I have recently met with a variety of startups that have business models that are entirely dependant on hyper user acquisition, activation, and retention. Dave Mcclure’s Pirate Math (AARRR) remains the text book to follow In these discussions I was drawn into a discussion about valuation, which turned into an email I have paraphrased below for your feedback.

First a qualifier, I don’t imagine I am the best person to discuss valuation from any angle. In my role making funding decisions, I am lucky to not have to price rounds, so valuation isn’t something I have done professionally. Similar on the pricing (revenue) side (solution value) to the market, my experience is all value (ROI) or market based (competitive) pricing in enterprise B2B, so not well aligned to the B2C startups.

To give you my 2cents, my view is that all the companies I encounter that work on user dependant models are way to early to have any concern about valuation. On the pricing front, most are not even ready to start testing, as they need to build a value proposition that is coherent. Note a problem – solution statement and a value proposition are very different though related things. Those that have a value prop and a MVP should be running pricing experiments at as high a volume as possible; inability to do so illuminates other issues (CAC & Value).

My experience with companies that are pre-funding and typically pre-revenue is that there is nothing to price in order to derive a valuation. In the seed round my view is to do a convertible note. The only logical pricing mechanism at this early phase is the value of the team’s time. Two founders who could reasonably earn $100k/ year each working for the man have a company that is worth no more than $200k pre-traction (NPV). Generally speaking investors set the price, the only say the entrepreneur has is their ability to create a market for the equity and negotiate a deal. Your company, in the early stages, is only worth what someone is willing to pay.

Most teams do not have anywhere near enough evidence to establish comps for their valuation. This makes hunting for investment a very dangerous use of time. Money goes to teams with traction, spend nearly all your energy on activity that demonstrates traction (signups, downloads, revenue, etc). Investors will not make your business work, customers will.

Here is an easy example to think about B2C valuation. A Facebook user is worth $100 (roughly) and provides the peak market comparable for every other Ad driven social consumer platform in the market. Every other company with a similar business model has a user value less than $100 per account and the drop of is extremely steep. FB has dominant market position, continued up and to the right growth, proven revenue, extreme stickiness etc. Tomorrow’s hot startup only has user acquisition on its side with no sustained track record of activating, retaining and converting those users to VALUE. Pre-value users occur at a negative run-rate (basic costs of the business, dev ops, and user acquisition costs). The amount of traction to overcome the disadvantage is huge, and to my knowledge no one in Canada has pulled anything like that off (Wattpad is working on it).

This is driving 10m users as the benchmark for a startup to become a candidate for a priced round (see If you can get that many users without spending a tonne of money you likely have some foundational value to build on. Before that you are pissing in the wind trying to raise money IMHO. Metrics change based on models but the mountain is just as daunting if you are SaaS b2b etc. The reason i dislike user models so much is that I don’t believe Canada has any sherpas that have been up that mountain, we have plenty of folks who have climbed b2b peaks.

This rant has come out of on going discussions about Canada’s accelerators and their propensity towards B2C startups. Generally speaking; asking for investment is a waste of time on Demo Day. The only route to funding is through traction. I want to see these companies make asks that drive against traction milestones, ie help the startup get on a growth curve to 10 million users. Make asks against milestones ❤ months out from demo day, ones that generate momentum and move the needle on the key performance metrics of the model. “SIGN UP for the APP now! please;) but seriously the bar will not open until you have downloaded the app”. Boom 300 users at zero hard cost, not a bad 30 minutes.

Part of the challenge is the accelerators are serving a segment of entrepreneurs that are drawn to b2c, but that is another post. What I want to see is better understanding & demonstration of growth hacking and better asks from b2c founders, because cash ain’t it.

“Real glory is being knocked to your knees and then coming back. That’s real glory.” Vince Lombardi

First, pursue your dream, your passion, your goals no matter what. The advise given to all, which usually generates focus and conversation on the potential positive outcomes, the ‘I gonna build an amazing product, and awesome company’ moment. This post is not about that. This post is about the near soul destroying assault that being an entrepreneur is going to launch on your self-worth.

The best startup mentors, advisers, gurus, typically at least acknowledge that building a business is ‘wicked hard’; however, I think there is little attention to the sources and nature of the hard. Yes raising capital, hiring talent, building culture, selling your solution, etc are really, really hard, but there is no lack of good insight and direction on those Rational, Tacit, Process problems. I believe the real hard, the real barrier to success, the stuff that keeps entrepreneurs up at night, is the emotional challenges that happen in the dips in your startup roller-coaster ride. I don’t think we spend enough time as a community helping each other cope with the unique life event that building a company is.

