

"That's what sold me. One slide." - cwan
http://www.avc.com/a_vc/2011/10/sound.html

======
pg
I would not treat this story as a sign of how to convince VCs. It is almost
never the case that VCs say yes because of one magically convincing point you
make.

Fred is not a purely functional VC (by which I mean not that he's
dysfunctional, but that he's stateful). This slide was accompanied by lots of
other evidence, including multiple prior meetings. The slide was just the
final increment that pushed him over into yes. It is very unlikely that if a
random person had walked up to him and shown him the same slide, Fred would
have been convinced.

What convinces VCs is, in order, (a) growth, (b) the founders' personal
characteristics, (c) what you say to them. If you seem like an effective
person and you have graphs that go up steeply, your pitch could be a bunch of
platitudes and they'd still be eager to invest. (As would we, to be honest.)
Whereas if you seem like an ineffective person and have no traction, you could
have the best story in the world, and they will all say no. (Here we're a
little more forgiving; we try to distinguish between genuine ineffectiveness
and similar but curable phenomena like youth, inexperience, diffidence, and
fear.)

~~~
NY_Entrepreneur
I don't quite 'get it': So, "Could you expand on your answer a little,
please".

You seem to be saying that the key is "traction", significant and growing
rapidly.

Then it sounds like someone who was just featured on the TV show 'Diners,
Drive-ins, and Dives" and has significant 'traction' growing rapidly would get
a VC investment?

Or so could someone who opened a pizza shop in a hot, new shopping mall.

So, it sounds like nothing about the core technology, Buffett 'moat',
potential business size, or business planning is relevant?

Then, suppose the business is a new Web site. Suppose the founder gets from
his ISP a static IP address and 15 Mbps upload bandwidth. Suppose his largest
Web page can be sent for less than 200,000 bits. Suppose he half fills his
bandwidth 24 x 7 for

    
    
         ( 15 * 10**6 ) / ( 2 * 200,000 ) = 37.5
    

pages sent per second. Suppose he sends three ads per page and gets $1 per
thousand ads displayed (CPM). Then his revenue would be greater than

    
    
         1 * 3 * 37.5 * 3600 * 24 * 30 / 1000 = 291,600
    

dollars a month. Now just why would he accept equity funding?

Net, it sounds like, for an entrepreneur, when equity funding might help, his
project is 'too early', and, by the time the funding is available, the VCs are
too late.

So, it sounds like VC funding is for where (A) the business has suddenly
encountered some problem and needs cash fast or (B) the founder wants to take
some cash off the table and not for usual business formation.

Then back to the restaurant: All across the US, restaurants and Main Street
businesses get built without VC funding, and commonly those businesses need
much more in capital equipment, ovens, site renovation, trucks, etc. than a
Web site filling 15 Mbps upload bandwidth. So, if those businesses don't need
VC funding, why do new Web sites?

~~~
tptacek
Comment threads where 'pg talks about how he or others decide to make equity
investments seem to draw out responses like this one, which all seem to amount
to "nuh-uh, it's super hard to get funding".

Well, respectfully, no shit. None of these firms are charities. Every new
founding team in the world --- I think literally _every one of them_ \---
discovers the seeming chicken/egg problem of traction and money. Think about
it; if that problem didn't exist, everyone on HN would have a funded startup.

VC firms will make speculate on a new team if that team has impossible-to-
ignore traction. They'll speculate on an unproven business model if the team
has an impossible-to-ignore track record. Where are the instances where
successful VC has ever speculated on both at the same time?

You lay out a scenario here illustrating that by the time you have enough
traction to (you think) satisfy Wilson or Graham, you won't need them anymore.
Bully for you! The same thing happened to us, and hundreds of other startups;
it's called bootstrapping. If you can bootstrap, you should; you'll keep more
control and ownership.

But I should point out that lots and lots of companies that bootstrap
themselves to a comfortably thrumming business end up taking VC in the long
term, for the same reason a conservative poker player is eventually going to
bet heavily on pocket aces. Eventually you come across an opportunity that
begs you to scale up quickly and buy market share. Part of the point of
bootstrapping is to allow you to be choosy about the hands you play.

