There's a middle ground between web application "lifestyle businesses" (like duping credulous customers into overpaying for a time-tracking tool styled with this month's CSS trends) and trying to start the next Facebook.
There's nothing wrong with being a small software company. People have been doing it for decades now. It's boring, but there's nothing wrong with it. Don't expect anyone to celebrate you for doing it, though.
Our time on this earth is limited, and people's attention is even more limited. No wonder that more time and attention is put towards trying to execute on big ideas. Sometimes those ideas end up not working out, but we're all better, I think, for someone having tried.
As pg points out, the ideas that led to the businesses that have formed the infrastructure that enables web lifestyle businesses could not have, themselves, been lifestyle businesses. Someone has to think big, take risks, and deploy significant capital in the interest of a dramatically better world. If you don't want to be that person, great, but don't tell the risk-takers that they're "wasting their lives". Would you say the same to scientists who take big risks? Artists?
The media packaging of technology entrepreneurship is undeniably offputting. But that's no excuse for dim commentary like this.
I'm not sure which "lifestyle business" duped customers into overpaying, but it is absurd to equate the so-called lifestyle business to "duping credulous customers into overpaying for a time-tracking tool styled with this month's CSS trends". I can list far worse cases - corporate fraud and crimes - with large companies
Ultimately, the "lifestyle business" is a silly vc-invented label. Running after VC money is also a lifestyle. All businesses aim to impact lifestyles of founders, employees and customers. The difference is that vc-funded business also impact lifestyles of vcs. Bootstrapped companies don't impact vc lifestyles (unless they compete with a VC-funded company :).
imo both lifestyles are equally valid, but it is absurd to describe one as a lifestyle company and pretend that the other one (which risks other people's money) is the true and only "risk-taker"
"duping credulous customers into paying for [something something] time tracking styled with the latest CSS design site trends"
I was not directly named, but if you ask me, it's pretty clear which app he's talking about: my first, Freckle http://letsfreckle.com .
And yup, that's me! I dupe 1,000 paying customers every month! They're so well-duped that they write love letters to our support account. I really can't get over the fact that I've got them so well-fooled they actually believe my software makes them happier and helps them run a better, more profitable business.
For the record, though, we have lots of functionality you can't get elsewhere. That's part of the magic of the dupe.
EDIT: Hey, look like that line about duping is back in Alex's comment. Either I'm blind and didn't see it the last time (which I concede is possible)… or it returned.
If lifestyle businesses like 37signals and freckle are producing the kind of tools like RoR and scriptaculous, more power to them!
My problem with the parent post was the absurd notion it promoted about companies that didn't run chase vc funding.
As mentioned, I also think that "lifestyle business" is a stupid vc-invented label.
Incidentally, Google developed great technology and a great monetization strategy before they took in vc funding. Being acquired wasn't Google's goal. The reality of today's VC world is the opposite of Google's approach. VCs make money through the acquisitions of companies they fund.
I've never really liked the term "lifestyle business" and I don't know who invented it. But I think it is a useful distinction, even for the people starting them. Is your goal for the company to make yourself a nice living, or do you want it to grow into something bigger than would be needed to achieve that?
It's false that VCs want companies to be acquired. They would much prefer that they continued to grow as independent companies, like Google or Facebook. Those are the big successes that generate most of the returns in the VC business.
I've read enough about the economics of VC funds to understand why this is, but I've also witnessed it firsthand. Unless you are setting the world on fire, your VCs don't want to sit on your board for 6 years, and will press for an exit.
This is something that challenges me about your analyses; you evoke Microsoft and Google and Facebook. If you're Facebook, all bets are off. I hope the Airbnbs do become as big as Ebay, but very few of the companies you help start are going to achieve that bracket of success.
Saying VCs aim to sell companies is like saying that if I try as hard as I can to get an A in a class and get a B, I was aiming to get Bs. That is just not what the word "aim" means. It's more like I accept the inevitability of Bs, since As are hard to get. Similarly, VCs accept the inevitability of acquisitions, because IPOs are hard to get.
In accordance with my new principle that once I have to start talking about the definitions of the words I'm using, the thread is doomed, I'm done now.
You don't, by the way, need to announce that you're "done now". That's passive-agressive. You can just "be done".
Sometimes, there is a tradeoff between liquidity and IRR. Groupon could have sold for $6bn, or perhaps they could IPO at $15bn. There, the board members decided that the prospect of improved IRR exceeded the delay in liquidity.
It's not an accurate representation to state that VCs only care about liquidity when a company isn't going anywhere: given that it's a tradeoff, and that liquidity has heightened importance the older the fund, VCs will push for liquidity even in investments in companies that are certainly doing better than "not going anywhere". The IRRs might be good, but their LPs may really want their money back after ten years, and are willing to sacrifice the IRRs to such an extent that a pretty good return just isn't good enough.
Unfortunately, I don't have specific data to back this up, but my sense is that very few VCs get to invest in blockbuster hits like Google (and as I mentioned, Google didn't take VC investment until they had already developed great technology and a great monetization strategy. So investment in Google was at a much higher valuation than what you'd expect for the typical VC deal)
Again without specific data, my sense is that most money-making deals (for investors) are deals like the YouTube acquisition or other much smaller acquisitions ........ and I also think that most VC-funded companies make little or no money for the investors (and either crash or go through firesales).
Angels are different. Angels are willing to invest in a startup whose only likely good outcome is an acquisition. But VCs will not even consider making a series A investment in a startup that doesn't have a credible plan for getting to the kind of revenues that would support an IPO.
Now, it is true that a company (like Google) could maximize ROI and yet change the world by being a large independent company. However, this exception doesn't prove the rule.
