TIME Startups

Why Investors Say Warby Parker Is Now Worth $1.2 Billion

Warby Parker founders David Gilboa (L) and Neil Blumenthal attend the 17th Annual ACE Awards in New York City on Nov. 4, 2013.
Evan Agostini—AP Warby Parker founders David Gilboa (L) and Neil Blumenthal attend the 17th Annual ACE Awards in New York City on Nov. 4, 2013.

The startup launched in 2010

Add hip eyewear startup Warby Parker to Fortune’s Unicorn List: the company has raised a new funding round of $100 million that pushes its valuation over the $1 billion mark.

The new valuation of $1.2 billion, first reported by the Wall Street Journal, comes after a round led by T. Rowe Price, the publicly traded money management firm that had revenues of nearly $4 billion last year. T. Rowe Price has invested recently in other notable tech “unicorns” including Flipkart and Lookout. The founders of those two companies—Sachin and Binny Bansal and John Hering, respectively—have all landed on Fortune‘s 40 Under 40 list in the past few years.

We named David Gilboa and Neil Blumenthal, the Warby Parker founders, “Ones to Watch” in 2012.

Warby Parker launched in 2010, selling designer eyeglasses for under $100, with a “one for one” model that the founders said was directly influenced by Toms and its founder, Blake Mycoskie. Toms began in shoes but soon launched additional product lines with the same one-for-one model, including eyeglasses and sunglasses—which makes it a Warby competitor. (In an interview with Fortune last year, Mycoskie said that the Warby founders reached out to him for guidance before they launched, but because Toms was already planning its eyewear line, he couldn’t respond or help them.)

Like a handful of other businesses that began with a web-only model but have since opened brick-and-mortar shops—dress rental site Rent the Runway, for example, or pants retailer Bonobos—Warby eventually began opening up store locations (its flagship location is in Manhattan’s SoHo neighborhood) and now has 12 of them in the U.S., with plans to open eight more this year.

In June of last year, the company announced it had given away one million pairs of eyeglasses, meaning it had also sold one million pairs.

Blumenthal and Gilboa have described their company to Fortune as more than a consumer brand. Blumenthal said he believes that investors look at the company “through the lenses” of social enterprise and e-commerce company, as well. “What they’re finding,” he said, “is our metrics and performance is best in class in each category.”

Achieving a billion-dollar valuation after five years puts Warby Parker at about the average compared to young companies that reached the milestone very rapidly, like one-year-old Slack and three-year-old Tinder, and others that took longer to get there, like Shazam, which has been around since 2002, and Quickr, founded in 2008.

Warby Parker still is not profitable, but says that its sales are growing each year.

This article originally appeared on Fortune.com.

TIME Careers & Workplace

Why You Should Start More Than One Business

businessman-looking-out
Getty Images

Because one company is not enough

There are two types of entrepreneurs: Those who start one company and those who start lots of companies.

Those who start lots of companies like to describe themselves as “serial entrepreneurs,” which may or may not be slightly fatuous. Those who start just one company may think of themselves as “business owners” once the thrill of the entrepreneurial journey has ebbed.

If you’ve started one company, you can do it again. And you probably should. One company is not enough.

I will explain why.

Starting multiple businesses guarantees that life will never be boring.

Let’s face it. Entrepreneurship is a rush. Whereas most people get into business to make a living, I find that a life worth living includes starting businesses.

After having started a few, I want to start more. Running a business is exciting in its own right, and I continue to do so on a daily basis. Starting them, however, has a set of unique challenges and thrills.

Keep starting companies and you’ll never live another boring day in your life.

Multiple businesses can provide financial security.

If excitement isn’t your thing, then maybe financial security is more palatable.

According to CrunchBase, the average successful U.S. startup raises $41 million and exits with $242 million. Notice, however, that is only successful startups. For every one successful startup, there are as many as nine unsuccessful startups. Angel.co puts the average valuation of their startup list (not all successful) at $4.3 million.

Not every startup turns out like Apple ($590 billion valuation), Facebook ($200 billion valuation), Airbnb or Uber. Those companies are the rare exceptions, not the general rule. If you want to sit on a future mountain of cash, you may have to start more than one company.

Starting multiple businesses allows you to stay fresh.

Every time you start a new company, you learn something new.

In my entrepreneurial pursuits, I’ve launched businesses in industries that I knew nothing about going into. Learning is half the fun of doing, and keeps your mind sharp and your skills fresh.

Not starting another business is a waste of your personal experience.

One of the worst things that you can do with your experience is to let it waste away. Experience is meant to be used, shared and acted upon — not stifled.

When you have the experience of starting a successful company (or an unsuccessful company, for that matter), you can turn around and use that experience to do it again. Or, you can use that experience to teach others how to do it.

Experience is one of the most valuable takeaways from founding a company.

Starting a business creates a valuable network that makes it easier to start another company.

Another valuable entrepreneurial asset is your personal network. When you start a company, you meet investors, advisors, other entrepreneurs, vendors, service providers and other people who help to grow a business.

