
All the wrong reasons for Stack Overflow's VC chase - marilyn
http://37signals.com/svn/posts/2159-all-the-wrong-reasons-for-stack-overflows-vc-chase
======
iamelgringo
I know that this is 37 Signal's thing. They like to be hip, contrary and
different. They take a popular post, and they take an opposing view, stir the
pot and raise a ruckus. After all, they are "rock stars". But really, David?

Why do you care what Stack Overflow does? Why do you presume to know more
about Stack Overflow's business needs than Joel? Why do you presume to know
more about the VC funding process and it's outcomes than Joel? You've run a
successful business and you manage a great open source framework. That's to be
commended. You chose to not take VC, and you have been successful.
Congratulations. (We'll ignore that bit about Bezos investing in you for now.)

But, there are hundreds if not thousands of successful software companies that
have indeed taken investor money. Presumably, it was the right decision for
them. Why do you insist on criticizing those decisions and put people down for
those decisions?

When I worked as an ER nurse in the inner city, we had an expression for this
behavior: "Up in someone else's kool aid, not knowing what the flava is".

~~~
antirez
this is exactly the contrary of what I would expect to read in an "hackers"
community. What's wrong with commenting a public post? After all Joel wanted
to share with the world why he thinks it is a good idea to get a VC for stack
overflow. This was promoted in HN, and is not just free promotion, also
exposes you to other opinions, so the only sane way to reply to the 37 Signals
post is with counter arguments, if you got some.

There is a value in the 37 signals post that is really not about stack
overflow itself. For instance, because Joel is considered to be a business
expert, other people running services that are similar business-wise could
think it is a good idea to get a VC for the same reasons. This guys deserve to
hear another bell (and many others if possible).

~~~
iamelgringo
Ok, here goes.

1\. The Answers market is in a land grab mode

David argued that just because they had a home run in one niche, it didn't
mean that they will have success in another niche.

I disagree. The brilliance of Stack Overflow (SO) is that they've come up with
a product that takes flows with how the internet works. People type questions
into search engines constantly. And, Google gives a high page rank to sites
that provide frequently updated, quality content on a specific topic. Stack
Overflow has nailed that, and because of that, a large percentage of their
search traffic is organic. Stack overflow, has also solved a big problem that
Yahoo answers has, which is reputation and trust.

I'm guessing the reason that they are interested in rapidly expanding SO to
other markets, is Joel sees that this is how the internet currently works and
SO has a 6-9 month lead on them in terms of technology and answer site savvy.
It's a good time to exploit that, in my opinion.

David also suggests via straw man argumentation that people typing questions
like "How to make swedish meatballs" isn't a market worth chasing. You'd have
to ask the people at the Food Network that. Joel might be interested in
licensing a "Food Overflow" to the Food Network's set of web sites. Or,
perhaps he would be interested in setting up a "Home Repair Overflow" for Home
Depot. Or, a "Car Repair Overflow" to Napa Auto Parts. Speaking of which, my
2003 caravan is acting up, and I'd kill for a "Car Repair Overflow".

2\. Stack Overflow is like Starbucks

Just because David can't see a reason for Stack Overflow to spend money
doesn't mean that Joel cant. SO has grown from zero to 6 million monthly
unique visitors in 18 months with a staff of 6 people. I'm guessing that Joel
is interested in adding dozens or hundreds of niche specific SO sites. And,
yes, if he is going to chase that option, then he needs a lot of capital to
hire.

3\. Stack Overflow wants to get on Techcrunch

Ummm. No. Read Joel's post. That's not what Joel said. Again, another straw
man by David. Joel said that he was interested in publicity. Publicity != Tech
Crunch. Publicity can also mean attention from old media outlets like
television shows, and newspapers. And, answers site benefit particularly well
from media attention and publicity. One of the big reasons that SO was a
success was because Jeff and Joel's blogs were so popular. If SO can get some
media attention in other markets, I'd wager could see explosive growth for
other verticals as well.

David dispariaged expanding SO to other niches by suggesting that SO was going
after kids interested in how to find 3 gold rings in Zelda. I'm guessing that
Joel is more interested in the consumer that asks "How do I change the
alternator on my 2003 Dodge Caravan". Someone asking that question ooking for
advice on changing an alternator in a 2003 Caravan, is going to be in the
market to purchase that alternator. Advertisers pay a premium to reach people
at that point in the sales funnel.

