Just because a startup has lots of customers and revenue doesn't make it a good business

Advertisement

Webvan truck

ACproducts

Bad memories...

"It's different this time."

Advertisement

That's one of the refrains heard during the most recent "steroid era" of startups, where investors were pouring hundreds of millions of dollars into startups at valuations that couldn't be justified by their underlying businesses.

Skeptics remembered how many companies went public during the dot-com boom on barely more than a PowerPoint presentation - they had no customers (but a big addressable market!) and no revenue. This seemed like a repeat.

Complimentary Tech Event
Transform talent with learning that works
Capability development is critical for businesses who want to push the envelope of innovation.Discover how business leaders are strategizing around building talent capabilities and empowering employee transformation.Know More

But a lot of VCs and Silicon Valley boosters pointed out that today's startups were quite different. They have real customers paying them real money.

One investor who lived through the last bust gave us a good point to deflate that line of thinking.

Advertisement

WebVan was a grocery delivery company during the dot-com boom. It spent heavily building its infrastructure, and instituted a 30-minute delivery window, which made deliveries expensive as they were spread among many locations. But it never passed those costs along to customers, and quickly burned through more than $1 billion before going bust.

This investor told us that WebVan's customers absolutely loved it. It had one of the highest customer satisfaction scores of any startup during the era.

WebVan's problem wasn't a lack of customers or revenue. Its problem was covering costs.

You can sell dollars for fifty cents and have a lot of happy customers and revenue, too.