These relationships are highly valuable. They enrich you personally and they allow you to create the platform upon which to build more companies.

Starting a network from scratch is tough. The game of who-do-you-know-that-I-can-meet gets old fast. Owning such a network, however, has value that goes way beyond money.

Starting more businesses gives you exponentially more influence.

Revenue isn’t the only thing that grows bigger with more businesses. Your influence grows, too.

Serial entrepreneurs don’t remain out of the limelight long. Because of their experience, they are called upon to share their experience, speak at conferences, participate in panels, provide interviews, and write blogs.

Such influence can be exhausting, but it’s also rewarding. Influence is part of your personal brand, which you can then leverage to earn even more.

The more businesses you start, the better you become.

The first time you do anything, you’re barely hanging on. The second time you do it, you get a little bit better. The third time, you’re starting to develop confidence. The fourth and fifth time, you feel like you’re getting the hang of it.

This is true for starting businesses, too. With every new business, you’re building on knowledge, brand visibility, marketing experience, and other resources, creating a business that is even better than the one before.

Why would you do it only once when you can get better with each successive attempt?

You can build every successive business faster than the one before.

Everything about building a business takes time — funding, marketing, development, research, strategizing, etc.

These time-consuming activities become easier and quicker every time you do it. You can spend less time finding VCs, writing proposals, searching for vendors, hiring developers, developing a marketing plan or researching your target market.

Each new attempt goes quicker, meaning that you can launch a successful business in just a fraction of the time. Starting only one seems like a definite lack of strategy.

Some warnings on serial entrepreneurship.

Starting lots of businesses is every bit as exciting as I’ve indicated. That being said, you need to keep in mind that there are risks, disappointments and stressors. Let me provide a few disclaimers.

  • Beware when starting any business. To be an entrepreneur is to take risk. To live life in general is to have risk. Based on my experience and disposition, I tend to think that to be an entrepreneur is to take less risk than, say, giving your life and livelihood to work for someone else’s company. Entrepreneurship has its own sets of risks.
  • You don’t have to break up with your old business. When you start a business, you become deeply invested in its success and future. When you start a new company, you aren’t neglecting the old one. You can still run it, coach it, advise it and profit from it.
  • Take a break between businesses. Even though starting businesses is fun, you’ll benefit more if you unplug now and then. I suggest taking a nice, long break between business ventures. You’ve earned it.

Conclusion

The more you start, the better you get. Launching a single business is only the start of a promising and successful future as a serial entrepreneur.

If you’ve started one business, good for you. Now, go and do it again.

This article originally appeared on Entrepreneur.com.

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TIME Companies

Workplace Collaboration Startup Slack Valued at $2.8 Billion

Stewart Butterfield, co-founder and chief executive office of Slack.
Slack Stewart Butterfield, co-founder and chief executive office of Slack.

Slack CEO thinks the funds will serve as "a good hedge about what might happen in the future"

Workplace collaboration platform Slack today made official what has been rumored for weeks: It has raised $160 million in new venture capital funding at a post-money valuation of $2.8 billion.

But one big question remains: Why?

Slack raised $120 million just last October at a $1.12 billion valuation and, at the time, didn’t even need the money. Instead, it simply wanted to join the (then less) exclusive unicorn club. So why go back to the well?

Company co-founder and CEO Stewart Butterfield explains: “We’re kind of in the best environment ever to raise money and while things could always get better and we’ll wish we had waited another six months, having a couple hundred million bucks in the bank is a good hedge about what might happen in the future.”

(If this argument sounds familiar, it’s probably because we put it forth last month)

Butterfield, who says Slack still has not tapped any of last October’s $120 million, adds that he’s not terribly concerned that macro pullback might lead to Slack later raising new capital at a lower valuation. “There’s always some downside risk to any business deal, but we’re very capital efficient and never really need to raise money again,” he says. “This valuation helps us recruit new employees and gives a high value to our stock when contemplating acquisitions… It would have been imprudent of me not to take it when it was offered.”

Does that mean Butterfield would raise another $160 million at a larger valuation in six months?

“If we could double our valuation again, I’d certainly think about it,” he says.

New investors on this funding round include Li Ka-shing’s Horizons Ventures, DST Global, Index Ventures, Spark Capital and Institutional Venture Partners. Return backers were Andreessen Horowitz, The Social+Capital Partnership, Google Ventures and Kleiner Perkins Caufield & Byers.

This article originally appeared on Fortune.com.

TIME Silicon Valley

How Google Perfected the Silicon Valley Acquisition

Signage outside the Google Inc. headquarters in Mountain View, California on Oct. 13, 2010.
Tony Avelar—Bloomberg/Getty Images Signage outside the Google Inc. headquarters in Mountain View, California on Oct. 13, 2010.

