The aspersion on all startups that have raised financing as likely to be unscrupulous and play fast and loose with ethics is pretty uncalled for. Because, of course venture backed startups do those things, but so do bootstrapped startups. You know what usually causes it? Desperation that you're going to fail. Bootstrapped startups can fail too, and often do. They usually just don't get big enough for anyone to notice first.
Finally there's this idea of an "acquisition graveyard". While it's true that acquisitions often go south, when they succeed the results can be great. Take Siri, for example, where the product reaches tens of millions more people than they ever would have on their own.
It seems like what DHH really objects to is taking chances, where you run the risk of failure for higher reward. And it's his right to go for the lower risk option. Raising money and doing acquisitions are just risky, not bad.
We've had numerous articles, many of them by VC's, explaining the economics here. VC's need their investments to wrap up within a specific time frame. Near the beginning of the time frame, VC's resist liquidity. Near the end of the time frame, VC's push for liquidity. The companies that hit the moon pay for the ones that don't.
Nobody is taking VC at gunpoint, so bickering over whether the founders are the ones begging to get to the moon or the VC's are pushing them to go there is besides the point.
Either way, customers are strapping themselves in alongside the company for the ride.
And then increasingly being the losers when the capsule fails to reach escape velocity and burns up on reentry into the atmosphere.
There are lots of pros and cons for the 37 Signals model vs VC backed companies, but I've personally reached the point where I won't even bother using a service unless there are strong indicators it will still be around in a year.
Both types of businesses (slow organic growth or VC backed) are capable of reaching that point of earning my trust that they will continue to exist. However, I do think that over the past couple of years that VCs throwing so much money at so many smaller moonshot ideas have really biased me towards distrusting in longevity as being the default state for any new company, and IMO that's a real problem for companies who want to provide their software as a web service where if they go belly up, I completely lose whatever time investment I've made in become their user.
But "Keep in mind that VC companies tend to go big or bust, with large rewards in success and none in failure" wouldn't make such an eye-catching headline.
Actuarially speaking, you are not getting in early on the next big thing. You're one of a cohort of 10 in which 9 are expected to fail; indeed, in which all 10 are being pressured to make longshot bets that hasten failure, because the worst case for the VC actually isn't "company goes out of business".
Failing fast isn't necessarily a bad thing. I'm sure there are many companies that have gone out of business because they took VC and tried to grow too fast, but what percentage is that really? When bootsrapping you often don't even know if the business will be viable for a couple years, which IMHO is a vastly worse situation to be in.
We're talking about being presented with the choice of a medium-risk medium-growth model, and a high-risk fast-growrth model, and invariably selecting the high-risk model.
That's what VC means. At the strategic level, it means invariably selecting the higher risk business model.
Again: "company going out of business" is actually not the worst case for the VC.
Different types of businesses need different growth rates to be successful.
People taking VC money take it because they need to grow fast or it won't work.
Examples outside of tech:
Green Mountain Rosters: They make K-Cups. They have to get as many Americans to buy K-Cup machines as possible so that they don't buy a potential competitor's product. If they went slow a competitor would go fast and destroy them. So they sell the machines near cost or less and try to get market penetration. Once everyone has those machines they sell the K-cups which is where the money is.
That business would be ridiculously stupid to go slow in.
Same thing with something like Twitter. If that started catching on but they didn't put any money in it for marketing and growth some other Twitter replacement would have come along and taken their market by being aggressive.
If your goal is to have control over your world and not have a boss, don't take VC money. Build a slow growth business in a saturated market and deliver top quality products. You will be happy and that is OK.
But don't look at what other people are doing with disbelief and frustration that they are "shooting for the moon" and "ruining customer's lives" (not really your words) because they are trying to win in a hard to win place and trying to represent their investors as true fiduciaries.
And coffee is a good example. Because among those indies, there are coffee roasters that have taken outside funding and suffered as a result.
# of coffee shops that went national with no financing = zero.
You can argue about the type of financing, but any type Starbucks had after the first investors expected big growth. Even today their stock price is at a P/E of 30 which means the market thinks they will growth at double digits every year.
I'm not saying going VC is good, or not going VC is good. Rather I am saying that each strategy has its own ups and downs depending on the type of business. Some businesses need VC funding to beat competitors, some can grow slow.
Yes!! This is the essential point, and I'm surprised pg didn't bring it up. It depends on the nature of the opportunity. If it's a large market that has recently opened up for some reason, you have to attack it aggressively or you will lose. Conversely, if the market has to be educated about the virtues of your product, you're better off going slow, because educating a market takes time.
I'll agree with DHH to this extent, though: I wouldn't be surprised if there were a lot more bootstrap opportunities out there than fast-growth opportunities.
You lose me here. 'Lean' startups can benefit from a VC investment as much as 'Moon-shot' startups do. My experience is that a VC investment implies that someone believes that the product can be accelerated by the application of money. When I hear 'moon shot' I hear mostly a pejorative 'high risk, publicity loaded but ultimately no follow-on project' (which is what the NASA Moon shot was)
I also agree with the 37signals guys that money in the bank is great, but its only great if you getting somewhere. John Walecka was one of the investors in FreeGate and he used a car analogy where money is the gas, and if you're sitting there idling you are using gas and not getting anywhere. Money, like gas, should be enough to get you from here to your destination plus a little reserve to cover contingencies.
