Is it impossible now to imagine life without an Airbnb, LinkedIn, or YouTube?
Yet at the start, they were just like any other small business. They had founders with a vision for what things could become once their idea became a reality. And they built on those ideas, gaining momentum and getting funding to continue to grow. We know (but often forget in the face of success) that it can be a bumpy road, especially in the first five years.
So when we came across CBInsights' compilation of five of the early pitch decks that current billion-dollar companies used when they were trying to raise an investment round, we couldn’t help but wonder: What did they do right? And more importantly: Would a VC fund them now? Or would they pass because the business model just didn’t seem like a smart investment?
Gus Tai, a general partner at Trinity Ventures, has spent the last 15 years leading investments in such startups as Zulily, Blue Nile, Dot & Bo, and most recently, Bulletproof. But even he admits that it’s not always easy to spot a unicorn. He went over the pitch decks of Airbnb, AppNexus, BuzzFeed, LinkedIn, and YouTube. Here’s what he told us.
According to CBInsights, Airbnb’s current private market valuation is $25.5 billion, which is larger than the public market capitalizations of HomeAway, Marriott, and Expedia, among other travel giants.
Tai points out that this presentation was put together in 2011 for a Series B funding round. His area of concentration is Series A. But what jumped out immediately for Tai was the substance of the presentation and what that reflected for the business. "The marketplace seemed quite large," Tai observes, and Airbnb’s rate of traction, coupled with a marketplace ripe for a new entrant, made this deck a standout. That’s even though a bunch of other companies were already providing similar services like VRBO, which was purchased by HomeAway.
Tai notes that Airbnb was following an approach that a number of VCs look for, namely those who look at aggregated services businesses like Craigslist (also listed as a competitor in this deck) and unbundle them by focusing on one vertical. One question he raises when looking at this from the standpoint of being asked to invest in a Series A is, "Yes, I could believe a team should win [with this model], but why should it be this team?"
Tai says he’d question whether they had sufficient insight to approach this type of channel. For this Series B round, Tai says that it’s important to remember that HomeAway had just successfully gone public, so that only enhanced Airbnb’s standing.
The current valuation for this company is $1.2 billion. But that’s not the only thing that’s changed about AppNexus, Tai points out. This pitch was made for a seed round back in 2007 or early 2008. That the economy was about to hit the skids notwithstanding, Tai says, both the entrepreneurs and the investors were taking a big leap of faith because they didn’t have momentum yet. And the business plan proposed is not what AppNexus is today, which is a real-time exchange for advertisers. "I was expecting to see that they had that in mind," says Tai. "What they really had was cloud-based service to compete with Amazon and Rackspace."
The thing that gave Tai pause was that Amazon and others were potentially powerful competitors. Not only did the startup have to worry about competition, but Tai says the plan struck him as capital intensive and required hardware because the original business model called for servers to host apps. The fact that their differentiator was the architecture was called into question, too. "Until it’s out there, you don’t know if customers are going to see the difference," he explains.
Home of exceedingly popular quizzes and listicles, as well as long-form journalism, BuzzFeed boasted only 2.5 million page views per month back in 2008. Now the media company is up to around 200 million page views per month, has snagged a $200 million investment from NBC Universal, and has a valuation of $1.5 billion. Tai called the deck "the archetypical presentation," adding, "Wow, that presentation and the essence of the pitch was world class."
That said, Tai admits he would have passed in 2008, partly because content was not an area he knew very well, and partly because in the cyclical nature of investments, that category was out of favor during the recession.
In 2004, the Series B pitch for investors was for a business that hadn’t brought in a penny of revenue since it launched. Tai says he was among the first 10,000 users of the platform, and that he is a friend of cofounder Reid Hoffman. "I didn’t choose to invest in the Series A," says Tai. "And to my great embarrassment, I would have passed on Series B, so shoot me," he adds, laughing.
As for the deck, he questions how to gauge when the market will get large enough to justify the investment. Tai says he had two conflicting thoughts about the presentation. The first was that 37 slides is tedious. On the flip side, knowing Hoffman, Tai says, "He is deeply insightful and precise in communicating the story of the power of the network." But that still didn’t lay the doubt about monetizing to rest.
When YouTube’s founders make a bid to raise funding, they had less than 10,000 users and only 100,000 views per day. Contrast that with growth to over a billion users who watch 7 billion videos per day. YouTube was acquired by Google in 2006 for $1.6 billion.
The pitch deck was part of a memo from Sequoia Partners' Roelof Botha, but Tai says the most notable thing is the rate of growth of customer engagement. Tai says that YouTube had 20 times the traction of other video sharing companies within the first six weeks. "The product was easier to use, it was a better product, and it was easier to distribute."
The question for the investor becomes twofold. "How do you build a distribution advantage after you have a product/market fit?" he asks. And also whether or not the platform would reach an apex and then decline. "We’ve seen a number of recent apps that showed promise and quickly faded away," he observes. It’s obvious that something was different about YouTube, but Tai notes that it’s still a gamble. To satisfy that, he says he’d need to know what the revenue model would be if distribution doesn’t reach a large enough size.
Though investors sometimes make mistakes and miss out on those unicorn companies that blow away their competition (see Tai’s pass to invest in LinkedIn in 2002), Tai says there are some common themes that rise up from these presentations.
In the case of AppNexus, it was the founding team coming from Right Media. "They had a lot of talent and expertise," he says, and they were planning to use infrastructure that they would have used in their former company, making the investment less of a risk.
It was the same for LinkedIn. "It helped that the founders came from a great heritage at PayPal," says Tai, but it also helped that they were capital efficient, especially early on. "They started noodling on this in 2001," he says, so assuming a founder is fine with putting in time, there is the potential to "trend up and to the right."
Disruption doesn’t always win the day when pitching. Many venture-backed companies, Tai says, are innovating within an existing market or grabbing mindshare from existing customers. "That said, all startups must have the point of view that they are different," he explains. "If you aren’t easily understood as being different, the customer will forget or confuse you." In the case of Airbnb, the value proposition was familiar enough, but they had better merchandising, matching capabilities, and better execution.
Tai is particularly sensitive to keeping a close eye on entrepreneurs who are zealous and passionate about their startup but risk burning out because they can’t keep pace with the growth of their business. BuzzFeed grew on the backs of its two founders, Tai says, and the thrill of early success may have been just the juice they needed to keep going.
Though it’s not immediately obvious from a pitch deck in the way a cash burn would be, Tai says, "An entrepreneur driven by passion may not be as calibrated for energy expending." There’s no easy answer, says Tai. It helps to have a team of founders who have worked together in the past and who can support each other. It suggests an ease of communication and a culture that is already established, says Tai.
"There’s a dilemma in any generation to pursue something with great energy and have that pursuit not be aligned with who they are," he maintains. For an investor, as well as for the entrepreneur, Tai says, "That is the bigger risk."