As tech's largest firms grow in scope and age, acquisitions have become an increasingly important maneuver

Correction appended, April 21

In late October John Hanke and several of his co-workers met for a reunion of sorts at Fiesta Del Mar, a Mexican restaurant near Google’s Mountain View headquarters. Hanke, a 10-year Google employee who led initial development of Maps, was once the founder of a small geodata startup called Keyhole that Google acquired in 2004. The fact that the one-time entrepreneur has stayed with the search giant for more than a decade makes him and his colleagues oddities in Silicon Valley. “There are quite a large number of [us] who are still at Google, and I have to say I don’t think anyone expected that when we first came in,” he says.

Google has used acquisitions to expand its workforce and launch new products since before it was a household name. Recently that strategy has become the modus operandi for technology firms in Silicon Valley. Facebook is using its fast-growing cash hoard to take control over sectors both adjacent to its core product (WhatsApp for $22 billion) and far-flung from social networking (Oculus VR for $2 billion). Microsoft, Yahoo and Amazon are doing the same, making big-ticket bets by buying Minecraft developer Mojang ($2.5 billion), Tumblr ($1.1 billion) and video game streaming site Twitch ($970 million), respectively. Even Apple, which long eschewed splashy acquisitions in favor of much smaller, less public buys, says it bought at least 30 companies during the last fiscal year, including the $3 billion purchase of Beats.

Overall spending on tech acquisitions topped $170 billion in 2014, up 54% from the previous year and more than double the amount spent in 2010, according to PrivCo, a research firm that tracks investments in private businesses. As the core of dominant technology companies get larger, they have come to depend on acquisitions not only to broaden their businesses but also to sustain the pace of innovation. “Companies are buying innovation,” explains Peter Levine, a general partner at venture capital firm Andreessen Horowitz. “As large companies need to be competitive and want to increase their footprints in a variety of different areas, one of the best ways to do that is through acquisition.”

The deals are a boon for startups as well. Venture capital is abundant, and companies can rely on investment rather than revenue to keep growing. If it’s not clear how a startup will eventually convert users into revenue, a buyout from a large firm can render that problem irrelevant—or at least less urgent. While investors and founders insist that launching a thriving self-supporting company is still the end-goal in Silicon Valley, “exiting” via a sale rather than an initial public offering can still net a lucrative payout. “It’s almost a goal for some of these companies as they start, to have that exit event,” says George Geis, a business professor at UCLA whose upcoming book, Semi-Organic Growth, analyzes Google’s acquisition strategy over the years.

But while snapping up a startup is now easy, holding onto its key employees is more difficult. Startup founders, who often think of themselves as entrepreneurs before engineers, are notoriously difficult to keep at large firms long. Partly, this is cultural: striking out on one’s own, idea in hand, is a fundamental part of the Silicon Valley ethos. The widespread availability of funding doesn’t hurt, either. That has left firms struggling to keep the expertise they may have spent millions acquiring. “When a firm is making a tech acquisition, they’re buying the talent as much as they’re buying the technology,” says Brian JM Quinn, a law professor specializing in mergers and acquisitions at Boston College.

A TIME analysis of startup founders’ LinkedIn profiles found that about two-thirds of the startup founders that accepted jobs at Google between 2006 and 2014 are still with the company. Amazon has retained about 55% of its founders over that time period, while Microsoft’s rate is below 45%. Facebook, with a 75% retention rate for founders, is beating its older competitors, but the company only began acquiring companies in significant numbers around 2010 or so. Yahoo and Apple, which have both gone on acquisition sprees under new CEOs Marissa Mayer and Tim Cook in the last two years, now have a similar retention rate to Google.

Google stands out among this cohort in large part because of the massive number of acquisitions it’s conducted. Overall at least 221 startup founders joined Google’s ranks between 2006 and 2014. Yahoo, the next closest competitor, added at least 110 founders to its employee roster in that time. Google’s internal calculation of its overall retention rate for startup founders through its history is similar to TIME’s, according to data provided by the company. Apple, Facebook, Yahoo and Microsoft declined to share any information on the retention of founders; Amazon did not respond to a request for data.

An examination of the ways Google tries to retain employees provides a window into the increasingly ferocious battle among the tech sector’s giants to expand through conquest. “Google,” says Geis, “has done a pretty good job—among the best in Silicon Valley.”

‘The toothbrush test’

Even when Google was small, it wasn’t shy about spending. The company’s first startup acquisition, the 2003 purchase of Pyra Labs, forms the backbone of what is today Blogger, an online publishing platform. Since then, many of Google’s most well-known products, including Android, YouTube, Maps, Docs and Analytics, have originated from acquisitions. “M&A has obviously been a huge part of Google—and, I think, Google’s success—for a long time,” says Don Harrison, Google’s vice president for corporate development, who oversees the company’s acquisitions.

Before any deal is finalized, it has to pass what CEO Larry Page calls “the toothbrush test”: is the product something you use daily and would make your life better? “If anything matches the toothbrush test and relates to technology, then Larry has an interest in it,” explains Harrison.