Again, think of it this way: the runway is 18 months, whether you took 2MM to "go lean" or 15MM to "go nuts".
The fact that you're hiring slow has nothing at all to do with the economics of a venture capital fund. The fund wants your company wrapped up within a fixed time frame either way.
2 great things about "lean": (1) it enables some companies to find their market without ever needing VC, and (2) it sets some companies up to confidently shoot for the moon with a validated market. Lean is helpful. It just doesn't change the mechanics of VC investment.
(I voted you up; someone voted your comment down, which is annoying, because it's a good comment.)
 In "Proofiness: The Dark Arts of Mathematical Deception", Charles Seife claims that NASA asked GE to calculate the chances of success in the Moon Landing and came out with 5%.
Not sure about your experience, but from what I've seen that's exactly the case. I was director of finance of a startup that raised (and burned) $30M+ from several 'tier A' VCs. I was in the board meetings where the VC partners and board members wanted that money spent. You don't hit home runs without swinging.
Well it is not like it is a secret, right?
The point DHH is making is that people don't really think through the implications of that logic.
While I certainly agree that there are several cases of startups taking VC money and becoming acquired or building huge, lasting businesses, it is tough to produce much evidence that that route has a high expected value. I would also say that based upon my own interactions with hopeful entrepreneurs, WAY too many are asking questions centered on raising investment cash instead of doing the hard stuff like building and selling.
The entities most capable of unfair or exploitative behavior are those who no longer need value that relationship to their customer. Yes, in one case this applies to companies close to failure - no matter their funding source. But as noted elsewhere, the acceptance of investor money adds many layers and new definitions to what 'failure' is.
Failure is no longer just 'going out of business' - it morphs to mean things like not having hit a number, not having made money fast enough, being pushed out of a job because people have lost faith in you, etc. The options for failure proliferate in an investor-funded corporation.
It's that same irony when a Fortune 500 firm makes a nice profit but the stock tanks because they didn't make as much as someone thought they should. Profit = success in the natural world; but somehow it gets turned around to equal failure - oftentimes costing real people their real jobs and costing companies real value of their shares that they could use to conduct real business.
So, as investor-funded companies are allowed only a small number of ways to define success, they are always closer to failure, and are forever more aware of the benefits of unethical behavior - especially when that behavior is so well-shielded by the corporate veil.
Instead of simply assuming that one of two equally plausible alternatives is true, it would be useful if David tried looking at the world and trying to figure out which actually is true. I'm not asking for a scientific study. It would be a start just to find an industry where some participants are VC funded and some aren't, and then look at how they each fared.
Companies without VC funding also don't have to deal with investors pushing to get a big return at the expense of every other part of their business. Maybe not all VCs do this - I suspect that's the reason your responses to this string of 37signals posts seem defensive - but a significant portion of them do.
> Instead of simply assuming that one of two equally plausible alternatives is true, it would be useful if David tried looking at the world and trying to figure out which is actually true.
Honestly, I think you're both painting with a wide brush. He's lumping all VCs together as pump-and-dump investors and you're taking his criticism of that business model as "no one should take VC money."
This is a tough topic, which makes the vague language at play here all the more frustrating. I'm not entirely convinced you two are actually talking about the same things.
While you're right that VC funding (and all of the other resources) can be valuable assets, I've had the end-user experiences he cites often enough to get suspicious any time I see someone taking it.
For example, The Talent Acquisition -- if anything, raising VC means you probably won't be a talent acquisition, right? His excuse for including this problem is that your VCs will be the ones to blab to Google about how great you are, at which point they acquire you and shut you down. Huh?
Any group can focus on generating profit from their ability to work well together and deliver to the world something that is truly needed and wanted. A group that pays its bills forward and productively pushes its ability to generate revenues, no matter if consisting of two people or many, many more, has to manage this fact.
VC as an 'injection combustible' is definitely of value in markets, but I propose that the group dynamic as defined by the individuals actively contributing to the survival of the company is too often over-managed before this reality sinks in. An executive team who have worked together to do big things in the past is really, sort of, a step above 'need outside help or else we are toast' levels of competence.
As appealing as such a question might be in abstract, I think the results would be pretty useless in practice. There's too much diversity, too many variables. Every startup is at rather incommensurable with every other, beyond the basic financial anchors. Every product's success is a highly stochastic combination of team, market conditions, direction of winds, luck, etc.
What would such a study--regardless of "scientific" rigour, which, if desired, may itself may be an unintelligible criterion given the complexity of the question--really tell us?
I think that might be a skewed metric. This may be the first time I agree with DHH, but VC funding changes the definition of "fairing well". It all depends on how you want to define success. I personally know a lot of bootstraped companies who have achieved success simply by not having to worry about making enough money to cover this month's payroll. That is clearly not the case with a VC funded startup.
