Recent valuations driven by a red-hot venture capital investment scene are eye-popping, but you need to justify your value.
Recent business news is slick with reports about startups, usually in the tech industry, getting millions of dollars in investment capital, typically from the gold-plated venture capital names. That in turn often drives those companies' valuations into the billion-dollar stratosphere.
Of course your fast-growth company wants a cut of this white-hot investment scene. For the past five years, venture capital firms have pumped 25 percent to 100 percent more than they've raised into a diverse array of investments, including clean energy technology, health care, and pharmaceuticals. But nothing's worse than getting money for an idea that you can't bring to fruition.
And you want to make sure you attract the capital you need, while emerging from the pack a winner, because it's not always a given that you will.
Nearly forty companies have received billion-dollar valuations in the past couple of years. But not all have gone on to be successes. Cautionary tales include Fisker Automotive, Groupon and Fab.com. Fisker filed for bankruptcy protection last November. Groupon continues to struggle with profitability and staff layoffs more than two years after its public offering. And Fab.com, which is now solely helmed by CEO Jason Goldberg after the recent departure of the site's co-founder, announced its third round of layoffs in October. That came after the flash-sale site received $300 million in financing from Andreessen Horowitz and other prominent investors.
Venture capitalist John Backus, managing partner of New Atlantic Ventures, in Reston, Va., says companies need to focus on at least one of three things to justify a billion-dollar valuation: Profits, revenue or market dominance.
"The problem most e-commerce companies have at a young age is that they have growing revenue but big losses as well," Backus says. "That only works if you have market dominance in a differentiated space like Zulilly."
In Zulilly's case, it commands the children's market for flash sales, Backus says.
Zulilly is also profitable, reporting in its October S1 Securities and Exchange Commission filing net income of $2.4 million for the first six months of 2013, compared to a net loss of $4 million for the same six months a year earlier.
Zulilly went public in November, and has since seen its company value leap to $4.7 billion, with stock nearly doubling at $38.60 as of mid-day Monday.