Typically, Google buys occur in sectors where the company has already been experimenting itself. Harrison points to YouTube as a prime example. Google already had a video sharing service called Google Video in the mid-2000’s, but YouTube’s fast-growing user base convinced the firm to offer a then-eye-popping $1.65 billion for the startup, even though it was barely a year old and earned no revenue. Today, YouTube brings in billions of dollars of revenue per year and is the third most-visited website in the world, according to Web analytics firm Alexa.

But the return on investment on an acquisition isn’t only measured monetarily. It’s important to Google and other tech giants that the founders behind ideas worth paying for stick around as well. Harrison says founder retention is one of the significant factors Google measures as part of the “scorecarding” it does to evaluate its purchases. “We hold ourselves accountable to make sure that the founders are able to be successful within Google,” Harrison says. “It’s something that we’re not only working on at the time we buy the company but we work on for years after as well.”

Cash alone can’t convince the top startup founders to join Google. 2014 was the most active year for IPOs in the U.S. since the year 2000, according to IPO tracker Renaissance Capital, and Chinese online retailer Alibaba had the biggest public debut in world history, raising $25 billion in September. “As aggressive as we’re willing to be, we probably can’t match public company premiums right now,” Harrison admits.

So Google tries to find other ways to lure key talent.

‘A True CEO’

For Tony Fadell, the CEO of smart home company Nest, the decision of whether or not be acquired by Google was really a question of how he wanted to spend his time.

Google had begun courting Nest almost from the company’s inception, ever since Fadell showed Google founder Sergey Brin a prototype of the Nest Thermostat at a TED conference in 2011. At the time, Fadell wasn’t interested in a buyout. “I wanted to keep it as a startup as long as possible,” he says.

But as Nest grew, so did Fadell’s logistical headaches. By 2013, he says he was spending 90% of his time on what he calls “back-of-house stuff”: managing finances, talking to investors, wrestling with taxes and fending off patent lawsuits. “There was a lot of selling to multiple entities that we were doing the right thing,” he says.

When Google came knocking again, offering a big payday and the chance to keep Nest’s name brand intact—a key requirement for Fadell—an acquisition seemed more appealing. Now Fadell says he spends 95% of his time focused on product development and key relationships. Nest, meanwhile, has gotten access to resources that would have taken much longer to accrue independently. The company launched in five new countries in 2014, but Fadell thinks they would have only reached two without Google’s help.

In many ways, the Nest acquisition is the ideal scenario startup founders envision when they agree to be swallowed by a larger company. Harrison, Google’s M&A head, calls Fadell a “true CEO” and says Google execs serve more as a board of directors for Nest instead of supervisors. Fadell says he hasn’t had to get formal approval for anything from Google, though he reports directly to Larry Page and meets with the Google CEO a few times per month. “He’s like, ‘Call me when you need me, but this is for you to run,’” Fadell says of his relationship with Page. “He gives us the freedom, so I run with that. Only when it’s really major decisions do I really touch base with him.”

Some founders who don’t quite have Fadell’s free rein are still granted a certain level of autonomy. Skybox Imaging, a satellite manufacturer that Google acquired for $500 million last summer, reports to the company’s vice president of engineering for geo products but maintains separate offices from Google in Mountain View. “We kind of get a little bit of the best of both worlds,” says Ching-Yu Hu, one of the four Skybox founders that now works at Google. “We’re all Googlers now so we have access to all the infrastructure there, but at the same time we’re semi-autonomous.”

The company has experimented with more direct incentives to maintain an entrepreneurial spirit. For a few years in the mid-2000’s Google handed out Founders Awards valued at as much as $12 million in stock to teams that developed successful new products like Gmail and Google Maps. Today awards are a little less explicit, in the form of more traditional of raises or promotions. Google works closely with founders in their first 90 days on the job to insure they’re getting acclimated well, but check-ins on founders’ progress can continue for years, depending on the acquisition.

At the core of Google’s pitch to founders is the opportunity for bountiful resources. Sure, those can be scratched and clawed for independently, but going it alone requires a lot more time, money and luck than hitching your wagon to one of the richest companies on Earth. “It was a pretty compelling pitch,” Hanke recalls of his own deliberations about whether to sell Keyhole to Google. “We could achieve a lot more standing on the shoulders of all that was going on at Google versus trying to do it on our own as startup.”

When Founders Leave

Still, even Harrison admits that not every acquisition goes smoothly. Because California is an at-will employment state, workers can generally be fired or choose to leave at any time. Tech companies try to ensure founders stick around for a while by offering a stay bonus or using “golden handcuffs,” which often meter out the payday for a big acquisition in company shares that vest over several years. Facebook’s acquisition of WhatsApp, for instance, includes $3 billion in restricted stock for WhatsApp employees, but they can’t fully tap into those funds unless they stay at the company for four years.

In some cases, golden handcuffs aren’t enough to keep founders on board. Kosta Eleftheriou joined Google in October 2010 through the acquisition of his keyboard app BlindType, but life at the massive company wasn’t what he envisioned. Eleftheriou says he was relegated to maintaining Google’s stock Android keyboard rather than envisioning ways to improve the product. He left after one month, leaving half of his compensation package for the acquisition on the table (he says the total acquisition price was in the seven figures). Now he’s a founder again, with a new keyboard app called Fleksy that has been downloaded 4 million times.

