Results tagged “funding”

One of the first questions venture capital investors ask people who make tech products and tech startups is if the entrepreneurs behind them are just trying to have a "lifestyle business". It's a euphemistic term, usually used with a slightly derogatory tone, that indicates an entrepreneur is "only" trying to make a company that will keep them in a happy lifestyle, providing for their family's needs and their friends' employment.

But my heart lies with the lifestylers, the mom and pop businesses. Even well-known businesses can basically run like lifestyle companies, with examples including functional sites like Craigslist and 37signals' various apps (though 37signals has taken some outside funding), and media startups like MetaFilter and Dooce. Each of these sites reaches audiences of millions and has community memberships that can range up to the hundreds of thousands or even higher. For even for the good VCs that don't see "lifestyle business" as an epithet, these kinds of businesses don't represent a success that they can participate in; lifestyle businesses provide great returns for their founders if they succeed, and they almost always delight their community of members, but they don't make tons of other people rich.

Where they do succeed on a large scale has been in innovation, in creating the cool new ideas or thoughtful choices in user experience that help influence larger companies and later efforts.

So historically, lifestyle businesses in the tech realm have only had impact in the narrow niche that they focus on, limited by either geography or demography. Even the most wildly successful basically plateau at a million users. They change the future of the web through the influence of their innovations, not through the direct impact of amassing large user bases.

Except that doesn't have to be true anymore.

The Web-Scale Lifestyle Business

One of the reasons that lifestyle startups have had to avoid scaling too large is because resource constraints limited either the total size of reachable audience, or the richness of the interactivity that could be supported for a user base. For example, running a site with an enormous user database used to require a significant up-front investment in servers, databases, load balancers, and even simple physical infrastructure like contracts to power providers and hosting facilities. Those costs followed a stair-step pattern where each subsequent round of growth was followed by a huge required outlay of dollars. Even some of today's biggest-scale bootstrapped startups, like Craigslist, are relatively modest in the level of user experience innovation they offer. That's not because they lack the technical chops to do so, but because enabling the cutting-edge realtime features that many sites use today would have been prohibitively expensive during the time when their sites were first scaling up.

The fundamental economics of reaching a large audience don't work that way today, though. Cloud computing, more efficient infrastructure, and delivery as a service offerings change the math, particularly by not requiring large up-front investments. If your community takes off and you're built with a contemporary architecture, you can scale your costs along with income. This has some implications which are subtle but profound:

• Being able to succeed with slower growth means you can respect your community members by not having to have an onrush of too many new users at once. Preserving a site's culture is good for the whole web.
• Lifestyle businesses have much more flexibility in revenue models, often being able to combine membership, advertising and merchandising into enough money to pay the bills. Gradual growth lets the entrepreneur experiment with these different models instead of having to shake down the community all at once through a paywall or intrusive ads.
• Not having to face the looming threat of a precipitous increase in infrastructure costs lets the startup's founder stay focused on product and community, instead of splitting time between keeping the site running in an environment it's about to outgrow and pounding the streets looking for money.
• The single biggest value that investors would offer other than money itself was connection to a network of established entrepreneurs that could help the startup survive. But if you're building a web startup today and don't already have a network, there's probably little hope for your startup anyway. Your business is predicated on having the resource that you used to have to rely on others to provide.

And You've Got Peers

The last thing that traditional investment would offer was expertise on what to do when your company succeeds. But these days, there's an entire community of other successful scaling experts who are willing to share their lessons. Just a few years ago you could count the number of people who'd built a website with a million users on one hand, but several of the best non-VC-funded startups have bootstrapped their way to a million users already, and the people who made it happen have moved on to new jobs since then, where they're allowed to share not just their experience but often the code and technology they created to make scaling possible.

Getting past the millions of users mark and into the tens of millions level is going to become increasingly common. When LiveJournal bootstrapped its way into becoming what was likely the first richly interactive social site with a million users in the early part of this century, much of the initial technology to do so had to be created specifically for that purpose. Today, using the much larger social networks and app stores that exist for distribution, social apps are getting to a million users in weeks, using largely off-the-shelf tech.

Getting Past Goldilocks

Right now there is often a "Goldilocks" problem in traditional VC-funded companies. You can either be big enough to fit into the classic funding model, where everyone's not-so-secretly hoping for The Next Google or The Next Facebook, or you can be small enough that you're dismissed as a lifestyle business which will never impact a huge audience. If you had enough ambition to want to reach millions of people with your work, but enough sense of control to want to keep ownership of your site, though, there was never a good solution during the web's first two decades that was just right.

Entrepreneurs faced with the choice between only having a small impact, or not owning their own work, can be left wondering which one is less painful.

I don't pretend to know enough about the venture capital world to know what the implications of this change are going to mean for that industry. But I know more than enough about people who've built important, world-changing lifestyle businesses to see that having the ceilings of potential audience size removed from their work is going to have profound and positive impacts on the web. I'm not much of one for predictions, but if I had to bet, I'd say we'll see a social application reach 50 million users without having had any outside funding within the next two to three years. And that business will have a fundamentally different set of goals and values than today's large-scale sites, because of it will have been built in a fundamentally different way.

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.