Silicon Valley these days is made up of two kinds of entrepreneurs (I’m painting with broad strokes, bear with me). The first group is the old guard. These are people who started companies during the late nineties and up until the 2000 stock market crash. The second group was either in school during that period, or doing something other that working in the tech world, and have started companies after the fallout from the crash.
Generally speaking, experience counts for something. So you’d expect entrepreneurs who’ve been through the ups and downs of a tech startup to have an advantage over the newcomers. Or at least have an equal chance at success. But in fact the opposite may be true. A number of venture capitalists I’ve spoken with have said that too many “old guard” entrepreneurs are not being bold enough in their business decisions, and it’s hurting their startups.
The first VC to bring this up to me was CRV’s Saar Gur at a recent conference. Since then I’ve brought it up with a number of other VCs. Across the board they agree - many entrepreneurs from the first bubble are overly cautious, and hurting their businesses.
The Old Days: Rock and Roll
Life was good in the “old days.” Venture capitalists, flush with cash and a little unsure how long the good times would last, encouraged entrepreneurs to raise money and spend it as fast as possible. Literally. The goal was to get revenues up to a million dollars a quarter and start the IPO process. By the time they got out the door, valued by the market on forward revenue estimates, they’d be a billion dollar company.
That meant raising money, hiring everyone in sight and paying for business development deals that could bring in revenue. Those deals were usually not profitable. You’d pay AOL $10 million per year, for example, to get access to their users in some form. That deal may only spreadsheet out to a million or two a year in revenue. But the board would approve it anyway - and write the $8 - $9 million loss off as a marketing expense. Since the market was only valuing based on revenue, it didn’t matter anyway. Capital was cheap. Only revenue was valued. Even if you paid $10 to get $2.
I personally sat through countless board meetings as a corporate attorney and watched these decisions be made. In general, the venture capitalists were the ones demanding growth at any cost. And the entrepreneurs did exactly what those venture capitalists asked.
The intense pressure entrepreneurs were under to get revenue at any cost led them to make decisions that, with hindsight, were blatantly foolish. And when the market crashed on April 14, 2000, those same entrepreneurs had to lay off most or all of their employees after making those decisions. And face outright humiliation on FuckedCompany, the site that chronicled the downfall of the Internet bubble.
It left a bit of a scar.
The New Guard
Entrepreneurs who didn’t go through the crash don’t carry that burden. They don’t have memories of looking their employees in the eye as the laid them off. They were never trashed on FuckedCompany for making ridiculously stupid decisions. Basically, they’re optimists, as any entrepreneur should be. They have no baggage.
And as a result they do exactly what they should do - they take big risks and hope for a big payoff. For the venture capitalists it’s even more important. They need one or two big wins in every fund to generate enough profits to keep their limited partners happy. A gun shy entrepreneur may not take appropriate risks at appropriate times, and the chances for success plummet.
I’m definitely a bit tainted myself. What I saw happen to startups in the first bubble makes me hesitant to raise money (we never have), hire too many people, or generally spend money (our offices are still in my house). I think less about growing the business sometimes than I do about losing what we’ve built so far. That’s part of the reason why I hired Heather as CEO to take over the business side of things. She’s conservative, but knows when its time to take risk and grow the business.
My interactions with Edgeio, a company I co-founded and which went into the deadpool last week, were similar. It seemed like every board meeting I was saying the same thing - stop spending money, stop hiring, stop. I was out voted, and the company followed its own path. The fact that they ultimately failed, though, doesn’t mean I was right. The investors felt that the time to spend and try to grow was now. It doesn’t matter that Edgeio failed, what matters is that it is the right approach if you are trying to make something big. If you want to be conservative, don’t be a silicon valley entrepreneur.
Taking risks doesn’t mean raising more money than you realistically need. It doesn’t mean hiring 20 people to do what 4 can do just fine. And it certainly doesn’t mean taking massive losses in exchange for a small amount of revenue.
But it does mean that you should raise money when it makes sense, hire people when you need them, and grow the business with a bold, take no prisoners attitude. Those are the entrepreneurs that change the world and ensure that their great grandchildren have massive trust funds. They are the ones that make Silicon Valley such an exceptional place. Don’t forget what happened in 2000 - but also don’t forget that you are here to take risk, and go for it all.