“It was a mismatch between what I was expecting and what happened,” Eleftheriou says. “I think that was partly due to maybe some unrealistic expectations on my side on how much creative freedom I would have. I was hoping to be part of a bigger picture than just some engineer working on something by themselves.”

As the founder of a small company that didn’t make huge headlines when it was acquired, Eleftheriou’s experience isn’t uncommon in the Valley. “Unless they’re sufficiently large, very few acquisitions continue to run independently,” says Justin Kan, a partner at the venture capital firm Y Combinator and cofounder of Twitch. “Oftentimes founders are rolled up inside another group inside of the company. They can’t make decisions as freely as when they were entrepreneurs. That affects people’s willingness to stick around.”

Sometimes founders simply crave the excitement of starting something new. Uri Levine was the only one of Waze’s three founders who chose not to join Google when the traffic app was acquired for $1 billion in June 2013. Instead he launched a new startup—his sixth—called FeeX, which aims to help people reduce investment fees in their retirement accounts. “Entrepreneurs, they are driven by a passion for change,” Levine says. “As soon as you become part of a large organization, you cannot change anymore.”

Google’s also had some more high-profile misfires. When it made its largest acquisition ever, the $12.5 billion purchase of handset maker Motorola Mobility, Page hailed it as an opportunity to “supercharge the Android ecosystem.” But Motorola’s phones failed to gain traction, the subsidiary racked up $1.4 billion in losses for Google, and the company offloaded the handset division to Lenovo for $2.9 billion in 2014. Harrison defends the deal as a smart acquisition because of the patent portfolio that Google acquired, helping the company defend itself from lawsuits by Apple and Microsoft (Geis, who has studied the transaction closely, called it “a wash” for Google).

The Spree Continues

At Google, at least, there are opportunities for change for some founders who join the company. Hanke, the former Keyhole CEO, spent several years heading up Google’s geo services, but now he’s in charge of Niantic Labs, a separately branded unit that Google bills as an “internal startup.” Hanke’s team develops apps that increase the opportunity for digital interaction in real-world environments, like InGress, a mobile game that requires players to visit physical locations to gain power ups. Android founder Andy Rubin also took on a role far removed from smartphones when he became the head of Google’s robotics division in 2013. (Rubin eventually left Google in October after nine years at the company).

Google is constantly making these kinds of bets on the future, and it needs new blood with fresh ideas to sustain them. The company is currently wrestling with multiple threats to its core business, search, including a declining share of desktop searches and a mobile market where Amazon is stealing product search queries and Facebook is taking ad dollars. If Google is to maintain its steady growth, it will eventually have to tap into a new revenue source somewhere, and that may well stem from an acquisition. The company may view Nest as the key purchase that ensures its future dominance, given Fadell’s perch. “Founders and everyone else at these startups, they want to be businesspeople,” he explains.

And the big businesses themselves? They want to ensure they don’t miss out on the next big thing. “The ability to move quickly in rapidly changing markets is one of the major drivers,” says Geis of the acquisition spree. “If you want to effectively compete and innovate continually, it can’t all be from within.”

Correction: The original version of this story incorrectly described George Geis. He is a business professor at UCLA.

TIME Startups

Snoop Dogg Just Invested in a Weed Delivery Startup

2015 iHeartRadio Music Awards - Arrivals
Steve Granitz—WireImage/Getty Images Snoop Dogg arrives at the 2015 iHeartRadio Music Awards at The Shrine Auditorium on March 29, 2015 in Los Angeles, Calif.

Eaze promises to deliver medicinal marijuana in less than 10 minutes

Snoop Dogg is one of several investors helping to fund Eaze, a California-based startup that promises to deliver medical marijuana to your doorstep in less than 10 minutes.

Eaze has raised more than $10 million in funding from DCM Ventures, Fresh VC, 500 Startups and Snoop Dogg’s Casa Verde Capital, Quartz reports. Founded by former Yammer employee Keith McCarty, Eaze raised $1.5 million of seed funding in November and became one of the first pot companies to get international investors, perhaps because the business only provides the technology, not the marijuana itself. In the nine months since its launch, Eaze has made 30,000 deliveries, and now the startup is looking to expand its team by hiring 50 people in the next 50 days.

The legal marijuana industry is growing fast: Alaska, Washington D.C., Colorado and Washington state have all legalized recreational marijuana, and 20 states have legalized medical marijuana. And other pot companies are also getting in on the action—according to CB Insights, weed businesses raised a total of $104 million in 59 deals over the course of 2014, with Privateer Holdings (the company selling Bob Marley-branded weed) raking in a $75 million investment from Peter Thiel’s Founders Fund.

[Quartz]

TIME Innovation

Five Best Ideas of the Day: April 13

The Aspen Institute is an educational and policy studies organization based in Washington, D.C.

