The Pegasus Startup: Flying Over VCs on the Wings of Profits
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The unicorn movement in Silicon Valley has been a great run, with startups plowing mountains of willing capital into audacious products that are changing the world.
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Airbnb, Uber and Slack have revolutionized travel, transportation and work forever. It took tens of billions of capital, but I predict each of these companies will become worth 10x their current market caps in the next decade or two.
However, a new species has taken flight in Silicon Valley, and we’ve been lucky enough to have invested in four of the six we’ve encountered. This new species is called a Pegasus.
A Pegasus startup is one that is so profitable that it is able to use its profits to soar so high, that it skips multiple rounds of funding.
Unicorns are Still Fine
Now don’t get me wrong, unicorns are just fine. Any company that can hit $100m in revenue and a billion dollar valuation is a great bet for early investors and employees.
If the dead money in bonds and bank accounts want to get to work making huge bets, I’m all for it. Folks betting $5-$10b to get a startup to 100 million addicted paying customers are making a wise bet.
It’s a fine use of capital if those 100 million users return $5 a month in profits for years to come (see Facebook, Google, Amazon, etc), and if they inspire hundreds of millions of more users to try the product.
I get that deploying billions of dollars makes most civilians confused, and it sure terrifies the old guard and public markets at times, but anyone familiar with high-stakes poker and investing with a decade-long time horizon — like I and other startup investors — is unfazed.
So Why the Pegasus?
I don’t know exactly why we’ve seen four exceptional startups in our portfolio take this route, Dyn.com, Calm.com, Superhuman and Fitbod, but as the kids say, “I’m here for it.”
We put $378,000 into Calm.com back in April 2014 and we own around 5% of the company (after selling a small percentage of our position in “idiot insurance”). Calm had $10,000 a month in revenue when we invested and have reported revenue of $7m in 2016, $20m in 2017, $80m in 2018 and an estimate of $150m in 2019.
What people don’t know is what happened between 2014 and 2018, which is that the founders put their heads down and didn’t raise any significant capital. They just poured profits into their growth, team and product — and it worked.
Their first round with venture investors was at ~$250m valuation and the second was at $1b.
No Seed Extension, No Series A, No Series B … straight to what most would consider a Series C financing.
Dyn.com, My First Pegasus
Back in 2012 I was contacted by Kyle York of Dyn.com in New Hampshire to join their board. They were fans of the podcast and wanted marketing support from a hustler, so they pinged me (Kyle wrote a blog post about it: https://dyn.com/blog/true-board-story-the-email-that-landed-jason-calacanis/).
I did a double take when they told me they were ramping from $4m to $35m in revenue, with a massive profit margin, but had not yet raised a round of funding. I joined the board and in 2016 they sold to Oracle.
Again, the skipped multiple, dilutive rounds of funding.
The team had built a simple product, charged a fair price, were frugal as f@#$k — and poured every penny back into the product.
Since the company was in New Hampshire, it was outside of the venture-industrial complex, and it grew wings and soared to massive heights because, well, it had to.
I never thought I would ever see another company like that again, but I have.
Superhuman is a bit quiet about its fundraising and revenue performance, but since you’ve likely heard about the magic of the product and only read about its last round of financing with my pal David Ulevitch at a16z, you can be sure it took the Pegasus route.
Fitbod came to our accelerator with $3,000 a month of revenue, and we’ve invested $399,000 into it over two investments, putting us at around ~7% ownership … but they haven’t raised since!
At LAUNCH Festival Sydney, they disclosed they had hit $800k+ a month in revenue — and they haven’t raised a penny since.
My pal Brian Alvey, who coached me on the book [ https://www.angelthebook.com/] and edited this piece with me, reminded me that Kickstarter raised a $10m round back in 2009 and has never raised from VCs again — perhaps making it the first Peagsus (anyone else got examples?).
[ Oh yeah, follow Brian on the Twitter, he’s the got the best quips: http://twitter.com/brianalvey ]
How to Be a Pegasus
It’s fairly simple if you want to be a Pegasus, I can describe it in five tight bullet points:
- Have a modestly paid, small team that produces an extraordinary product (easy!).