4\. The investor will give you advice, connections, and introductions

David has the balls to give Joel hell for raising money in order to get
advice? 37 Signals took money from Bezos to "get his advice". I'm just flat
out calling bull shit on that one. I'm really sick of 37 Signals guys talking
out of both sides of their mouths about this subject. They really have no room
to talk on this one.

And, yes, investors often do have connections that young entrepreneurs can
use. I have a number of friends in funded startups that have gotten
introductions to airline executives, banking executives, CFO's of large
consumer product companies because they found investors that had experience in
those industries. It might not be an issue for 37 Signals, because they are
sell ebooks, chat and TODO lists to Rails Developers, but if your business has
anything to do with medium to large businesses, then the introductions come in
really handy.

5\. Taking money means big exit or IPO

"I don't know if you heard, but IPO markets aren't all that interested in
eyeball companies without the numbers to back them up". Fog Creek makes $1
million a year on a job board that he advertises on his blog. 37 Signals also
makes a bunch of money off their job board. There are more ways to monetize
eyeballs than just advertising. SO is already doing that.

And, Silicon Valley is full of people that have made a bunch of money off of
big exits or IPO's. Have you looked at the real estate market in the area? One
of the reasons that it's so high, is because Google's first 1000 employees
were all millionaires. Yahoo, Ebay, HP, Intel, Cisco, Sun, Oracle... Living
here, you're surrounded by people that have made a killing off of options.
Living in Chicago, you'd never see that, so I can see where David's myopia
comes from.

The IPO market isn't over, and the merger and acquisition market is warming
up. The last 10 years of financial and real estate hubris are collapsing
before our eyes, and investors are going to be looking for places to make big
returns again. It's just a matter of time before companies like Facebook, Yelp
or Twitter IPO, and I'd be wiling things in the tech world will begin to look
a lot different. Also, there's a bunch of companies in the economy that laid
off a lot of people and they are now sitting on tons of cash. Those companies
are going to be interested in growing, and acquisitions are a very nice way to
do that.

A founders chances of getting a large company to look at her startup as a
potential acquisition are better if they have already been valued at $10
million post money, than if it's 4 guys in their garage with a website.
There's a reason that Del.icio.us took investment before they got picked up by
Yahoo.

6\. Taking VC will make your company successful

Joel said that taking VC makes sense if it meant you could grow the company
and the founder wasn't interested in self aggrandizement. Joel has written a
number of times that one of the problems that he saw with a self funded
company, is that his employees don't have a huge upside potential. Upside can
be shared with employees via options and an IPO. A quick acquisition for $6
million based on 3x annual revenues... not so much to share with employees.

I don't get the impression that Joel is doing this because he wants the money
personally.

------
patio11
If I were told "Here's several million dollars, an Answers platform, and a
mandate to make a super-scalar return", I would immediately start trying to
pull off Demand Media, starting each property with a core of content produced
by cheap freelancers and then thickening them out with real UGC as they gained
traction in the search engines. The million get spent on the freelancers and
on having my crack team of engineers build a search prediction algorithm so
that I know, e.g., what the top three questions about birdfeeders and the
highest payout topics are.

The resulting company looks very, very different than what StackOverflow looks
like... but it would make sense, I guess. (Major risk of getting annihilated
by Google in the next 12 months but, hey, not my money.)

I generally yield to no one in my agreement against "land grab" economics.
However, this space actually _is_ a land grab. Maybe it isn't obvious to DHH
because DHH doesn't really need to worry about the nuts and bolts of SEO all
that much, but Demand Media can create a page for $15 and sell $40 of ads on
it _this year_ (it will still be there next year). That model scales to the
effing moon, at least until Google gives them the smackdown.

~~~
vaksel
there is a difference between Demand Media and StackExchange...howto sites get
linked to, Q&A sites do not. eHow is a PR8 site, while SO is a PR6 site.
Original content will always outrank Q&A.

I covered it here: <http://news.ycombinator.com/item?id=1128146>

~~~
blasdel
That post was deleted, linking to this I presume:
[http://blog.styleguidance.com/post/391922539/stackoverflow-g...](http://blog.styleguidance.com/post/391922539/stackoverflow-
getting-vc-funding-is-a-recipe-for)

~~~
vaksel
yes that was it.

Apparently my blog got permabanned on HN for outing that Techcrunch intern.