1. Why do we need human pilots again?

By John Markoff in the New York Times

2. We thought education would unlock the potential of Arab women. We were half right.

By Maysa Jalbout at the Brookings Institution

3. Peru found a 1,000 year-old solution to its water crisis.

By Fred Pearce in New Scientist

4. Why Saudi Arabia might need to break the country in two to “win” its war in Yemen.

By Peter Salisbury in Vice

5. Startup accelerators are great…we think.

By Randall Kempner and Peter Roberts in the Wall Street Journal

The Aspen Institute is an educational and policy studies organization based in Washington, D.C.

TIME Ideas hosts the world's leading voices, providing commentary and expertise on the most compelling events in news, society, and culture. We welcome outside contributions. To submit a piece, email ideas@time.com.

TIME Startups

Here’s the Major Downside of So Many $1-Billion ‘Unicorn’ Startups

Uber
Getty Images

Billion-dollar startups aren't rare. They're practically a dime a dozen these day—and that's not an entirely good thing

We live in a magical age of unicorns, those pre-IPO tech startups valued at $1 billion or more. And unlike the dot-com bubble, most of these startups are for real. They are companies whose services–like Uber, Spotify or Pinterest–we use every day. You could even say we consumers are the ones that are helping these unicorns to fly.

There is only one problem: Most of us consumers, as individual investors, are being shut out of the party.

These days, you hear a lot of people in the tech-investing world talk about how this is not 1999. The red ink has been washed away by the black at the strongest startups. A confluence of new technologies–the cloud, social networks, smartphones–are creating the mega-brands of the future. As one CEO memorably put it, “It’s the biggest wave of innovation in the history of the world.”

This is more or less true, but another big difference between today’s tech market and the tech market of 1999 is often overlooked: During the dot-com bubble–when most of the IPOs were pipe dreams waiting to crash–individual investors were able to buy their shares freely. Today, by contrast, most of the investments in the hottest tech startups are happening behind the velvet ropes of private financing.

US securities laws set up last century ensured that only accredited investors—currently, people earning at least $200,000 a year or with a net worth of more than $1 million—could buy stocks in private offerings. Those laws were intended to protect smaller investments from the risks of traditional private investments, and they worked for a long time. But recent changes, such as the JOBS Act, allowed private companies to more easily avoid IPOs if they so desired. And most of them have so desired.

The result is that tech companies that would have been open to ownership by everyday people in earlier decades are now open only to the elite. Hedge funds and other institutional investors jockey for access to occasional venture rounds rather than the daily battle of public markets. Corporate insiders have greater control in setting valuations, while executives escape the scrutiny of quarterly disclosures.

And so, unsurprisingly, the tech IPO has become as rare as, well, a unicorn. According to Renaissance Capital, 35% of the companies that went public in 2011 were technology startups. By last year, only 20% of the 273 IPOs were in the tech industry, and most were in the enterprise space rather than the brand names consumers knew. In the first quarter of 2015, only four tech companies went public. And none of them were exactly unicorns.

Three of those four tech IPOs have a history of losses–cloud-storage company Box, online-ad platform MaxPoint Interactive, and domain registrar GoDaddy. Only Inovalon, which runs cloud services for health-care companies, went public with a profit. In the wake of the recession, it was all but impossible for companies to go public with a history of losses but that changed starting last year, when according to Renaissance, 64% of large tech IPOs debuted with net losses, the highest ratio since 2000.

The companies that are choosing to go public aren’t the cream of the crop. Box may have a bright future, but like GoDaddy it went public at the behest of its investors and did so only after months of delays. Box also priced its IPO below its last private round, following late 2014 IPOs like New Relic and Hortonworks that took so-called “haircuts.”

Which brings up another reason for other companies to avoid IPOs–why do it when you can get better valuations in illiquid private markets? True, liquidation preferences and other private perks justify some of that premium, but private valuations are often more art than science.

The pace of tech IPOs are likely to pick up, but few of the candidates in the current pipeline are the highly coveted unicorns. Next week, Chinese e-commerce platform Wowo is expected to raise $45 million. Craft marketplace Etsy is also hoping to raise $250 million in the coming weeks. And mobile software Good Technology aims to list soon as well. All three have steady histories of net losses.

When it comes to the companies with the brightest futures, they are conspicuously absent from the pipeline. Long before the term “unicorn” became popular, CB Insights compiled a list of hot startups expected to go public in 2014. A year later, their list of hot startups expected to go public in 2015 looked suspiciously similar. And now that we’re into the second quarter, there’s little sign that many of them are planning to go public.

Ride-sharing giant Uber, lodging disruptor Airbnb, online-storage pioneer Dropbox, social-ephemeralist Snapchat, social-pin star Pinterest, music-streaming king Spotify, mobile-payments upstart Square–all have been sought after and well funded in private rounds. All have intimate connections to consumers, and would be broke without them. All couldn’t care less, it seems, when it comes to sharing their success with those consumers.

