Tuesday, December 11, 2007

Good Life

It's strange how things are getting easier for me. Things are going my way or maybe it's just my perception. I am pretty laissez faire these days. The visa fiasco was only temporary. I am quite excited about London and other treasures on the way.

I am reposting this because I want to keep a copy of this myself:

The Twice Shy Entrepreneur

Michael Arrington


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.

1 comment:

Gaic Conan said...


London is not that bad!

we building a free Entrepreneurs Investors community. Our idea is to bring to entrepreneurs advice that will help them in the growth process. The website is free of charge while still in beta. Let's develop markets together!

I leave you the decision to publish the address of the website (thestreetmarket.com).

Thanks and good work!