Try many, many times! Failure only means success, my daddy told me!
btw
I’m introducing “Balm” on the site!
http://fakesteveballmer.blogspot.com
Perhaps the real answer lies in incorporating BOTH perspectives in a business.
Experience DOES count for something.
It is probably best to have a wide range of professionals who can bring varied approaches to the table. In essence, the wisdom of the crowd speaks volumes.
So the daring optimism of the newbies blending in with the pragmatism of the experienced - can produce a more proficient enterprise. The key lies in a democratic blending as opposed to a hierarchy where one can nix the ideas of the other.
Good read! Thank you.
I have had to go through similar issues a few times, but I learned from my mistakes, always own more then 51% of the company, that way, you cannot be “out-voted” no matter what others say. Of course, this puts a lot more pressure if things go bad but hey, life is about risks… take the bump on the head and move on
Jon
Yep, win some, lose some. That’s part of the game.
Nhick
http://www.itrush.com
“These are people who started companies during the late nineties and up until the 2000 stock market crash.”
“They don’t have memories of looking their employees in the eye as the laid them off.”
I started a company in 2003, and I fired plenty of people. Your brush is broad indeed.
The really important thing that young people in the valley don’t understand is that to succeed you have to be ahead of the curve, not following it.
None of these startups are ahead of the curve and 90% of the applications that come out of Silicon Valley these days only waste people’s time.
Michael Darling, be nice and do not delete my Plug for PHSDL, it is my Baby. PHSDL is an Anti Zlob Trojan ActiveX Malware domains Spam Filter…
Love and Kisses Igor The Troll.
Woo an article. A good one too, nice read.
@Chris .R - “ahead of the curve”? ugh. Did you read than on your cliche-a-day toilet roll? Soz mate but that bullcrap doesn’t wash.
“@Chris .R - “ahead of the curve””
My toilet paper doesn’t have any printing on it, sorry. I actually use the toilet paper at the office most often and they use the cheapest stuff available. Not even double ply.
I have to give it to you. This was an excellent article!
I guess you do have a few humble bones in your body.
The problem with VCs and super aggressive investors is that what is best for them is rarely good for most of the entrepreneurs they fund. Aggressive investor ROI models are based on having lots of failures and just a few BIG BIG wins, which means doing whatever it takes to get fast growing revenues and crazy multiples. As such, most of the VC funded companies are unable to sustain themselves and fail…works for the VC’s, but not for the 9 out of 10 entrepreneurs that give their lifeblood and fail.
It sounds like you are growing your company the right way and will change your criteria for who you invest with in the future.
I apologize for my earlier comments about Edgeio.
“but not for the 9 out of 10 entrepreneurs that give their lifeblood and fail.”
I hate to comment again, but if you can’t make a profit, then you either have to change your business or you fail. Why should online businesses be any different than offline?
I have to move our business 3000 miles just to get away from what’s taking our top half, and I’m not sitting here making excuses. It’s an excuse.
Many would not fail if they grew their business in a more traditional sense and were not forced by their VC’s to incur ridiculous infrastructures that can only be supported by the 1 out of 10 that actually achieves the highly improbable revenue targets. We have all seen the spreadsheets that all hit the 100M annual revenue mark in just a few years.
This article seems like it’s all about you trying to save face.
Wish I was in silicon valley. Love the spirit!
“Many would not fail if they grew their business in a more traditional sense and were not forced by their VC’s to incur ridiculous infrastructures”
I know we’re doing comments on a blog post here, but this is actually very interesting. Can you elaborate on this and provide some examples or documentation???
I’m actually curious as to how they would force somebody to take on a backwards business plan?
@jose, My business makes about 1/4M gross, and I am working on search. Say a VC came in tomorrow and put 2M into the new US company in SF in common shares and sat one of their @ssholes on the board of directors. What would they ask us to do that would kill it? I think that would be the easiest way for me to find out what I’m curious about in relation to your statement.
I like poor income entrepenurers. They are like real life Elvis or Rockstar. Where do I find who lives in closet?
Great Article!
I just think that the old guard, (myself included), are just waiting to see where this is going before we dig deep and take a run at stuff. I love seeing the brash bravado of the young guns - I love the arrogance - I love seeing them be so optimistic - it is inspiring - it feels like 1999.