In the meantime, stop complaining about investors not giving you the time of
day. It's silly. There are things to complain about regarding investors, but
not handing free money out to unproven businesses isn't one of them.
Investment firms are themselves businesses (they aren't investing their own
money!) and their responsibility isn't to you or even the startup system; it's
to their LPs.

~~~
NY_Entrepreneur
"nuh-uh, it's super hard to get funding".

I never suggested any such thing. But I WAS being critical: PG's description
amounted to saying that VCs want to get on the plane only after it has already
left the runway. Although I didn't say it, I suspect that, then, what PG is
saying is not all that close to how VC funding works. I wasn't being critical
about it being "super hard" to get funding but just about the apparent
contradiction in what PG wrote.

The VCs can do what they want. As Mark Suster has illustrated with some graphs
and data, over the past 10 years the VCs have been doing poorly, and about
half the partners are 'unemployed' as VCs.

So, I can't 'look up' to the VCs as business experts. They have MBAs; pseudo-
great, I've been an MBA prof. Some VCs have had some startup experience, maybe
in 'biz dev'. Pseudo-great; I helped start one of the most successful VC
funded companies in history. And as IT experts, I have to look down on nearly
all of VCs (although YC is an exception) so far I'd need a Hubble telescope to
tell them apart. I've taught computing in two research universities, published
peer-reviewed original research in computer science, mathematical statistics,
applied mathematics, and artificial intelligence, and helped ship two
commercial products from Yorktown Heights.

Any way it goes, I have to build a successful business. So does every
entrepreneur on Main Street who opens a pizza shop, auto body shop, grass
mowing service, etc.

So, as you wrote, by the time I've built a successful business, say not an
"unproven" business, I would be able to sell a fraction to a VC. Okay. Just
why I'd want to do that escapes me.

Or, the day before I take a VC check I have a 'proven' business, say, half
filling 15 Mbps upload bandwidth with revenue close to $300 K a month and own
100% of it. The day after I take a VC seed check, I have $100 K -- $500 K more
cash in the bank, that is, revenue from 1-2 months, where it took me much
longer than 2 months to get the seed check, own none of my company, have to
get my fraction of 'my' company back on a four year 'vesting' schedule, and
can be fired by the Board at any time. Bummer.

My point is not that it's tough to get VC funding. Indeed, I MUST build a
successful business, VC funding or bootstrapped. It's plenty clear, from what
PG wrote and more, that once I've built a successful business, say, $300 K a
month in revenue growing quickly, then I could get a VC check. And PG is
saying that much before then, I can't get a VC check. Okay. Thems are the
rules. Good to know the rules.

So, what was my point? Just that the rules as PG wrote them don't make much
sense. I doubt that what he wrote is very close to the truth.

As an entrepreneur, I have to evaluate the potential of my business early on.
Nowhere did PG mention that a VC will review that evaluation. Here he is
mostly correct: One could count with shoes on all the VCs in the country who
could evaluate or even direct the evaluation of the crucial, core 'secret
sauce' in an IT business plan.

People have mentioned a similar point before: If VCs want to wait until there
is significant traction growing quickly, now they risk waiting too long. That
is, it used to be that, to get the traction, the company needed funding to
write the software. Surprise: At least from Microsoft, once one understands
the relevant parts of .NET, essentially all the code for a Web site, indeed,
for much of commercial software, is already written, and all that's needed it
a little, simple glue to join the .NET code.

Next, surprise: If usage grows, then can call up, say, Tiger Direct, get some
parts, and plug together one heck of a 64 bit server for less than $1000.
We're talking what, 4 AMD cores at 3.0 GHz for $100? A motherboard for $100?
Main memory at $10 per GB? 2 TB hard drives for $100 each? A high end Antec
power supply for $100? A case for $50? Some fans for $2 or so each? What'd I
leave out?

Next, surprise: If usage is significant, just $1 CPM will throw off enough
cash to buy servers enough to double capacity in less than two weeks. So,
that's exponential growth. Bandwidth used to be really expensive. Surprise:
Now where I live $15 Mbps upload with a static IP address costs $65 a month,
and CAN use it for a Web site.

Fred Wilson has written on his blog that these changes are good for VCs.
Maybe. And I continue to see the major successes taking VC funding and don't
have a good list of successful bootstrapped companies.

Still, from what PG wrote, basically I've got to have, say, $300 K a month in
revenue, growing quickly, to qualify for a Series A. But, in my case, that's
just me and my team, two of whom have four legs, long tails, and long
whiskers, and myself and I and a server at my left knee in my living room. For
the server, I have one in a box in the next room. I also have an offer of a
loan of one with 32 cores and 2 TB of main memory -- that used to be a lot of
disk; now it's main memory! BELEIVE me, a 32 core server could send well over
35 pages a second from my Web site software! For the Microsoft software, their
BizSpark program will let me, or essentially any IT startup, have the copies
of Windows Server and SQL Server for free for a while.

Again, I'm not complaining that getting a VC check is too hard. Indeed, again,
I need to build a successful business, say, $300 K a month growing quickly by
myself. And, apparently PG would agree that with such a business I could get a
VC check. Okay. But why then would I want to take a VC check?

Net, if I can ramp up to $300 K a month in revenue, I won't need a VC check.
If I can't, I can't get a VC check. So, either way, there's no VC check. So,
my point is, with PGs description, of what use are the VCs? Understand now?