~~~
astrec
Really? Although I found it to be in very poor taste it _was_ on your own blog
and I'd be surprised and disappointed if this was the case. Any moderators
willing to confirm or deny?

~~~
vaksel
it was submitted to HN too(made the front page)...got an email from pg for
it...called me an asshole and said that he was embarrassed that such meanness
was posted on HN

~~~
astrec
It wasn't exactly your finest hour.

That said, I (perhaps naively) assume that the HN community is strong enough
to self heal sans permaban - the intent of flag, innit?

~~~
allenbrunson
I think most news.yc users overestimate the value of voting. It's in your
face, you see the numbers on every item, so it's easy to assume that's the
most important thing. It isn't. It's just a guide, that indicates what the
users are currently thinking. Sadly, it doesn't work to put too much stock in
what they're thinking.

Pretty much every site on the internet where users gather and talk has
eventually turned into a cesspool of angry arguments and spite, just before
imploding altogether. Clay Shirky wrote the definitive essay on the subject:

<http://www.shirky.com/writings/group_enemy.html>

So the evidence is pretty clear: leave the users to their own devices, and
they'll eventually destroy the community. pg and the editors are well aware of
this. So they curb bad behavior, behind the scenes. Many, _many_ users and
submissions get banned or killed. If it wasn't that way, this community
definitely would not have survived for three-plus-years now.

And if you ask me, pg did absolutely the right thing banning that blog entry.
It was exactly the sort of ugly, spiteful thing that sends a community
spiraling into its death throes. I'm glad it's gone.

~~~
astrec
I suppose flag is a form of voting, but I think you underestimate the value of
HN culture. Angry arguments and spite have rarely been tolerated here.

It appears PG didn't ban a blog entry, but rather a domain, and one which had
previously been a source of useful content. If we apply this same standard we
ought start banning entire domains left, right and centre: first cab off the
rank should be techcrunch.com

~~~
allenbrunson
As a matter of fact, many domains _have_ been banned. Hundreds. Again,
perfectly necessary to keep the peace.

------
chime
Reading the original post, I thought pretty much the same thing. The whole
idea of getting VC money is to jumpstart the next phase of a company/product's
life. Facebook was a college kid's side project that looked promising but VC
money made it top 3 site on the web. YouTube would have been impossible for 3
typical 20-somethings to afford out of their personal/family savings. They
needed VC funding because they were burning through $1m/month in cash. What
exactly is it about Stack Overflow that Joel can't pay for himself with his
own funds? What kind of hiring does he want to do to make it any bigger?

Joel listed all these vague reasons that sort of sound good without actually
saying concrete steps / changes that would come out of VC funding. I would
definitely like to hear what it is that he, despite being one of the most
popular tech bloggers with a boatload of notoriety and savings, can't do with
Stack Overflow that somehow VC money can.

~~~
frederickcook
They've created a great platform and established no way to make money off it.
It is like Twitter in the early days, but like DHH said, it has the
disadvantage of being on a thousand different niche websites instead of one
aggregate.

One possible way to still make a good return off it is take the Twitter path
of getting VC money with the hopes of finding some revenue stream down the
road. Maybe they can come up with a similar search deal?

~~~
InclinedPlane
Where do you get the idea that stackoverflow doesn't make money? It appears to
make enough money to pay for its own hardware, its bandwidth costs, the
salaries of several employees, and more.

~~~
blasdel
StackExchange certainly doesn't make any money, and they've promised their
customers that they'll have 45 days warning before they start charging.

Even then, almost none of their SE customers could afford the proposed fees
based on their current income.

~~~
johns
You confuse StackOverflow (the company with 3 employees and Joel as a founding
partner) and StackExchange (a product of Fog Creek based on the SO code).
StackExchange's revenue is less important than the revenue from StackOverflow
which is currently derived from ads and the careers site.

------
100k
Does anyone NOT think Joel is going to get one of the best VC deals of all
time? He's insanely well connected and has a proven product. He'll get
meetings with all the top angels and VCs no problem then start a bidding war.
I bet he gets a great valuation with good terms on control and equity.

------
robryan
I got the impression that Joel just wants to give the big risk venture with a
big payoff for success a go. As he says Fog Creek is build the safe slow
constant growth way and he always has that to fall back on.

