
What’s Really Going on in the VC Industry? What Does it Mean for Startups? - wheels
http://www.bothsidesofthetable.com/2010/07/16/whats-really-going-on-in-the-vc-industry-whats-it-mean-for-startups/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+BothSidesOfTheTable+%28Both+Sides+of+the+Table%29
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csbartus
Summary + Opinion :

Mark Suster, the prominent VC writes a highly supported (by Brad Feld, Fred
Wilson etc.) article about the current status of his industry.

During their lost decade —since the 2001 bubble— they have realized startups
need significantly less investment than before. That’s right, this is the 37
Signal way with no investment at all.

Since there is no need anymore for money to start up many investors will close
their business. For the others there is one card left: scalability.

They think a business to become mature, to serve millions needs heavy
investment. They only forget 37 Signals has over 3 million customers paying an
average $50 monthly fee without any investment, with less than 20 employees
and no offices at all.

Don’t repeat yourself and Less is more — staying lean — are amongst the basic
principles of scalability.

Their only hope, the Fat model resembles ironically Clay Shirky’s, their
mentors principle:

“Institutions will try to preserve the problem to which they are the
solution.”

The complete article is at [http://metaman.tumblr.com/post/819220481/the-
current-state-o...](http://metaman.tumblr.com/post/819220481/the-current-
state-of-the-venture-capital-industry)

~~~
rmah
_They only forget 37 Signals has over 3 million customers paying an average
$50 monthly fee without any investment, with less than 20 employees and no
offices at all._

Really? 37Signals is generating $150 mil * 12 = $1.8 bil in revenues per year?
At the stated 20 employees, that's $90 mil in revenue per employee. I think 37
Signals is an awesome company and I have the utmost respect for them. But I
find these numbers hard to believe.

More likely they have 3 mil customers using free accounts. and a few percent
of that -- I hear 2% is the average conversion rate for freemium, but let's be
nice and say 4% -- or 120,000 as paying customers. At $600/yr, that leads to
$72 mil per year in revenues or $3.6 mil per employee. Which is both amazingly
great and within the realm of believability.

P.S. 37 Signals does have an office in Chicago.

~~~
rimantas

      P.S. 37 Signals does have an office in Chicago.
    

Since today: <http://37signals.com/svn/posts/2456-thank-you-coudal>

~~~
rmah
From earlier this year:

[http://37signals.com/svn/posts/2344-construction-on-the-
new-...](http://37signals.com/svn/posts/2344-construction-on-the-new-office-
continues)

Guess they're finally moving in.

------
10ren
(naive) Question: What do web startups need $20mm for? (linked from the
article: [http://www.avc.com/a_vc/2010/07/some-thoughts-on-the-seed-
fu...](http://www.avc.com/a_vc/2010/07/some-thoughts-on-the-seed-fund-
phenomenon.html))

I mean, what can they spend it on? I can think of servers and bandwidth (but
they're pretty cheap these days, except for youtube-content intensive), and
staff (but what would they _do_?) and perhaps advertising and publicity in
general can absorb as much money as you can throw. I guess a professional
sales force would be expensive.

~~~
starkfist
Servers are not as cheap as everyone says. You need the staff to keep the
servers working.

~~~
csbartus
There are platforms as service like Heroku emerging with no need for staff at
all

~~~
starkfist
Platforms as service don't work as well as advertised once you get past a
certain point.

~~~
csbartus
Ok, but spending millions on infrastructure?

~~~
starkfist
Well you gotta do what you gotta do.

In my experience if you are really doing serious traffic, you have to do a lot
of custom stuff. The platform-as-service vendors are not prepared to really
help you. Or if they say they are, they will charge you so much money that it
is cheaper to do it yourself.

In fact... I actually worked at one of those platform-as-service places, back
in the day before they were called such. This is how it works:

You are a big whale of a client, like twitter. Nobody at twitter likes systems
engineering or sysadmins, so they call up the platform-as-service place. The
platform-as-service place doesn't really know how to do it either... but they
are thinking "fuck... this is TWITTER... we NEED this account." So they say
they can do it. Then when they get twitter, they are totally in over their
head and are scrambling to hire people who can fix twitter's shit. So
essentially you are not just outsourcing your infrastructure, you are
outsourcing the hiring of the sysadmins. You could just bypass this altogether
and hire your own systems engineers in the first place. However lately it
seems like the story has to include 7 months of half-assed "platform as
service" with ultimate failure before realizing this on your own.

~~~
mmt
I almost replied to your terse OC to disagree [1], but I think this
explanation is extremely insightful and worthy of attention and upvotes[2].

I call it the myth of the commodity server, and it's particularly prevalent
among software engineers, since the natural inclination is to approach every
problem as though it can be solved in software. Perhaps ironically, this often
excludes the kind of software sysadmins write, which is deployment and
configuration.

Far more importantly (from my POV), such an approach ignores the importance to
cheap, reliable scaling of being able to customize the arrangement of the
hardware [3].

Pretend that all servers are the lowest common denominator, and scaling gets
expensive fast. Often the end result is more/earlier customization of software
(e.g. writing a distributed DBMS from scratch, which takes on a life of its
own, not getting any cheaper), and I can't imagine that's cheaper than hiring
a sysadmin to customize configuration and deployment cheap hardware (which
does get cheaper) to get mind-blowing I/O.

[1] I still do, in the sense that I feel it implies that the server hardware
or its operation is anywhere near as expensive as employees. I'd be quite
surprised if any startup spends more than one tenth on servers as it does on
people. However, your point that some people _are_ required when one has
enough serious traffic is one with which I do agree and one that is often
missed.

[2] Bias disclosure: I'm a sysadmin

[3] Which effective customization requires knowledge of and experience with

------
arnorhs
Great article. Mark is so damn smart. He essentially covered the same topic on
This week in VC so if you like to watch a video of the same topic:

<http://www.youtube.com/watch?v=tNaZfLV-5SA#t=41m38s>

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sabat
This is a somewhat distressing post if you actually need VC.