~~~
joshu
You seem angry.

Traction isn't necessarily the same as revenue.

PG's view of the world isn't a universal rule.

~~~
NY_Entrepreneur
"You seem angry."

The reply by tptacek discarded the point I was trying to make and claimed that
I was just complaining because, according to an uninformed claim of tptacek, I
was having trouble raising equity funding. The goal of tptacek was to try to
gain upper status via an insult. That was a personal attack for no good
reason, and I was angry at tptacek. Otherwise, I'm not angry at VCs.

For PG's post, it seemed to be deliberately a bit far away from what VCs do.
It's frustrating to see such from the other side of the table.

"Traction isn't necessarily the same as revenue." Well, one form of 'traction'
is a lot of users, and in some cases can have that long before any revenue.
Examples include the early months of YouTube, Facebook, and Twitter. So, they
had a lot of 'unique eyeballs' per month, and the assumption was that there
should be a way, somehow, to 'monitize' that. Maybe. Usually.

In my case, a lot of eyeballs mean a lot of Web pages served and, for my Web
pages, a lot of ads displayed. Then a lot of eyeballs mean a lot of revenue
and, in my case, nearly all that revenue pre-tax earnings. Or, yes, I thought
of 'monitization' up front. My most important Web pages have been carefully
designed to have a banner ad of 720 x 90 pixels across the top and some number
of ads 300 x 250 pixels down the right side. So in my case, 'traction' and
'revenue' go together.

"PG's view of the world isn't a universal rule." Yes, that is a weak version
of my main point.

Maybe some LPs have asked their GPs to fund only 'traction', but likely some
VCs are still able to fund something off the back of a napkin if they really
want to. Even if they could, to me that's a bit moot: VC funding or not,
likely not, like anyone on Main Street, I still need to build a successful
business. At one time, a shot of VC funding could have helped my project a
little. But now I'm so close to going live that what VCs do is getting to be a
bit irrelevant. I'm still in touch with some VCs in case my personal funding
runs out, but my guess is that it won't. Lots of pizza shops get to earnings
without VC funding, and my project should be able to, also.

~~~
tptacek
Sorry you feel that way. You may just be in the crossfire of a bunch of other
similar threads. Meanwhile, it sounds like you have little to be upset about,
since your business is doing so well.

~~~
NY_Entrepreneur
You keep assuming that my concern here is my business. It's NOT. My concern
was just being clear on just what the heck VCs do.

VCs are welcome to do what they want. While I have very little respect for all
but a tiny fraction of VCs, I am not angry at any of them although I believe
that here PG was not accurate.

VCs and my business are close to mutually irrelevant.

From all I can tell, my business is doing well, but, yes, I will be happier
when I am getting $300 K+ a month in revenue.

"Crossfire", what VCs do in general or nearly always, etc. are getting to be
nearly irrelevant for everyone: Just a short look at the finances of a VC and
see that VCs need 'home runs'. All the rest is low grade work or just a waste
of time, effort, and money. But there are only a few 'home runs' each decade
in all IT VC in the US. So, 99 44/100% of what VCs 'do' is irrelevant, for all
concerned. In particular, what is 'usual' is irrelevant. And for the VCs,
'patterns' are irrelevant.

The major failing of VCs is that they do not have effective criteria to select
the 100 - (99 44/100) of interest, or even the candidates. So, about all they
can do is follow the herd of the 'usual', draw their 2%, and hope a home run
comes out of the blue. That's the key reason on average they are not making
much if any money.

That lack of effective criteria is in wildly strong contrast with essentially
everything in serious applications of science, in engineering, and in
technology outside of VCs.

My criteria that get me to invest my effort are nothing like those of the VCs,
usual or otherwise. On this point, I'm standing on solid ground, and the VCs
are standing in a swamp.

It looks like Darwin will have the last word.

~~~
joshu
They look at patterns. This is what VC does.

