TechCrunch, Venture Capital, Record Labels and Getting What You Asked For

There have been another spate of interesting conversations around the tech industry about what goals a tech company should have, and how they should achieve those goals. Right now, most venture capital organizations and the majority of trade press support an infrastructure that's optimized towards a certain set of results; The question is how we accommodate those who are trying for a different set of results.

One great conversation came from Ev Williams tweeting about tech conferences, and how Twitter would have been received:

I don't think Twitter would have done well at TC50 or Demo. (Likely response: WTF?) Wonder if Google would have. (Search? Yawn.)

I replied, "But @ev, response at TC50/Demo can be determined by reputation & ability to tell a story, both of which your team has." and Ev responded in kind with "Perhaps. But are reputation and ability to tell a story determining factors of success?". At that point, I realized we may have been talking about slightly different things, closing out with the brief observation " Narrative & experience are necessary but not sufficient. They're useful when creating a product, not just onstage."

And the core of it is that TechCrunch 50, Demo, and other tech industry showcase events are really optimized for a certain model of business, following a traditional path of venture capital funding, a certain amount of buzz or attention within a particular community, and (these days at least) an exit route that involves selling to a large incumbent that's interested in that area of innovation. I have lots of friends who have followed this path, and I don't begrudge them their success with it, but I think the logical extension of this path having become well-trodden is that we end up with events that as I mentioned last week, can be fairly criticized as insufficiently world-changing.

Interestingly, that last bit of criticism from Sarah Lacy on TechCrunch, saying that companies that had demonstrated their wares at the TC50 conference had for the most part not been very ambitious, was followed by a thematically similar post by Vivek Wadhwa, asking what value VCs have really brought to the world of innovation. I think the answer to Vivek's question is "It depends." but it's a very healthy sign if TechCrunch itself is questioning the fundamentals of the VC model and startups, and perhaps that skepticism justifies my tentative endorsement of the reigning regime of tech pundits.

But the crux of what I see as this reckoning point for the venture capital industry and venture-backed startups is that VCs are starting to look a lot like record labels. That's not a criticism — I used to work in the record industry, and I've enjoyed collaborating with a number of venture capital firms over the years. In both cases, though, the majority of their work is optimized for a certain model of success. This neatly mirrors Trent Reznor's analysis of what it takes for a new band to succeed:

If you are an unknown / lesser-known artist trying to get noticed / established:

  • Establish your goals. What are you trying to do / accomplish? If you are looking for mainstream super-success (think Lady GaGa, Coldplay, U2, Justin Timberlake) - your best bet in my opinion is to look at major labels and prepare to share all revenue streams / creative control / music ownership. To reach that kind of critical mass these days your need old-school marketing muscle and that only comes from major labels. Good luck with that one.

If you're forging your own path, read on.

  • Forget thinking you are going to make any real money from record sales. Make your record cheaply (but great) and GIVE IT AWAY. As an artist you want as many people as possible to hear your work. Word of mouth is the only true marketing that matters.

As it stands right now, the VC model is optimized for creating new Lady GaGas. I happen to like her work, so it's good that there will be more of those, both in the tech and entertainment worlds. But some people just want to be indie rockers, making a living with the work they love. It's that goal that is underpromoted in our tech trade press, and that perhaps inspires some of the skepticism around what gets hyped up.

That leads, naturally, to Jason Fried's post on 37Signals heralding their new $100 billion valuation. (At least on paper)

37signals is now a $100 billion dollar company, according to a group of investors who have agreed to purchase 0.000000001% of the company in exchange for $1.

Founder Jason Fried informed his employees about the new deal at a recent company-wide meeting. The financing round was led by Yardstick Capital and Institutionalized Venture Partners.

In order to increase the value of the company, 37signals has decided to stop generating revenues. “When it comes to valuation, making money is a real obstacle. Our profitability has been a real drag on our valuation,” said Mr. Fried. “Once you have profits, it’s impossible to just make stuff up. That’s why we’re switching to a ‘freeconomics’ model. We’ll give away everything for free and let the market speculate about how much money we could make if we wanted to make money. That way, the sky’s the limit!”

I had talked to Jason a few weeks ago when he was planning to write this post, and though timing had it being published at the same time as Twitter's just received $100 million in funding, it wasn't designed to be a pointed critique of any particular company or funding event, so much as an overall pattern of not questioning particular narratives in the tech industry. And perhaps even more, it's a criticism of the fact that we don't question the values and goals that those narratives express.

And that was perhaps the point that was missed in Jason's rant about Mint's sale to Intuit which I blogged about last week. People got distracted by the speculation of whether Mint sold at the behest of the founders or investors. (As it turns out, it was likely the decision of the company's founders.) But the larger point was that, by selling to an incumbent from the last generation, Mint's team was expressing a desire for incremental improvement in an industry, instead of radical revolution. There are merits to both goals, but I know that a lot of us who truly love technology and have had our lives and companies transform by it are hungry to see more people be ambitious and shoot for creating revolutionary change instead of evolutionary change.

It's reassuring, though, that despite coming out on opposite sides of a VC funding story this week, both Ev's questioning of how tech conferences and media evaluate startups, and Jason's questioning of how VCs fund and (over)value startups come from the standpoint of asking: Can't we do more? Can't we do better.

It seems clear that the answer is, yes, we can support different outcomes, ones that optimize for more ambitious or radical changes. But we can't keep following the same path and wondering why it doesn't lead to a different destination.

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