Maybe that’s why they’re called unicorns. Not because billion-dollar startups are rare–they’re practically a dime a dozen these days–but because, for most investors, they might as well be myths frolicking on the far end some of some rainbow.

Read next: Why This Apple Watch Rival Is Very Important

Listen to the most important stories of the day.

TIME Startups

9 Tips for Turning Your Invention Into a Business

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Getty Images

Start working on rolling out the business right now

startupcollective

Question: I invented something that I think has potential to become a business. What is one thing I should NOT forget to do next?

Get Real Feedback

“Your friends and family will probably support your idea even if it’s not so great. Find real people who are target customers for your idea, and see if they will actually buy it before you build it. You can use strategies like this to raise some early money from real customers who will help you make your product better than you ever could without their feedback.” — Patrick Conley, Automation Heroes

Obtain Trademarks

“If you have invented something, I will assume you’re applying for a patent. What you should not forget to do is obtain as many trademarks as possible relevant to your invention and field. These could be marketing slogans and product names. Moreover, make sure to get related domains as soon as you have a chance.” — Evrim Oralkan, Travertine Mart

Write a Business Plan

“Regardless of what you may have heard, business plans are not anachronisms — they are still relevant. Strategic planning is key to startup success; without it, you’re lost. Unfortunately, a good product isn’t everything. Without a plan and the ability to execute on that plan, even an invention with the greatest potential will wind up dead in the water.” — David Ehrenberg, Early Growth Financial Services

Validate Demand

“Most products fail because people don’t actually want them and/or are not willing to actually pay money for them. When you think you have a great idea for a product or business, you should immediately validate or invalidate that there’s actual demand for that product. “The Lean Startup” methodology gives a very specific plan for doing just that.” — Danny Boice, Speek

Execute!

“No seriously — start working on rolling out the business ASAP. Over the last few years, I’ve witnessed too many people with good ideas waste time writing a detailed business plan only to never get the idea off the ground. Do the minimum you need to do to prove you actually have a real business. Get some customers; get feedback. ” — Janis Krums, OPPRTUNITY

Make Your Early Users Happy

“Your invention may have all types of applications, but it’s important to focus on the application(s) for the set of users you’ll make very happy — enough to create buzz around your product or service and get customers to eventually pay you.” — Andrew Fayad, eLearning Mind

Check to See If It Exists

“I can’t tell you how many fab ideas I’ve had, especially in the shower, that I’ve looked up online only to find they already exist. Although it seems like the most logical and simplest next step, it is surprising how many people don’t take the time to do it. If the business idea already exists, the next question to ask is: Can I build a better mousetrap? If yes, do it. If no, skip it.” — Erin Blaskie, Next Dev Media

Be Patient

“Make sure there is demand for your invention. Make one prototype, and then try to bring in orders rather than making a ton of product and trying to sell it. Make the prototype, take photos, accept orders and market. When you have enough orders, start building. It’s the Kickstarter approach: Build one, and then sell.” — Jim Belosic, Pancakes Laboratories/ShortStack

Focus on Sales

“Get sales. Do whatever it takes to collect revenue. This process will validate your invention and get you on the road to making it a successful product.” — Thomas Cullen, LaunchPad Lab

The Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launched StartupCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.

TIME Careers & Workplace

These 5 Inventors Regret the Popular Products They Created

The pop-up ad inventor had good intentions

Many a founder has referred to their fledgling business as their baby. Pouring all of your time, resources and energy into helping something grow can make you feel like a parent raising a child. But what happens when that baby turns out to be more like Frankenstein’s monster?

Here are five popular tools and products whose creators say they wish they hadn’t built.

Related: 20 Motivational Quotes from Legendary Entrepreneurs, Leaders and Visionaries (Infographic)

The founder of Flappy Bird

For a few weeks last winter, it felt like you couldn’t go anywhere without hearing about the travails of an 8-bit bird. The addictive, impossibly tough mobile game Flappy Bird was at the top of the Google and Apple charts and reportedly pulling down an average of $50,000 a day. But in February of 2014, creator Dong Nguyen pulled the game altogether, tweeting out “I cannot take this anymore,” and “I can call ‘Flappy Bird’ is a success of mine. But it also ruins my simple life. So now I hate it.” Nguyen said that the removal wasn’t due to legal issues, but rather the hype became too much for the self-described “passionate indie game maker.”

Read more: Flappy Bird Reportedly Flapping Away For Good

The founder of Keurig K-Cups

K-Cups, the little single-serve plastic coffee pods that populate break rooms worldwide, helped their parent company Keurig Green Mountain bring in $4.7 billion last year, but the man who created them says he regrets their existence. Keurig co-founder John Sylvan recently told The Atlantic that he doesn’t own a Keurig K-Cup brewer. “It’s like a cigarette for coffee, a single-serve delivery mechanism for an addictive substance,” he explained. While the K-Cups are massively popular (and since the patent expired in 2012, all manner of beverage companies have been using the tech and design), the environmental footprint leaves something to be desired, as they are neither recyclable nor biodegradable — and therein lies Sylvan’s issue. Sylvan left Keurig in the late ’90s, and is now at the helm of a solar panel company called Zonbak.

