You may have seen in the news yesterday that Cameo, the site where C-list celebrities get paid to send birthday greetings to tooth-grindingly dull people, just laid off 87 people -- 25% of its total staff.

If you're like me, your reaction to this news went like this:

1. Wait, Cameo employs 400 people?
2. What the hell?

Which gives us a good starting point to talk about the weird dynamics of venture capital! So let's do. ( 🧵 )

First, a disclaimer.

Unlike companies we've discussed here in the past, Cameo is privately held, not public. This means you can't buy Cameo shares on the open market -- and it also means Cameo is not required to do all the financial disclosures public companies are. So we have much less hard data available to judge their performance by.

So when it comes to analyses like these, caveat emptor, etc.

So what DO we know about Cameo? A few things.

1. Last year, they claimed that in 2020 they'd brought in gross revenue of $100 million. They claimed that was 4.5 times more than they'd brought in the year before.

2. On the basis of that revenue, they raised a new round of venture capital funding, bringing in $100 million from a group of big-name investors, including Google, Amazon, Softbank and Tony Hawk (yes, THAT Tony Hawk).

3. That VC money they raised last year was based on a "valuation" of the company as being worth a billion dollars.

Which means we have to talk about valuation.

A venture capitalist doesn't give money to a company for free. What they get in return is "equity" -- an ownership stake in the company. Essentially, they are buying a piece of it.

And if you are thinking about buying a piece of something, your first question is going to be: what's it worth? What kind of deal am I getting here?

So if you want to raise money from VCs, you're going to need to be able to answer that question. Which means you're going to have to find a valuation.

So you pay a bunch of accountants to sit down and pore through all your financial records, adding up all your assets and subtracting all your liabilities. That tells you what your company is worth TODAY, right this minute.

But that's only part of what the VCs are interested in. The other part is, they're buying a stake in your company today because they want to sell it for more money tomorrow.

So the other part of valuation is, figuring out what your company is going to be worth TOMORROW.

And saying what a company is going to be worth in the future is, naturally, a fuzzier enterprise. Unless you own a crystal ball, you're going to have to make some guesses.

Which is where you run into some tension. The accountants will tell you, when you have to make guesses, make conservative ones. Bet low. Underpromise and overdeliver.

But you want to raise as much money as possible! And the more your company is going to be worth tomorrow, the more money VCs will want to put into it today.

So you don't just take today's revenue and draw a straight line projection. You say, hey, if I had a ton of money, I could do more than just what I'm doing right now! I could expand into all these new lines of business! And that would bring in lots of new revenue beyond just what my core business brings in!

And that's how you get to a $1B valuation on the back of $100M in gross revenue. (Not even NET -- i.e. with all your expenses subtracted out. Just raw figures on dollars coming in the door.)

So you take that high valuation to the VCs, they love it, they buy in. You now have $100 million more in the bank to play with.

Everybody's happy, right?

Well, yeah -- until you remember that you just promised the VCs that, with their money, you can take your $100M gross revenue company and grow it into a company worth a billion dollars.

Which means that now, you have to actually DO THAT.

"What if you DON'T?" you ask. "What if you just take the money and don't bother trying to meet the figure you promised to the VCs?"

The short answer is, they will destroy you.

They have lots of ways to do that. They can blacklist your current company from future VC fundraising (the VC community is a tight little club). They can blacklist your FUTURE companies too. They can say "you'll never work in this town again," and MEAN IT.

Additionally, they may have demanded one or more seats on your company's board of directors as a condition of the fundraising deal.

A board can't take away a founder's ownership stake, but they CAN, if sufficiently unified, force that founder to step down from having an active management role.

They can get your ass fired from your own company.

So ignoring the promise you made to the VCs isn't an option. You made a commitment, now you have to keep it.

But remember, the commitment you made wasn't based on a sober evaluation of what a reasonable future performance target would look like. It was based on candy floss and moonbeams, because you wanted as high a number as possible so you could raise as much money as possible.


Which means you really only have one option.

You expand like mad.

You open new offices all over the place, filling them with new hires. You take every "one of these days" ideas you've ever had for the business, and try to turn into an actual line of business.

You throw all the spaghetti you can grab at the wall, and hope something sticks.

And if it doesn't? If none of your spinoff ideas pan out, if none of the people you hired bring in more money than they cost, if you've burned most of the VC money and all you've accomplished is watching spaghetti slide down the wall?

That's when the layoffs start.

Or, more precisely: that's when YOU start laying people off. And praying can either get expenses in line with revenues -- two things which you may never have had in line in the first place -- or you can raise more VC money.

So, who loses?

The VCs lose a little, but honestly, they don't care. They expect to lose money on most investments. What they care about is that you look like you TRIED to make them money, even if you were really just running in a circle.

You lose more -- it's gonna be hard for you to raise more money in the future. But you don't really lose that much. Nobody's gonna take your house away.

The real losers are the people who upended their lives to come work for you.

But what else is new?


@jalefkowit I gather you're not a fan of htat approach. Me neither. Arguably, with the 'startup' mentality, i.e. businesses funded by VCs designed to be packaged & sold to a richer corporate eventually, is a net cost for the society in which it exists. All those that fail are a net cost, and those that 'succeed' and are on-sold (most of them in NZ) to foreign corporations, remove the 'value' (knowledge, skilled people, biz ecosystem) from the society from which it emerged.

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