26 Feb 2014
SCENES FROM AN INTERNET:
A Short Screenplay by Cameron Koczon
INT. STUDIOMATES, BROOKLYN - AFTERNOON
Mandy, Jason, and David announce that they are shutting down Editorially. In a post marked by class and honesty, they cite the primary reason as: “Editorially has failed to attract enough users to be sustainable, and we cannot honestly say we have reason to expect that to change.”
INT. SOMEWHERE NEAR WEBSTOCK - NEW ZEALAND TIME
Amy Hoy reacts to Editorially’s shut down.
dammit, this is what happens when you approach software like a fairy unicorn princess & not a business http://t.co/xuEtZnm1VW
— Amy Hoy (@amyhoy) February 13, 2014
.@ceonyc spend more money than you take in… the definition of the VC experience, and also an irrefutable (mathematical) path to failure
— Amy Hoy (@amyhoy) February 13, 2014
EXT. MOUNTAIN VIEW, CA - DAY
Brian Acton, Jan Koum, and 53 others seen freaking out à la that scene in Home Alone because of the $19 billion dollar acquisition of their company, WhatsApp. Ripples of jealousy and bewilderment spread throughout the Internet and assorted tech meetups.
INT. PORTLAND, OR - MORNING
Josh, Shamir, & Co. announce their decision to sell Simple to Spain’s BBVA for $117 million dollars. The response is more somber than celebratory. CEO Josh says that the only way to build the kind of company they want is to get off the VC treadmill and partner with someone who would give them (let’s hope) both the resources they need and the autonomy to build the kind of product and organization that they want.
EXT. HANOI - NIGHT
INT. ITUNES APP STORE - 10 DAYS AFTER FLAPPY TAKEDOWN
The top 3 spots on the free app charts are taken by cheap Flappy Bird knockoffs.
INT. YOUR MIND - SO WHAT?
Here’s the deal. We’re a community of technical practitioners and business1 is still new to us. But we’re a scrappy bunch, and we’ve been figuring it out on the fly, building our own community lore and understanding on the subject. I’ve watched this process unfold and noticed two themes that concern me: the vilification of VCs and the assumption that startups are the only game in town.
- VCs are not villains.
VCs are not villains. They’re people with money who invest in a very specific kind of story: the blockbuster. For the most part, the money they invest is not their own. They invest on behalf of large institutions like universities, pension funds, and insurance companies. They invest that money in a very risky thing called a startup. Startups fail much more often than they succeed, so a VC fund makes all of its money on one or two home runs.2
Hence, the need for blockbusters. If your startup doesn’t have home run potential, they can’t fund it. If it does, they’re happy to give you all the money you want. If you take that money, you agree to something that looks like the following:
I [sign name here] will run my business on rocket fuel in order to attempt to become a billion dollar company. If my fuel reserves (cash) get low and the billion dollar business feels less likely than when we started, I will consent to either conserve fuel (cut costs / fire people), return fuel (call it quits and return the remaining cash), or give up the ship (sell to a larger company).3 Otherwise, more rocket fuel please.
Nothing sinister here. It’s just a game with a set of rules that everyone is expected to follow. And, when that game goes well, it can go extremely well.
(WHATSAPP - Enters Stage Left)
WhatsApp is the stereotypical Silicon Valley startup4, but they found their success outside of the iPhone-centric tech community that funded them. They painstakingly translated a messaging product onto platforms that no one else would touch. J2ME! That’s a whole lot of thankless work made possible by a big pile of VC cash. The end result of all that cash and effort is that millions of underserved people have access to what is essentially affordable Internet for the first time in their lives. Kind of a win.
Of course, it doesn’t always go that well. Even when things are going well by most standards, as in the case of Simple, it may not be enough for VCs to get their home run so an alternative is sought out. In the case of Simple, the alternative is a huge bank that has a lot more money and more “patient capital.”5
It might be helpful to think of VC money as a funding source for a bizarre branch of science that tests the size of markets. In the case of Editorially, they were running an experiment to test the following hypothesis:
Is the market for building tools for writers big enough to sustain a $1 billion dollar company?
Given their shutdown post, it’s clear that they concluded it is not.6 With a small team, you can only run one experiment at a time7, so they didn’t get to run the following one:
Can you grow a solid $2 million business out of building tools for writers?
That one is now up to someone else to figure out.8 Someone without VC funding.
- The startup game isn’t the only game in town.
The VC-funded startup is just one of a variety of options for starting a business, but it’s definitely the one with the best marketing team. Startup news dominates our streams and at the outset it can be easy to equate “starting a business” with “doing a startup.” Try not to do that. You don’t need to build a blockbuster. You can just build a business. The Silicon Valley™ way of building a business is a fine option for certain circumstances, but you’re welcome to skip it.9
If the startup™ isn’t the right fit for our industry culture then we need get better at seeking out and discussing the narratives that do fit our vibe. I’ve got my eye on quite a few. Some, like MailChimp, Basecamp, Pinboard, Tattly, and Hoefler & Co. are fairly well known. Others, like Harvest, Ghostly, and Cultivated Wit are perhaps less so. There’s also the growing bootstrapper movement that Amy Hoy champions which targets B2B products with “small” markets by VC standards but plenty big by regular human standards. These all represent potentially successful alternatives at various scales to the startup™.
We need to remember that there are many narrative options available to us, not one. Each has its own pros and cons that we as an industry can learn more about and you, as someone interested, can discover your favorite. As we explore these options, and discover the ones that excite us most, we must remember not to become dogmatic. Don’t assume that other approaches, and those taking them, are somehow wrong. There are many ways to build a business, just as there are many ways to design a web site. In both cases, it’s about choosing the right tool for the job.
In conclusion, VCs are not villains, startups aren’t the only game in town, and I love the way you look today.
1the non-client services kind
2This includes all the money lost in the failed investments and enough to give back.
3This is a pretty big time simplification. Lots of nuance and detail left out. For example, a more realistic number than the Austin Powers billion for VC returns is 10x money.
4 Based in Mountain View. Founded by ex-Yahoo. Backed by Sequoia. Bought by Facebook.
5 There’s a term for you kids. Just means they’re not in as big of a rush.
6 Which is both surprising and sad. Come back writers! Come back!
7 Before you get to pivot!
8Maybe if they had more energy, they could pivot their way into oblivion.
9 So long as you know what you’re skipping. Ignoring something without understanding it first is rarely wise.