Venture Capital: "It’s Worth What!? Pressure-Testing Companies with Sky-High Valuations"

From Knowledge@Wharton:

Are the sky-high valuations that have put companies like Uber and Airbnb constantly in the headlines proof of their staying power? Not necessarily, says Derek Lidow (Twitter: @DerekLidow), author of Startup Leadership: How Savvy Entrepreneurs Turn Their Ideas into Successful Enterprises, who teaches entrepreneurship, innovation and creativity at Princeton. 

In this opinion piece, Lidow, who was the founder and former CEO of iSuppli Corporation, offers a four-part test for how companies can evolve from “top draft picks” to “wily veterans.” 

Uber recently set a record when it was valued at $17 billion. The transportation start-up both disrupts and leverages the incumbent infrastructure of taxis and town cars. Airbnb, the home room rental start-up, was recently valued at $10 billion, giving it a greater worth than most of its larger traditional hotel rivals. Sky-high valuations have become commonplace. The question is: Are these companies really worth it?

Some start-ups hit upon the right idea at the right time — though almost all must iterate several times before they perfect their offering. Some get the imprimatur of a savvy investor with a strong track record. Others catch the fancy of the media. Each of these can boost a firm’s valuation; but none is a guarantor of ultimate long-term success.

The most critical factors to assess in a start-up and its long term potential for success are what stage it has reached on the journey, and whether its leaders are likely to navigate each of the remaining transitions successfully.

As an entrepreneur, investor, and professor of entrepreneurship, I have learned that every start-up must traverse four distinct stages as it matures. No stage can be skipped and each has its own leadership and strategy imperatives. The most critical factors to assess in a start-up and its long term potential for success are what stage it has reached on the journey, and whether its leaders are likely to navigate each of the remaining transitions successfully. Few entrepreneurs have the natural gifts to excel at all four stages; they can, however, learn how to master them either through personal development or by supplementing their skills through other members of their team.

These four stages must each be navigated in turn as a company evolves from what the founders think to what they know. Stage One is customer validation. The entire focus is to find a customer willing to try your minimum viable product or service. Stage Two is operational validation. In this stage, your strategy focuses on execution to satisfy that customer and find more people willing to try the product. You begin to understand who will buy your product, on what terms and what it will take to deliver it. Stage Three is financial validation, when you discover if your business can survive in the hurly-burly of a competitive market place. Your strategy focuses on scaling. Stage Four is self-sustainability. At this stage, the strategy focuses on innovation as you introduce new products to attract new customers. Your business demonstrates that it is viable beyond the original concept....MORE