You have a content business. The exits tend to suck there. Pattern. I
certainly avoid ad-driven businesses as angel investments.

Also, if you conduct yourself in person like you do here that is probably
another issue.

~~~
NY_Entrepreneur
"They look at patterns. This is what VC does."

Yup, again, they don't have effective criteria.

"You have a content business." Wrong. You are misinformed.

"Also, if you conduct yourself in person like you do here that is probably
another issue."

What I do here is fine. What PG wrote is a bit far from what VCs do, and I
called BS.

Generally people want to suck up to the VCs and get all excited when they
'receive a round of funding'. No, what they did was just sell a huge chunk of
their business and put themselves under the control of a VC Board under some
really bad terms. I won't suck up to VCs.

Entrepreneurs, including in IT, and on HN, need simply to observe that the US,
border to border, is just awash in entrepreneurs who start successful
businesses on Main Street with no contact with VCs. The people I've seen in
yacht clubs were mostly successful on Main Street, and there wasn't a penny of
VC equity in sight.

My mention of a pizza shop is dead on the center of the target: Now a Web site
serving a few dozen Web pages a second takes much less in capital equipment to
get started than a pizza shop. And the Web site has some advantages, e.g.,
once the site is up, mostly just lean back and let the servers do the work, 24
x 7, and that beats the heck out of all the food handling, kitchen cleaning,
floor washing, worker supervising, customer interactions, etc. at a pizza
shop.

I and likely nearly all of us have neighbors in big truck, little truck
businesses, fast food, gas stations, rental property, various trades, etc.
They make it, buy houses and new cars, get their kids through college, etc.
without a big failure rate and without VC. A Web site can be a better
business, still.

Since on average, as reported by Mark Suster, VCs are not making much if any
money, I have more respect as businessmen for a guy running a pizza shop,
especially a guy running several, than I do for VCs.

For technical expertise, maybe in all the US a dozen IT VCs have some
significant technical qualifications, and otherwise they would be at best just
dead weight in an IT startup. So I can't respect VCs technically either. VCs
commonly have a LOT of trouble handling their e-mail; NOT good. VCs commonly
want others, lawyers, CEOs, bankers, etc., to 'filter' entrepreneurs for them;
NOT good. VCs commonly assert that they have wide 'networks' -- mostly not
among well qualified technical people! Nearly none of the VCs are anything
like the people I respected in math and physics in school or like the people I
respected, say, at Yorktown Heights.

VCs need entrepreneurs more than entrepreneurs need VCs. So, I'm not here to
suck up to VCs. For what PG wrote, I call BS. So be it. There's nothing wrong
with that. HN is for 'hackers' who should not be sucking up to VCs.

~~~
tptacek
VCs want a specific kind of entrepreneur. You might need to face up to the
fact that, generalizations aside, they don't need _you_ or _me_ , despite the
fact that we are entrepreneurs. Similarly, as admirable as it is to get a
local small business off the ground, all the rationalization in the world
isn't going to get Fred Wilson to fund your favorite pizza shop. Try
convincing the owner to make grilled cheese, instead.

You might also pay careful attention to what Joshua Schacter is telling you
about how VCs look at content businesses, because all the HN comments in the
world aren't going to change the fact that it's hard to get funded with a
business model that has become unpopular among VCs.

But on the other hand, like I've said ad nauseum: if you can go it alone
without VC, I agree that you should. We did; we've been growing at a steady
clip since 2005, and not chasing VC is (by unanimous consent among the
founders) one of the better decisions we made.

I'll say it yet again: there are a lot of things to complain about with the VC
model. I just don't buy that what they choose to fund is one of those things.
If VC won't put money into something that is obviously a strong bet, that
should be an exploitable market inefficiency; a place to build up market power
and differentiation without competing with 10 me-too valley shoot-the-moon
built-to-flip startups.

Good luck with your thing!

------
Murkin
Warning to visitors: The 3min video has no relation and DOES NOT show the
slide in question.

~~~
fredwilson
Warning to visitors number 2: The title of the post is Sound Someone put a new
title on it here and changed the point of the post

~~~
groovy2shoes
Warning to visitors number 3: The video doesn't tell you anything about what
Soundcloud does.

~~~
jaycieh23
soundcloud does sound.

------
rauljara
As this anecdote demonstrates, it is very powerful to be able to organize
information in a way that reveals gaps and holes. Another famous example: the
periodic table. What Ljung did was make a periodic table of social media. And
I have a sneaking suspicion that the way he organized his table is not the
only way one could do it, and that a different organization might reveal more
opportunities.

------
MatthewPhillips
To me that slide says that SoundCloud is simply following a trend. A "___ for
___" company isn't one that I would bet on long term.

