There are two sayings I like when it comes to the unicorn bubble:
- “Too much money makes you stupid”
- “Any idea’s a good one when you’ve got $100M burning a hole in your pocket.”
Startups are supposed to be focused. Startups are supposed to need to prioritize ideas and opportunities. Just as startups weren’t supposed to buy Superbowl ads, startups aren’t supposed to have hundreds of millions of dollars to plow through in the name of creating brand mystique either via huge-budget events like Domo’s Domopalooza or would-be viral videos, like the one below.
But wait, you protest, didn’t Salesforce always do aggressive marketing and wasn’t that risk-taking part of their greatness? Well, yes and no. A good part of their early marketing was guerrilla PR done on the cheap. Yes, they also ran big events, but they mostly found a way to pay for them — Salesforce raised $53M in VC before going public. Domo has raised nearly 10x that.
Now, I have no particular beef with Domo. Other than being next-generation BI, I must admit to always having had some trouble figuring out what they do — in part due to the abnormal secrecy they had in their early days. I know they don’t compete with Host Analytics so I have no beef there. I also know they have sexed-up the BI category a bit, and they’ve certainly done a great job of positioning themselves as a cool company and have created a lot of buzz in the market.
But at what cost?
Domo has raised $483M. It does cause one to wonder about their capital-to-ARR ratio, which is a great overall capital efficiency metric and one that no ever seems to talk about.
- While I don’t know in Domo’s case, I’d guess for many unicorns that this ratio is 10 to 20x — where the company is running a kind of perpetual motion machine strategy where you generate the Halo Effects hoping to drive the sales that justify the valuation that you got on your last financing. This strategy, as many will discover, works well until it doesn’t. If the epitaph of Bubble 1.0 was about Network Effects, that of Bubble 2.0 will be about Halo Effects. Remember Warren Buffet’s famous quote: “only when the tide goes out can you see who’s swimming naked.”
- I know for a reasonably capital-efficient SaaS business the capital-to-ARR ratio might be 2-3x. Perhaps an order of magnitude difference.
Back to our core topic — what’s an example of something that looks like a good idea when you have $483M burning a hole in your pocket that, well, might not look like such a good idea if you were forced to lead a more frugal marketing existence?
How about a YouTube mini-series with Alec Baldwin? That’s exactly what Domo did.