~~~
yankeeracer73
I think you might be right. Bootstrapping a start up is damn hard and damn
stressful. And it takes a long time. As someone mentioned earlier, 37s is a 10
year old company that is now highly profitable, but it took a long time for
them to get there and build up the following they have now. There's something
to be said for trying to grease the skids on Act II and get there a little
quicker than with Act I, especially when you were successful with Act I.

------
ojilles
Quoting from the article:

"There are a few indicators for the type of company that I believe can benefit
from, and should take, VC."

Which means, the list in his article of companies that can benefit is more
academical, and each of these may not apply to StackOverflow.

The response from 37signals is a bit presumptuous in the sense that it assumes
Joel means //all// of these apply to StackOverflow.

~~~
Timothee
Exactly. I'm surprised this didn't come up more in the comments and that even
Joel Spolsky, when commenting himself, didn't mention it. He was not saying
that StackOverflow is in a similar situation as Starbucks', just that
Starbucks was one of these cases where it makes sense to take VC money.

------
jmm
It may be that DHH's last point (taking money off the table) is the crucial
element here. I.e., this could be an easy way for Joel and Jeff to get their
second or third homes without destroying their baby and their darling
developers at Fog Creek.

------
necrecious
I don't know why Joel used Starbucks as his example of why land grab makes
sense for StackOverflow. Starbucks, like McDonalds, is all about
location/location/location. So it is literally needing capital for a land
grab.

Websites are never about a land grab. Especially when talking about creating
just a network of sites for individual niches.

~~~
netcan
Starbucks wasn't about a literal grab for land. it's not that hard to find
locations for coffee shops. It was a grab for a piece of culture.

The US didn't have enough coffee houses with good coffee and that kind of an
atmosphere. If Starbucks had taken 10 years to get to LA, there would have
been Starbucks-like coffee houses there by that time.

~~~
patio11
I don't even think Starbucks needed the culture, except for branding. If they
make it into your morning ritual, you -- one individual customer -- are worth
$1,000 a year. Every store they drop down is just another vending machine to
recruit $1,000-a-year walking bags of money. This gives them expansion
imperatives similar to a bank's desire to situate branches, or a cell phone
company's desire to site stores.

~~~
netcan
That is more or less what I meant by culture: to become a part of a
city/office/industry/person's culture. The culture was forming and if they
didn't become part of it, some other cafe would have been the place where you
go for your morning brew, George and Jenny meet on Tuesdays or the theatre
school people go to use the internet.

------
swombat
If I may permit myself a pun, DHH is right on the money.

VC funding makes no sense for Stack Overflow.

------
mrphoebs
DHH is strongly typed.

------
goodgoblin
I think DHH's post raises a valid question about the land-grab analogy. What
land exactly is being grabbed here?

I guess that is the real mystery, as other commentators have pointed out. I
assume there is some kind of grand business plan which yahoo answers and
expert exchange missed and which Joel et al have not missed. It would not be
the first time they took a 'solved' problem - bug tracking software - and
built a successful business off of it.

~~~
dpcan
It's like any real estate on the web. The best of the best are NOT hanging
around Yahoo Answers. I've tried to get answers there and it's pitiful. You
have to create a place where the most talented congregate. Location location
location.

------
jasonlbaptiste
I don't get why they don't raise a small amount (750-1mil) from some insanely
smart angels.

------
sabat
I'd take DHH's opinion more seriously if he had any actual experience with VC
or startups. 37 Signals is not a startup -- they crow about that fact
themselves. 37 Signals is a small business.

David's points all presume that he fully understands what Joel is planning; he
clearly cannot, since Joel hasn't laid out a detailed business plan.

~~~
pavs
> 37 Signals is a small business.

Are they really a small business? I have the impression that they have a large
user base - and IMO a better set of products than Stack Overflow.

~~~
100k
The point is that 37signals explicitly claims not to be a startup. Their line
is that they're a profitable 10 year old company.

I once asked DHH in a Q&A his opinion on working on a startup outside of
Silicon Valley. He corrected me.

~~~
KWD
That's not to say they were not once a startup. Every 'startup' should have
the objective of becoming a sustainable business. Eventually the startup tag
will go away, but that's not to say they were not once there. Microsoft was
once a startup. Apple was once a startup. It makes me laugh here on HN where
some guys weekend project can be considered a startup when it really has no
potential to ever be a business.