Maybe I am too old skool but when a business plan needs VC financing to get off the ground - that is when the bell starts to ring for me. It is one thing to get funding to build a manufacturing plant - it is another to get VC money for Aeron chairs and Swanky diggs in class A office space.
The fact that you run the biz out of your house speaks volumes - keep burn low and revenue high and take big scoops - awesome Mike that’s the ticket.
Cheers,
Eric
Everyone fails at one point or another. It’s usually those who learn from their failures and pick themselves up who get ahead.
Here’s 7 motivational quotes to start a successful entrepreneur’s day!
“The fact that you run the biz out of your house speaks volumes - keep burn low and revenue high and take big scoops”
http://www.hgn.ca/corporate.html
Eric, your team is one person. And Canada sucks for business. I just blogged about moving the fsck out of here. These people are playing with 10s of millions of dollars a piece. Like Cognos, except 10 times smaller. No VC is ever going to fund a Canadian business, and the BDC is a joke.
Were you actually in the bay area around 99 or are you talking about your experiences in Toronto?
I feel bad about firing a bunch of people making good money and relocating, but the environment here is really not good for web businesses. How are you coping with that in Toronto?
They often would get you to beef up with “known” management staff and spend tons on sales and marketing to get your revenue in hyperdrive. All this is necessary to get the 10x revenue multiple liquidity event they seek in 3 or so years, but the risks are very high and very few companies are successful using this model.
Once you burn up the first series funding and do not meet revenue targets, they can either walk away and let you die or make additional investment with a lower market value and payout preferences that pretty much ensures that only they can get rich should the company ever make it. I have seen many a company where the founders end up with such a small equity stake that they might as well go work for somebody else.
For some entrepreneurs this model works great because they too are only interested in quick paydays before moving on to their next gig.
For the record, I have only funded my companies with personal funds and private investors that were willing to be silent and minority investors. Growth is funded by income thrown off by the company. It is indeed a much slower route and does not produce the multiples as quickly as VCs expect, but I am in control and have a much better chance to be successful.
Of course, all VCs are not this way, but MOST certainly are.
Good article, but…
“A gun shy entrepreneur may not take appropriate risks at appropriate times, and the chances for success plummet.”
I don’t agree.
A gun shy entrepreneur will do things, spend money, take calculated risks… wisely, or at least more wisely than the other type. They build companies that generate enough cash to sustain themselves.
A VC backed entrepreneur is more likely to spend like an idiot, blame others, the economy for his failure. It’s easier to spend money when it’s not yours. And guess what, a LOT of money is available, so…
I think you are acting like a gun shy entrepreneur with TC. (Offices in the house, no crazy marketing campaign) and … your are profitable.
Those in the Valley should consider themselves lucky to have such an easier access to capital than anywhere in the world. The hard thing to do is to spend VC money like it’s yours…
“Once you burn up the first series funding and do not meet revenue targets, they can either walk away and let you die or make additional investment with a lower market value and payout preferences that pretty much ensures that only they can get rich should the company ever make it.”
Is it really that simple? Where they just template software businesses to a boilerplate like that and simply see if it works?
If each business is a couple million they must loose so much money in bad investments.
=~ /loose/lose/;
sorry about that.
As a survivor of both the stock market crash of ‘87 when I was a retail broker of technology securities, as well I’m a survivor of a business I had co-founded in the very late ’80’s/early 90’s that did mortgage lending during a very high interest rate period, and as well -a survivor of the dot com crash, I definitely agree. (maybe I am an old fart as opposed to old guard)
I’ve seen as much of the dark side as the good side- and I wear those badges of honor (or stupidity)
But the point here is if you have not see the down side of a cycle, you may think it is as non-existent as the tooth-fairy and will not put in place the measures to manage the downside risk that everything in life and business face.
On the other hand, because of some of that caution, I have missed many an opportunity. Example: My wife has been begging me to buy a house for the last 10 years. I keep ‘reminding her’ for most of those 10 years, that the prices are bound to plummet soon. Well, things have softened in the bay area, and maybe they are not exactly ‘plummeting’, but I probably could’ve done fine if I had bought during many of the times that I thought the market was at its top, which was most of the last 10 years.