The founder of pop-up ads

Ethan Zuckerman is a blogger, researcher and the director for the Center for Civic Media at MIT as well as the founder of Geekcorps, a nonprofit that sends volunteers to help build tech infrastructure in the developing world. But he is also the architect of what we know now as the pop-up ad. Last summer, Zuckerman told The Atlantic that he wrote the initial code to get a better understanding how to target ads to individual users, and ended up creating a monster known for NSFW images and computer viruses. “I wrote the code to launch the window and run an ad in it. I’m sorry. Our intentions were good,” he explained.

Read more: The Creator of the World’s First Pop-Up Ad Apologizes for Everything

The founder of ShipYourEnemiesGlitter

Zuckerman’s road to hell was paved with notably decent intentions – not so much for the mind behind the viral sensation ShipYourEnemiesGlitter. The straightforwardly malicious startup, which was founded by a 22-year-old Australian man named Matthew Carpenter, allowed customers to send an envelope full of glitter to their enemies for $9.99 a pop. When the requests apparently got to be too much, Carpenter sold the domain for $85,000 dollars. In a post onProduct Hunt, Carpenter wrote “Hi guys, I’m the founder of this website. Please stop buying this horrible glitter product — I’m sick of dealing with it. Sincerely, Mat.”

Read more: We Should Never Forgive the Horror of ShipYourEnemiesGlitter

The founder of Ctrl-Alt-Delete

Microsoft founder Bill Gates has done a lot of good in the world, but he does regret the implementation of the login command “ctrl-alt-delete.” In an interview given at Harvard in 2013, Gates explained that there could have been a single button to allow users to log into their computers instead of the odd three-button combination, but the engineer responsible for IBM’s keyboard design didn’t want to do it. As The Verge points out, that man – David Bradley – has previously said “I may have invented it, but Bill made it famous.”

This article originally appeared on Entrepreneur.com.

MONEY Fast Food

McDonald’s Wants to Replace the Drive-Thru with Drones

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Roger Kisby/Getty Images

That's the kind of revolutionary idea McDonald's wants to hear about at SXSW, the hipster festival where the fast food chain will be a big presence in the hopes of winning over millennials.

How’s this for an odd, arguably desperate pairing? McDonald’s, which just celebrated its 60th anniversary, and which has struggled mightily to gain favor with trendy millennial consumers, is serving as a “Super Sponsor” at this year’s South by Southwest (SXSW), the annual music, movies, and ideas festival in Austin that’s a magnet for everything young, hip, and forward-thinking.

Not only will the McDonald’s logo be splashed throughout Austin during the mid-March festival, the fast food giant will be handing out food free of charge to attendees and will welcome startups to pitch ideas that could change how the company does business. “We want to be in the flow of ideas, offering our scale to interesting partners, with the intent to make the lives of millions of people who use McDonald’s a bit simpler and even more enjoyable,” McDonald’s explains of its decision to be a part of SXSW.

There will be three separate days for pitch sessions, each focused on a different topic, such as “Reinventing the Restaurant Experience” and “Mobilizing the Transportation and Delivery Revolution.” For the latter, startups are supposed to take the fact that “our existing idea of door-to-door delivery and drive-thru will soon be obsolete” into consideration when pitching innovations. Those with the best pitches could get a chance to win a trip to McDonald’s Illinois headquarters to explain their concepts to company leaders, and potentially become partners.

Apparently, McDonald’s really wants to hear about so-called “moon shots,” i.e. big ideas that stretch the imagination and may at first seem impossible, but which could prove ground-breaking and transformative if they ultimately come to fruition. Like so:

Imagine a world where drones could deliver you food while you’re driving down the highway. Seems crazy now, but technology is increasingly revolutionizing our everyday lives.

This kind of thinking is quite a step up for a company whose most recent “Big Idea” was bringing back Chicken Selects to the menu.

Gathering solid business ideas is probably not the primary reason McDonald’s is invading SXSW, however. More likely, the company is hoping to make inroads with influential hipsters and millennials, the generation that shows far greater preference for Starbucks and fast casual restaurants like Panera and Chipotle than it does for McDonald’s and other fast food players.

Yet millennials are famously difficult to win over with advertising, and the McDonald’s brand is often polarizing, attracting haters and critics no matter what move it makes. So the company’s supersized presence at the youth-dominated festival seems puzzling to some.

“The usual SXSW crowd is not the [McDonald’s] crowd. [Attendees are] usually edgier, healthier, more techy, definitely more millennial,” Wendy Liebmann, CEO of the WSL Strategic Retail consultant firm, told MarketWatch. “McDonald’s may see this as an opportunity to show it’s become hipper, trendier and [be] using SXSW as a platform to be seen differently.”

In which case, look out Burning Man festival goers. McDonald’s may be coming after you next.

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