Starting, building, and growing a business is an immersive experience, it becomes the core of your life. When the business is not going well, you are not going well. This affects every other aspect of your life. We (the Startup Community) readily endorse, training, coaching, mentorship, etc to assist each other with the rigors of the day to day of a startup, including taking care of your health through, diet, exercise, family time, down time, etc. I don’t think we talk enough about the emotional work that it takes to empower the success of you and your business.

Here is some stark reality for aspiring entrepreneur. Getting money, whether it be revenue, investment, grants, etc, into your startup will take twice as long as your conservative estimate. Unless you have serious credentials (you had a SR Exec job at a big time company, you did something amazing at an amazing company, you were a key player in a previous successful startup, you achieved an exit as a founder) no one other than friends, family, and fools (the FFF round) will fund your business plan. First timers and the unproven must achieve traction prior to getting investment, traction should first be interpreted as steady MoM revenue growth, second MoM user growth, third you have built an AMAZING prototype. Please do not plan on being the exception to these rules. Yes this produces a catch22, this is the dip, the chasm, the obstacle between you and success.

These periods are IMHO what it really is to be an entrepreneur, and the difference between success and failure here is intensely dependent on your emotional talents. How do you stay confident, fully engaged, calm, cool, and collected in the 1 step forward 2 steps backwards loop? You are 30 days from bankrupt, your friends & family are anxious, your life-partner is stressed, your co-founder is off the rails, your team are looking for jobs, the ship is sinking. Successful entrepreneurs find a way to survive.

Breaking through to the next phase doesn’t happen because the anchor client finally signed, your user acquisition hit a tipping point, you got featured on TechCrunch; it happened because you persevered the emotional turmoil of the period prior to those outcomes enough to do the work that allow those things to happen. Failure to execute is rarely due to a lack of know how (plenty of blogs, books, and people), or skills (possible, but where there is a will there is a way), the failure happens inside you, the Will gives out. You need to train, plan, and actively manage your emotional well being as well as be engaged helping your team do so as well; that my friends is HARD.

Watch episode #161 at the very end, after an amazing chat about the block and tackle of startup success, both Jason Calcanis and Fred Wilson finish with the statement “it really is just about perseverance isn’t it.” Two of the biggest icons in the industry truly connect on the pain of their failures and the ability to overcome them that has produced their successes. Gary V and Kevin Rose hit it even harder, its sacrifice, ‘its always hard’, and ‘working your faceoff!’ here. What Gary V hits particularly well and consistently in most of is his content, is the raw straight at you position that building a business is going to absolutely everything you have; your success will be achieved by your passion, guts, and relentless hard work. This is beautifully simple truth. I want to outline a few ways that might help you activate, build and maintain those attributes of passion, guts, and hard work, because I know I struggle nearly every day to so.

I will start with some hard, non-emotional things that will help pave the rocky road out of or away from the hard times that will come in a startup.

  1. Save One Year’s worth of living expenses (at least six months) if you can. Money pressure is visceral and very hard to ignore; its hard to focus on building your business if you are not sure how you are going to pay the bills. Remember revenue and investment capital always take longer than planned and rarely happen in a startup in a sustainable way in year 1.
  2. Align those closest to you, specifically your life partner. No matter, how strong and positive your relationship, a startup is going to put it to the test. Never take your private relationship for granted, for good or ill it is going to impact your business life. Your partner is a part of your team, communicate your needs open and honestly and reciprocate. Two front wars are really hard to win, keep your war at work.
  3. You and your co-founder(s) are married, all the same rules apply. This is an unique business relationship, normal rules do not apply. You need to support each other emotionally not just professionally. Your co-founder’s issues at home are going to affect your business, they will resent not getting sympathy / support when the server crashes at 2am, losing a deal hurts bad talk about how it feels and wait to talk about why you lost. Your startup is your baby, you better have alignment on how you are going to parent it.

In my experience and observation, the truly critical takeaway entrepreneurs have from their failures are the emotional scars. Failure tests your resolve, it trains your reaction to adversity, it exposes you character. Failure informs you mental and emotional models for the next startup. From them you learn how to position yourself, your venture, and your team for better outcomes. I have failed twice in companies that I have founded. Those lessons inform my entrepreneurship everyday, and I am much stronger, effective, and valuable for those failures.