Love these kinds of posts on Techcrunch. Inspiring, to the point and thoughtful. Thanks.
Success comes to people that see a real opportunity, i.e. a better or new way to do something, the flexibility to adapt, total dedication in the face of adversity to fulfil the vision they have. Most importantly they do not think of the exit or size of the opportunity when they start off they just want to fulfil their vision.
Old guard or new guard is irrelvant.
Do the math. A $5M investment in 15 companies makes money if only 1 pays a 16x investment multiple. The potential multiples right now are so huge (much larger than 16) for questionable business models (Facebook, YouTube…..) that investors are statistically better off having a few BIG winners than lots of OK producers.
Purely from an investment perspective, I would probably do the same thing.
“Do the math. A $5M investment in 15 companies makes money if only 1 pays a 16x investment multiple.”
This sounds like somebody planning on counting cards in Vegas. Business ventures shouldn’t be like that.
There is the strong possibility that out of those 16 junk bond investments that NONE of them pays off. Even if you have the Barry Bonds style free agents working there.
I have to say I don’t believe this. It would be irresponsible.
Does anyone here have entrepenurer’s fighting spirit like Rocky Balboa does?
Every entrepenurers should do this.
1. Train and work hard
2. Avoid begging money or take VC money.
3. Grow your startup icon.
4. Find a favorite journalist(NYT, Techcrunch, etc) to make you iconic hype.
5. Presentation.
Ivan Drago is Microsoft, Google, Yahoo, etc.
This is 1984 steve jobs who did presentation .
http://video.google.com/videop.....4946885931
http://www.youtube.com/watch?v=2GEDy042iNM
Inspiring post Michael!
Got a startup in the pipeline for you to review imminently and this kind of bullish post helps make it feel like I’m doing the right thing. Time’ll tell I guess…
At the rate technology companies fail, junk bonds are much less risky. At the rate “good” technology companies fail, VC’s absolutely need to have some produce the huge payday to offset the number of inevitable losses, which means that MOST of their deals need to be structured to enable the company can quickly hit the huge payday.
oops…you know what I meant.
Off to make money…then time for golf and family fun.
@Chris R.
“And Canada sucks for business. ”
“the environment here is really not good for web businesses.”
If there is one type of business that you can basically start from anywhere in the world, it’s a web based business.
Yes, there is less money available outside the valley, but to start and grow a business, it depends what your goals are.
Owning 5% of 100M company (the VC call the shots)
or
100% of a 5M company (you call the shots).
The best place to start, flip a company and make a few (!) bucks is SF bay area.
But to start, grow and keep control of your company, you should stay in Canada!
“At the rate “good” technology companies fail”
@jose, if you look at youtube for instance, you had 2 of the core developers at Paypal that started that up. They already had the know how, dev help and connections to make it succeed. Greenspan had the same at MySpace because of eUniverse.
You look at 95% of the stuff that comes across TC in new posts, and these people are total no names with no history. I have a better history than most of these people and that really speaks volumes.
The rock stars all go work where they have job security. These aren’t “good” technology companies. These are people with no chance what so ever.
I am also positive that most of these startups are funded not by VC, but by solid, non-web businesses that have no real idea of what it takes. I guess you could call them VC.
When I think of VC though, I think of risk capital at a bank, and that’s a whole other ball game.
“But to start, grow and keep control of your company, you should stay in Canada!”
Ah, hahahahahahahahahahahahhahahahahahahha
cough,
hahahahahahahahahahahahahah……
@Chris R.
“Ah, hahahahahahahahahahahahhahahahahahahha
cough,
hahahahahahahahahahahahahah……”
Objective met!
Chris R. - (If you’re after success, you’ll take this advice and run with, and take it in stride, cause I only mean well.)
You are obsessed with hearing yourself! Stop feeding your ego with lies and bullshit possibilities. I’ve been a long time TC reader and lurker, your name constantly pops up on the comment section with this pompous attitude always embedded. You have zero credibility in my books, from what i have observed, because you are simply an idealist. you just like the idea of an entrepreneur. you talk about what i would do, what we should do, what i’m doing etc, YET -yet, you have ZERO substance. there is no action in any of your words.
