You’re the Boss Blog: Why the Tumblr Deal Is a Disaster for Entrepreneurs

The Next Level

Avoiding the pitfalls of fast growth.

I have never met a fast-growth entrepreneur that I did not like. Sure, some are weird and scary smart, but what I like about fast-growth entrepreneurs is that most have a riverboat gambling streak that makes them fun, free and a little different from most small-business and corporate types.

While many in business live in horror that they could lose it all tomorrow, fast-growth entrepreneurs are always doubling down. Why? Because they believe their “jackpot” is just around the corner. Their stuff is so good that somebody is going to come along and offer them a price that is far more than the company is worth. Too often, the jackpot never comes, but the entrepreneurs buckle down and make the company work — with increased revenue, profit and market share.

And eventually, the fast-growth entrepreneurs comes to realize three things: This fast-growth thing is harder than we thought it would be. Getting liquid and selling the business will take a little longer than we thought it would take. And every time we try to take a shortcut, it absolutely kills us. The riverboat gambler transforms into a true business leader and capitalism works. And then just when we think we have it all figured out, some fast-growth fallacy like Tumblr comes along — with little revenue and lots of expenses — and hits the one-in-a-million jackpot with a billion-dollar buyout that seems to redefine what fast-growth success means.

To my mind, a lot of people are missing the point when they talk about whether Tumblr is worth $1 billion price tag Yahoo! is paying. I will leave that question for others to decide, but I do know this: The deal is a disaster for fast-growth companies because it tells entrepreneurs to be gamblers rather than leaders. In fact, I think the deal is bad for American business, period, and I fear we may have three to five years of Tumblr silliness in the market as a result.

Let’s first give Tumblr its due. It is the Ferrari of Web platforms. The sleek and fast upstart created a Web community where every blogger can write and ride in a style that says, “I am important, too.” Don’t laugh. Remember Mary Kay said she built a cosmetics empire by telling housewives they were important — but she did not give away the makeup. She sold it for cash. Tumblr has yet to figure that part out.

And that’s why the deal is a disaster for entrepreneurship and emerging companies. In the short term, Tumblr has redefined what success means for technology companies: sleek, cool, and nonpaying users are more important than revenue and profit. All of a sudden, success is no longer the moment when an emerging company crosses the financial threshold to where cash flow, margins, and market share increase and incremental expenses decrease. Tumblr’s way is a lot easier. It will not stand the test of time, but for now, every upstart technology chief executive is going to try to win the next lottery the way Tumblr did. And about 99 percent will fail.

I am not opposed to jackpots. And I have no doubt that Tumblr’s team worked extremely hard, and for building a great site with cool design and 100 million users, they deserve a big reward. But $1 billion stops everybody in their tracks and says, “Let’s do it the Tumblr way.”

Of course, Tumblr supporters will say, “What about the potential ad revenue with 100 million users?” Well, there is a reason it’s not going to work. It would be the equivalent of covering a Ferrari with an ad wrap. You would no longer have a Ferrari, and if you insert ads, Tumblr will no longer be cool. Fast-growth entrepreneurs should pay as much attention to the Tumblr deal as we do to last week’s lottery winner.

Cliff Oxford is the founder of the Oxford Center for Entrepreneurs. You can follow him on Twitter.

Article source: http://boss.blogs.nytimes.com/2013/06/06/why-the-tumblr-deal-is-a-disaster-for-entrepreneurs/?partner=rss&emc=rss