- Charge from day one and pour those profits into growth.
- Focus on four things: team, product, customer feedback and growth.
- Triple revenue year-over-year.
- Ignore any ovation from an investor who doesn’t have the twitter handle @jason
It’s really that simple.
Step five is optionally mandatory, so if you are building a Pegasus I’m here to help, and by help I mean having you on the podcast, keynoting our events and cooking you a 14-hour brisket when you stay in the “Travis Kalanick Suite” at our place when you’re in town.
Just email me at jason@calacanis.com and let’s put $500,000 into your bank account and then start the process of ignoring all other investors until we hit $10m in revenue.
The Value of Being a Pegasus
This is going to be fairly obvious to anyone in the industry, but to state it explicitly for new founders and civilians, there are two major benefits:
- For every round of financing you skip, you save 10-20% dilution. If you skip 2-3 rounds of financing this could double your ownership at an exit.
- You never have to stop working on your product to do a fundraising tour.
If you’re an elite founder with an elite team, and you have the ability to focus, I highly recommend this strategy. If you come up against rabid competitors, sure, take the big money and go to war — just try and do it after you hit $5-10m in yearly revenue.
Epilogue: Beware the Dark Pegasus
It’s been reported, in a spectacular scoop by my pal Amir at the awesome The Information (not fake news), that a company called Toptal raised $1.5m on a convertible note and then never converted that note into equity because it was a Pegasus with a whisper number of $200m in revenue.
The founder, Taso Du Val, also allegedly screwed his employees and co-founder out of their equity by never converting his LLC into a C corp and creating stock.
This is a huge violation of the explicit covenant of startups: “we all lose a decade of our lives trying, or we get fabulously rich together.”
Toptal is the Dark Pegasus, the worst of all animals … a creature so evil and filled with greed that not only do they want to preserve their cap table, they want to do so by screwing everyone they can — including their own family (aka, investors, employees).
I spoke with Amir (http://y2u.be/2SyGZfObj2E) about Toptal, as well as with an employee who got screwed out of $2-$10m in my estimate (http://bit.ly/2m2bY0I) and I blew a fuse in the middle of the episode (sorry, I don’t do that often … in public).
So, welcome to the magical land of startups … filled with packs of Unicorns, which we call a “blessing,” and now a half-dozen Pegasi flying above.
Best
@jason
PS – LAUNCH SCALE, October 7-8 in SF, is free for founders; $500 if you want to come to lunch with me and the team or if you work for a bigger company, law firm, etc. It’s a killer event designed to help founders grow their startups. http://launchscale.net/tickets
PPS – We are looking for a host city for LAUNCH Festival in 2020 through 2023 (four-year deal). The event has been in Sydney for the last two years and we’ve loved it, and might stay another four years but we agreed to open up the process. It’s $500,000 a year to underwrite the entire event, which has thousands of founders attending for free. We do this at breakeven in order to help founders grow their startups. If you’re interested (Berlin? Tokyo? Spain? Brazil? Rome? Austin? Miami? Nashville?), fill out this form and let’s have coffee. [https://host.launchfestival.com] In Sydney we ended up investing in five startups over two years, so we poured $500,000 back into the ecosystem (win! win!).
Some great Podcast Episodes you might have missed:
E967: Jeff from Twilio back on pod for the 3rd time. https://youtu.be/2Q86UjKU4uI
E962: Finally got Sophia from Girlboss.com on the pod. https://youtu.be/pg0Ifx1TFAw
E963: My Greek brother from Cameo.com, which is on fire, was on. https://youtu.be/ldxf2QiVlwc
E939: Unicorn founder Melanie Perkins of Canva.
https://youtu.be/8TBSg79Gf0M
E901: SendGrid.com CEO Sameer Dholakia on the podcast after selling to Twilio. https://youtu.be/PcWs4WnWFvU
Also, I gave a talk at Mark Suster’s Upfront Summit to discuss thesyndicate.com, which has invested $40.8m in 103 deals — including our first deal: Calm.com. https://youtu.be/YQa6vD9KG9Q
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