My point is that a good VC can't afford to be divorced from reality. In practice, VCs do seem to understand that their primary aim is to maximize ROI (and that this aim is more often achieved through being acquired and not by being a large independent company)
Of course, all of this is opinion, but in the absence of data proving otherwise, I'm going to stick with my opinion :)
Larry/Sergey took $100k investment from Andy Bechtolsheim before they even had incorporated. Less than a year later they took $25 million in VC. AdWords was launched a while after that.
for some reason this isn't part of the microsoft history story and most ppl don't know about it - but it took years for microsoft to gring out decent revenues and profits.
'lifestyle business' is meant to mean a small business where the goal is to gain enough revenue to live from. ie. something between ramen profitable and taking a salary from a VC funded business.
I can't really think of a top50 tech firm (on market cap) that didn't raise outside capital at some point.
Microsoft's first profitable program was Basic and it was released soon after the company's launch in 1975.
6 years after Microsoft launched, TVI invested and obtained a tiny portion of Microsoft's stock. To answer your question on the history, this sole vc investment played a very small part in Microsoft's history and the tiny VC share is one reason why Microsoft was a founder-run company.
Btw to be clear,capital can definitely be useful. Youtube had losses running into hundreds of millions of dollars. Yet, VC money helped them make a big impact on the world.
However, after Microsoft's model, my preference would be for the model adopted by companies like Google. Google developed great technology and a great monetization strategy before they took in a single penny of venture funds. Again, it is no coincidence that Google is a founder-run company today.
All that said, I have no problem with zero-revenue companies that chase vc funding and hope to get acquired (Acquisition is how most VCs get returns on their investments). I'm just suggesting that it is absurd to create silly labels like "lifestyle business" and pretend that risking other people's money (i.e. vc funds) is the litmus test for a true "risk-taker"
There is a class of entrepreneur who don't quit their job, or leave one foot in that door, until they actually raise money and can pay themselves that salary.
for eg. I know of a smallish no-revenue VC funded startup where the CEO and founder pays himself $300k. what the board and investors didn't know is that for the first 6 months in the life of the startup while he was 'salary sacrificing' he was actually consulting with a big co. for $30k a month. I wouldn't call that taking a risk, its the opposite, really
The guys grinding out on almost nothing and quitting their jobs are the real risk takers - and that happens with self-funded, family funded, friend funded, angel funded, VC funded or zero funded businesses.
Personally, I'm in it to change things, but I'm not going to discourage someone who is in it to provide a good living for their family. Going all out when you're supporting others just isn't an option in some cases, in fact it could be downright dangerous.
However they will be much better at "business" by the time they do it.
Small businesses aren't easy to sell, there are tons of family-type small businesses (and I am not talking about corner shops) lacking anyone to take over.
Derek Sivers completely automated CD Baby to a point where he wasn't even needed anymore. Then he sold it for $22m.
Actually that's the perfect example of what I'm talking about. Not sure why I didn't think to to mention it before.
While making it all automated is the goal, it doesn't mean it will be attained. I believe CD Baby is more an exception than the rule. Its hard to hire people who care, let alone people who will make sure the business runs even without you.
so they would invest their own money to create a bigger company, the difference being that the source of funding is now the founder
then the founder thinks, jeez, I am taking a big risk here, investing $100M of my own money to start this bigger business. I am going to call some friends and ask them if they want to share this load
and thus you end up re-inventing venture capital
issue of semantics isn't it - why does it matter that it has to be the founders own money?
have you built the next Facebook (which also happens to not be a "change the world" service anyway)?
Disagree with the post...fine, but no need to drag everyone through the mud in the process.
His presentations do imply that he was the driving force behind the Scala adoption for their messaging queue, so that's arguably a must-have to reach Twitter's current scale.
ETA: I tend to agree with you, just sayin'.
It seems Freckle isn't the only one who wants to use "this month's CSS trends".
For one thing, software development is almost entirely a knowledge-based industry. It does not require external funding to reach any useful viability in the way that, for example, a factory for industrial machinery or a large retail store would.
Moreover, in software development, the mechanical grunt work is trivial. The real value is determined by things like project ideas, business models, dealing effectively with users, and ability to convert those into a useful software design. That means small teams of really good people can punch way above their weight class.
As I see it, those basically negate the two big reasons most projects would necessarily be implemented by a large company (scale of people and scale of materials). That pretty much leaves variations on the themes of community/personal development and regularity/job security as the major reasons a good software developer might choose to work as an employee of a company rather than going it alone or with a small team they put together.
After a few years, I came to the conclusion that both of those benefits are mostly illusory. Does employee #32,768 at BigCorp, Inc. really have more job security in the current economic climate than a contractor with four or five repeat clients, or than three guys running a lifestyle business that has 1,000 customers and enough money coming in each month to easily pay everyone's bills? And do employees at big companies really develop skills and experience faster than a bunch of guys who build an entire working business from scratch or a contractor who works with four or five different technology stacks within a few months?
I'm not saying employment isn't for anyone. Obviously the kind of regular work environment it brings suits a lot of people, and not everyone wants to take on all the other stuff that goes with doing it all yourself. However, those are basically social constraints rather than technical ones. They don't reflect on the potential value a particular software developer could contribute to a project.
I notice that several people in this discussion have pointed at the need for some things to be done at scale. Pg himself wrote:
> If that happened, the whole world would crumble, because we wouldn't have any technology bigger than could be built by lifestyle businesses.
But the way I see it, every successful large project is either a successful small project that grew or a bunch of successful small projects that learned to interact effectively. No-one says that just because you decide to run a small business instead of working for the The Man today, you can't grow that business or collaborate with others tomorrow.