Guest Post - Jof Arnold - VCs will die MEME
By Stewart Townsend on Dec 08, 2008
VC will not die. There, I’ve said it. Again. This post addresses a number of points raised in a TC.com article which I feel are misleading.
[Edit 2: VC = Venture Capital or Venture Capitalist in this context.]
First though, let me open by mentioning a few things which are important background information to this post (and will help you decide if you want to read it further):
- My degree was in mechanical engineering, not economics.
- I’ve only been in the web industry since July 2007.
- I’ve tried, and failed, to raise VC money for a startup.
- I had a startup until recently.
- 99% of all the people I know, and drink with, are in startups.
The only reason I think I’m qualified to write this post is that I count amongst my good friends a number of VCs who’ve taken time to explain the industry to me over numerous beers/breakfasts. [Eternally grateful, btw; you know who you are ]
So, on to the opinions:
Successful web companies are expensive (features aren’t)
Bedroom successes like HotOrNOt - and TC.com for that matter - tend to give the impression that anyone with wordpress and EC2 can make a multi-million dollar web company in minutes. There are some occasions where this can happen, but as witnessed by the endless stream of tiny web companies that come and go, this is a rarity and not the norm. The key reason is that margins in web apps tend to be quite small (eg ads), so to start making serious cash you need scale.
Unfortunately, scaling isn’t just about having the latest elastic-cloud infrastructure; it’s much more about brand, design, advertising and marketing… and that is where things start to get seriously expensive. For example, Netflix is reputed to spend >$1m pcm on marketing alone!
A web app is not a company. It’s a feature. Don’t forget that.
“But I’ll grow it organically”. WRONG. WRONG WRONG!!!
Or rather “Perhaps, but unlikely”. But I understand where you got that notion from and I admit I was duped at first also; it’s all this talk about things “going viral” isn’t it? Well, sorry to disappoint but it just isn’t true for most people. Build it and they probably won’t come.
Let’s suppose you build a really awesome web service/app that could appeal to 1 in 100 people in the entire world - a huge potential market of 70m users. That means you need to speak to 100 people before you stand a chance of even one of them telling someone else about it. And they will have to tell another 100 and so on. The problem is, most people outside of the web community communicate with <50 people on a regular basis so the maths are against you.
All the while you are doing this slow ramp-up, someone else is going to borrow $Xm VC money, get a serious campaign together and obliterate you by seeding their brand in front of millions of individuals. They’ll also have the money to hire the staff necessary to support such success.
And let’s not even consider the notion that by the time you’ve organically grown your startup to the point you can start making money, the world will have moved on.
Sometimes I wonder if web tech people bury their heads in the sand a little too much when it comes to things outside their industry. If that’s you then I have a newsflash: early stage web tech is not - and hasn’t been for a long time - the pillar of many VC portfolios. I know the tech industry think it’s the be-all and end-all because they always seem surprised when big firms like 3i pull out of early-stage.
VC is all about investing large sums of money at high risk (which means new markets usually) for ridiculously high returns. The fact that the technology side of web tech has been commoditised and ubiquitous means that in the most part the web is no long as hot as it was 5-10 years ago. What’s hot now is greentech - and there VCs are like pigs in shit; high startup costs, high risk, massive returns. VCs haven’t died - they’ve just moved on to pastures new.
Ok, so I’ll build my startup without VCs
Most people (I can list the exceptions - there aren’t many) shouldn’t build a business on the assumption of funding ANYWAY - in any market conditions. I admit I’ve made this mistake and it was the reason why we closed our first startup this year; the business wasn’t predicted to breakeven for a long time and required two rounds of VC money to be interesting. And let’s face it, how many VCs in the UK were going to fund something that risky when they didn’t understand the business and we were a bunch of first-timers.
But never mind the scarcity of money - you all know you are going to be shafted if you get funding early-stage, right? Simple rule: don’t take money when you need it. If VCs are approaching YOU for a slice of the action, then it might be worth considering what they have to offer because you know you can refuse any bum deals.
I lept from my previous job into the tech industry because I saw a lot of incredible startup exits and wanted a piece of the action. It helps to be honest about these things. I wanted to be rich. But right from the start I knew my experience, knowledge and plain odds were against me so I spent a long time getting to know the market and the people. I also joined/founded a startup fairly early in my web career so as to see what it was like on the frontline.
As I see it, the audiences of many tech blogs consist of a lot of people like me, but where I think many of them differ is in the sour grapes department. I get the impression that many people feel it’s some sort of RIGHT that they sell their niche app to Google for billions. By virtue of being denied success they have an in-built desire to dismiss the opportunies/success of others… and what better symbol of success in the web industry is there - second to an exit - than raising VC money.
By dissing VC’s, they are secretly saying “fuck you for not making me successful”. And probably a little bit of “but I’ll take your money if you have some, please”
Finally, it’s entrepreneurship!
Most of what’s above is my naive interpretation of the world around me. But there’s a powerful force behind all this which guarantees there will always be VC - and that, dear reader, is entrepreneurship… or perhaps it’s capitalism, to be more brutal about it.
If I’ve branded and targetted this blog well enough you are probably a founder of a startup - or at least involved in one. So you’ll know all about how you saw an opportunity and invested in it with your intellectual (and possibly financial) capital. When dissing the VC model, consider: Why didn’t anyone else do it? Why did you choose that particular thing? Would you choose something else if only you had more money or more skills?
The fact you are able to start a startup is because you have something that someone else doesn’t - and you are leveraging that gap. Angel investors work on a similar principle, only they also bring lots of money; they use the fact that they have money, when others don’t, to take opportunities that might not be available to them otherwise. They are, in effect, also entrepreneurs in the same way entrepreneurs are investors.
But what of people or organizations with vast amounts of money? Well, they have another layer of resource; people. These groups/individuals split their large sums of money amongst smaller groups who can invest it for them - which in a crude sense is how VCs work.
So as for VCs dying, I think that’s highly unlikely. Provided there are people with large sums of money to invest, there will also be experts who will step in and help them. What do you think? Comment me!
[Edit: in case you skipped to the end, I do indirectly make the point that I don't expect web startups to find raising VC easy. The writing has been on the wall for early-stage VC for a long time]