~~~
simonw
Investors bet on that kind of pitch all the time. There's a reason it's such a
common way of describing a company: it's really, really effective. If you can
capture the essence of your startup in just three words you'll find it a lot
easier to explain to people what it is that you do.

------
pace
Strange post, feels like blogspam. As Murkin already said: the 3 minute video
(which can't be forwarded) has nothing to do with this mentioned slide and as
PG said, it was for sure NOT the slide that sold Soundcloud to Fred, it was
clearly the traction at that time. Just check Alexa.

Wondering why Fred posted this, maybe Soundcloud needs some attention. The
Soundcloud founders did some really good job regarding building traction and
raising dumb money. But c'mon this network IS about music and not sound. And
it's so overrated, this thing is a kind of Dropbox for DJs with all the legal
struggles the music industry will soon approach them with -- and then everyone
including Fred will realize that an exit is far far away or never will happen
...

~~~
fredwilson
The title of my post is Sound Someone changed it here It is not at all about
the slide It is about sound and why it matters

------
shin_lao
I don't like when people try to find a single reason for decisions, especially
in that case.

Generally there's a couple of reasons spread over time that eventually trigger
a decision.

The worst part is that it's very difficult for us to make a list of these
reasons because:

    
    
      * We don't remember all of them
    

and

    
    
      * We want to believe we are rational and therefore exclude the irrational reasons
    

That being said I think it's paramount to be able to explain your business and
why it will work in few words because that way you can spread the idea within
and outside the company easily.

------
kwamenum86
Is it me or is a social network just for sound obviously a bad idea?

~~~
recursive
It might be just you.

~~~
kwamenum86
Is this something that you find compelling? Does sharing sound intrinsically
valuable to you? Do we need a social network just for sounds? I don't get it.

~~~
rudiger
Sharing music is inherently social.

~~~
mgkimsal
_music_ yes, but not necessarily all sounds. However, if they'd pitched it as
'music', people would say 'myspace, been there, done that'.

"Sounds" are one of those things that have to be consumed synchronously and as
a whole (generally speaking). Long and short form text, and pictures, can be
compressed, sliced up, moved around, and we may get the gist of it - and can
easily share.

Videos... not as much, but we can still take a small segment of a video/movie
and get value from it.

Songs, probably similar to movies, but _sounds_ as a broader topic, not so
much. At least, not to me.

~~~
rudiger
What's good for the goose is good for the gander.

------
JoshTriplett
I wonder how well that one slide would have worked in the absence of the
numerous previous conversations.

------
CurrentB
That video seems to be the exact opposite of a single convincing slide. I
watched it and have no idea what SoundCloud is supposed to do. In the context
of social media platforms, I would think that sound, for the most part, would
be music. The video hardly mentions music and talks about generic "sounds",
which may be interesting from some perspectives, but I don't have the faintest
clue why it would be a be the basis of a missing
youtube/twitter/flikr/whatever as the slide mentioned implies.

------
mcantor
Perfect idea for a business-selling slide. It answers two powerful questions:
1.) What gap are you filling? and 2.) Is there a precedent for success when
filling gaps of this type?

------
kgermino
>That's what sold me. One slide. _This 3min video expresses it well._

I think that sentence lane makes it clear that it wasn't _just_ the slide that
sold him. The slide was the single thing that made everything click and
allowed him to see the vision but if all he knew was the slide I doubt the guy
would even get a second glance.

------
marquis
For anyone who's curious John Cage would be considered the grandfather of
'sound'. Beautiful example here: <http://www.youtube.com/watch?v=7KKE0f1FGiw>

When I watched the Soundcloud video, I thought of the sheer influence Cage had
on modern music.

------
mikeleeorg
I love the lines: "I met Alex Ljung, founder/CEO of SoundCloud a number of
times and each time he pitched me on his business. Each time I said no."

I love them because they show how perseverance pays off.

------
niklas_a
That's just silly. If you seriously let one slide convince you, you are bad at
making investments. What about the team, current progress, previous
achievements?

------
nirvana
I must confess, I immediately started thinking about a similar slide for my
startup, with each of the areas which had been successfully conquered in the
past, and then a last one for us.

It's kind of an easy formula, at least for what we're working on.

------
borism
still haven't sold me on that one...