You know how i know this? because you keep promoting what you’re doing. you want others to know what you’re going to do before you even do it. a visionary doesn’t promote anything, they get it done and the promotion works naturally.
the best service TC can give you is an IP ban, so you can spend the time away from TC and getting the reality check you so need, and to save us from your annoying and recurring comments.
Happy Sunday all. Great article Michael!
“Longtime reader” IT blogging is very much a conversation. For instance I wanted to know what jose meant by VC’s destroying a business that would have done well otherwise.
As for the substance I have no idea what you mean. Do you want SVN access to the source code?
“a visionary doesn’t promote anything, they get it done and the promotion works naturally.”
If by naturally you mean by huge extensive campaigns then yes. Nothing on the web works “naturally”. I hate to burst your bubble.
Really like some thought provoking pieces like this - keep ‘em coming Mike.
I’m from the “old guard” and must admit that I do have a preference for wanting to grow businesses organically now and less about raising millions of pounds to go large quickly. I had a big success so it’s not fear of failing, probably more down to the fact that it focuses you on trying to get revenue into the business as early as possible and then scaling from there.
I know of one company who got funding in the UK earlier this year and have already spent most of it, seeking a new round. As they had money in the bank, they felt they could spend lots on PR, offices, people, marketing… and that throwing money at something would work.
Far better to not get funding, not be tempted to waste the money, and definitely keep the cash burn as low as possible at all times!
Great post.
It is so true… We strive to make a big change in our industry. This is what i always wanted. I remember myself at age 15 looking at Gates and Jobes and just knowing that this is where I’m going to be.
There are so many times that I look in our company (i run a startup) Excel sheet and have this feeling of let’s just go big. Don’t try to make the Excel say we can live enough time with the money we raised.
This is a real dilemma. Are you spending more of what you have in order to try to do a big impact (especially in such a rapid evolving and competitive landscape) or do you plan your moves carefully so to be sure you will have enough money to get to where you want in a more slow and manageable way.
I don’t have the answer. Like everything, it is probably somewhere in between and it’s definitely not the same answer for everyone.
Good post. I like that Arrington didn’t say ‘I knew I was right’ for the Edgeio deal, even if he was right. He leaves it to the reader to decide to come up with their own conclusion as to whether or not he was right.
Good post Arrington.
-Reader
Michael-
You point out the difference between Enterprise Value and Stock Value. The latter is the sole focus of the VC community and the former is the intrinsic or long-term value of the actual business model.
As any CEO knows, tension between management and VCs nearly always exists between the goals of building a valuable business and “putting lipstick on this pig to move it.” Often the decisions that improve one Value have a polar opposite effect on the other.
Your analysis is right on and timely. Its NOT “different this time.”
“Those are the entrepreneurs that change the world and ensure that their great grandchildren have massive trust funds. ”
I would suggest that giving the great grandchildren a massive trust fund is a sure way to trash their lives. The term “Trust Baby” comes to mind. Better to let them make their own way and spend the money elsewhere. Interesting post though.
This is one of the best articles I have read in a long time summarizing the general sentiments of startups for the last decade. As a bubble survivor (although we never raised money), we are a lot more conservative than others in our domain.
I have to disagree with everything said so far.
The late 90’s didn’t just see a lot of businesses that didn’t have what it takes, but it also includes entrepreneurs who weren’t worth funding.
The guys today still went through the bubble - but as observers. They’re generally cautious, conscious people. They know it would be hard to lay people off if need be. But I’d also note that they’re probably also a lot sharper than the previous lot. I think the VCs are doing a better job of backing the good ones this time.
Nice post Mike, we are following all of the above, nearly went down the 1st one but hit the fork in the road early.
See you Tues
Why is a Stanford Phd in Computer Science only making maybe 160k? I find bay area companies operating on the cheap.
Longtime reader, thank you for saying what you did in post #38. Chris continually posts and adds no value…. please stop and launch your product - and then come back and post.
I am also like the old guard on my projects, low burn rate out of my house while I keep a very good paying day job. Over 90% of my revenue is profit, and my subscription based service is completely automated. Will I get rich and retire, probably not… but it’s nice additional revenue and I know I am running it responsibly - so I can better serve my user base.
But (as Mike pointed out) this mentality certainly does stunt the desire to innovate and do more. I would push the envelope much more if this was my #1 focus.