surprisingly, many of their secrets to success seem stereotyped. The most valuable businesses in San Francisco to occur in the age of the smartphone have a number of common traits, including a willingness and ability to post massive and sustained losses; high-powered investors; and a preponderance of business models that are easy to explain.

-- Advertisements --

No, this is not a recipe that is likely to be reproduced without the talent, dynamism, connections and timing. But if you have these ingredients, following the principles below could give you a good hang on the unicorn status.

First you conquer, then you win

Losing money is not a bug. This is a feature.

First, lose money until you leave your rivals in the dust. This is the most important rule. It's the collective glue that keeps stories of San Francisco's startup success stories together. And while businesses in other places have thrived with the same practice, no doubt the San Franciscans are doing their best.

It 's no secret that a majority of the most valuable Internet and technology companies in the city are losing money or posting tiny profits relative to valuations. Uber, called the world's most valuable startup, reportedly lost $ 4.5 billion last year. Dropbox lost more than $ 100 million after losing more than $ 200 million the previous year and more than $ 300 million the year before. Even Airbnb, whose model of taking care of a share of the lodging revenue seems an easy recipe for returns, has taken nine years to show its first annual profit.

Do not make money can be the ultimate competitive advantage, if you can afford it.

The pillars of the industry are also losing money. Salesforce, with a market capitalization of $ 88 billion, recorded losses for the vast majority of its operating history. Square, valued at nearly $ 20 billion, has never been profitable under GAAP. DocuSign, the 15-year-old publicly-owned company that dominates the electronic signature space, has lost more than $ 50 million over its last fiscal year (and over $ 100 million in each of the two previous years). Of course, these companies, like their unicorn brothers, are investing heavily in revenue growth, attracting investors who appreciate this approach.

See also  Prodigy raises $ 5.4 million to unify the car buying experience in-store and online
-- Advertisements --

We could continue. But the basis of delivery is: Losing money is not a bug. This is a feature. One could even argue that entrepreneurs in metropolitan areas where the culture of investment is more restricted financially are absent.

What is also remarkable is the propensity of so many startups in the city to wreak havoc on existing and profitable industries without generating big profits themselves. Craigslist, a non-profit organization in San Francisco, could have started the trend in the 1990s by blowing up the newspaper business. Today, Uber and Lyft have decimated the value of taxi medallions.

Do not earn money can be the ultimate competitive advantage, if you can afford it, as this prevents others from entering the space or making up the time that your start-up engulfs more and more market share. Then, when rivals are out of the picture, it is possible to raise prices and start focusing on running in the dark.

Collect money from investors who have already done it

You can not lose money by yourself. And you can not lose money, either. To succeed as a San Francisco unicorn, he is helping to lose money thanks to a short list of prestigious investors who have already supported valuable and unprofitable start-ups from Northern California.

This is not a mysterious list. Most names are well-known investors who have been actively investing in local startups for many years and are often listed in rankings as the Midas list. We have gathered a few names here.

You may be wondering why it is better to lose money thanks to Sequoia Capital rather than to a less well known but still wealthy investor. We could assume that the following factors are at play: a company's reputation of selecting winning startups, the willingness of subsequent investors to track these valuations to higher levels and the ability of these firms to accompany companies in wallet.

See also  Do's and Don'ts in the Manufacture of Advanced Technology Companies
-- Advertisements --

Whatever the exact link, the data speaks for itself. The vast majority of San Francisco's most valuable private and public Internet and technology companies support short-listed investors, usually starting with the early rounds.

Choose a business model that loved ones include

Generally speaking, you do not need to know a lot about semiconductor technology or network infrastructure to explain what makes a business strong. valuation of San Francisco. Instead, it is closer to: "They have an application to get rides from strangers", or "They have an application to rent rooms in your house to strangers." It may seem strange at first, but soon everyone seems to be doing it.

This is not a recipe that is likely to be replicated without the talent, dynamism, connections and timing.

A list of 32 unicorns and near-unicorns based in San Francisco is populated primarily by companies that have widely understood brands, including Pinterest, Instacart and Slack, as well as Uber, Lyft and Airbnb. Although there are lesser known business software names, they are not among the biggest beneficiaries of investments.

Some of the consumer brand recognition qualities of San Francisco, which face the consumer, may be related to the decision to settle in an urban center. For example, if you were thinking of building semiconductor components, you would probably be installing your headquarters in a less congested suburban environment.

Reading between the lines of red ink

While it can be frustrating to see a company swerve from one quarter to the next without making a profit, there is ample evidence that the approach can be very fruitful with time.

See also  SEC condemns third "brain" in Centra Tech's ICO fraud
-- Advertisements --

Seattle Amazon is probably the poster child of this strategy. Jeff Bezos, recently declared the richest man in the world, led the company for more than a decade before reporting the first annual profit.

These days, San Francisco seems to be at the center of this business building technique. Although it is certainly not necessary to locate here, it seems to be the only urban place that is most closely associated with massively scalable, money-losing and consumer-oriented startups.

Maybe it's just one of those things that after a while becomes a status quo. If you want to be a movie star, you go to Hollywood. And if you want to go to Wall Street, you go to Wall Street. Likewise, if you want to do it by launching a business that alters the industry with a good shot at a multi-billion dollar valuation, while losing huge amounts of money, then you go to San Francisco .

Advertisements