Practically, this is the difference between buying a house with cash or buying it with a mortgage. And that's part of DHH's point - the homeowner who buys their house with a mortgage they can pay only if everything goes right is hardly and barely the owner of their house or destiny.
I'd also add that the successful moon-shot companies don't justify the business model in-and-of-themselves either. An overnight success, beholden to investors with short time frames, that gets pushed to an IPO and into the arms of shareholders with an even shorter timeframe . . . not an attractive recipe in my opinion. Companies built slowly, organically, and personally are capable of more longer-term thinking and risk-taking then entities that more resemble a joint-venture between investors and contract workers glued together mostly by their dream of mutual exits. If everyone is thinking of how they are going to leave, the bonds are by definition very weak.
This is not an indictment of VCs per se - moreso of the short-term pressures that dominate when money is at stake and opportunity costs are forever pressing on the gas pedal.
So in order to refute it, one needs to find out how many startups, that are profitable from the start, end up failing. Probably not many, but I don't know.
Also, for the author(s) of this post, "fail" includes being acquired and then integrated and "sunsetted" — which, depending on your point of view may or may not count as "failure". It's certainly not a failure from the founders' perspective; for the users', it's at least a setback.
Plus, all of these drawbacks apply substantially to unfunded companies, except maybe four. Although, if it were MY money on the line rather than an investor's, I think I'd be MORE careful with it, not less. So the pressure cooker aspect should decrease with VC.
I see this piece as a marketing material with implicit message: "use Basecamp.Next, not Asana, Trello, Sprintly, or other products".
I've got to give the man a prop: well done marketing-wise, well done.
He's basically making the reasonable point to build quality shit people actually want to use without accounting gimmicks and all else will follow. Funny that it takes a Danish guy to understand the American Way™.
He's tired of all the Kool Kids making a product with no hope of ever making money somehow landing millions in VC. It's offending to those of us that actually build things people want to use, but don't happen to live in the right place or have the right institution on their résumé.
He doesn't need to; it would undermine the credibility of his message, and given 37signals' business principles, he stands to gain more by spreading FUD towards VC-backed startups in general than by plugging any one particular product.
If this is a marketing piece, who is it marketing towards? It certainly doesn't read as if it is written for people who decide what web-based collaboration software their company will use.
The difference between DHH and others is that he's actually practicing what he preaches more often than not.
While 37Signals are brilliant marketers, not every opinion is marketing speak. They actually believe this stuff and don't mind sharing what they think.
I think some people associate the word marketing with lies, scams, and whatnot. What if we view the word marketing as a way to market products in a more neutral sense.
Can his honesty a marketing material? why not? it depends who reads it.
A message can be a marketing material regardless the intention behind it.
> The difference between DHH and others is that he's actually practicing what he preaches more often than not.
I think we all know that otherwise we'll call people who don't practice what they preach as a not-genuine.
> They actually believe this stuff and don't mind sharing what they think.
Most people believe on what they build/working on, otherwise it's a one-trick pony and it takes a lot of guts to work in such place especially for engineers.
>> marketing material with implicit message: "use Basecamp.Next, not Asana, Trello, Sprintly, or other products".
Oh wait...those were all started and built to very significant revenues without VC (at least not until they were already large and successful).
And that's just in the tech industry.
That's because there are a lot of startups that, say, Sequoia backs, but there is only one IBM. If a Sequoia-backed startup screws IBM, IBM CIO will not talk to another Sequoia startup for the next 10 years.
Because there are only a few major acquirers of security software/hardware companies (Cisco and Symantec being by far the leaders) and I have never observed this mentality among those companies; there are absolutely VCs that tend to make investments in IT security companies, too.
It is also the case that what is true for Sequoia --- the top tier of the top tier of the top tier of VCs --- is probably not true of the asset class as a whole.
To be clear, we are not talking about successful acquisitions that make the fund. There interests of shareholders and customers are likely to be aligned anyway.
I agree, but few things are true of VC funds as asset class as a whole. Top-tier funds behave differently than the rest.
A lot of companies get bought, but in most cases, the innovative software they made doesn't go away. It just gets rolled into some other product.
The best example of product acquisition taking over the host is probably eBay, a PayPal Company (now).
(This actually run thru my head when I saw Stripe getting big VC funding. I was thinking - damn their great support will probably significantly deteriorate : if I run into a problem, I will probably be forwarded to some low wage employee reading the script)
Perhaps this is a bit of an outlier, but this is how the Heroku acquisition was framed and it does seem to actually be working out well, no?
I wish all acquisitions looked more like the Heroku acquisition. I also wish I had a pony... :-)
way back before dhh had enough money to commission his own Zonda, 37signals were just another little company no one had heard of. what they preach is what they already did to get where they are now
oh, and as part of that journey they created (not sure when) and opensourced (almost 8 years ago) a little web framework Rails, built on a little known (outside of Japan, at the time) language called Ruby.
The right investors will change the game for you.
I suppose it depends on what markets you're targeting. 37Signals tends to aim at small businesses that would be more willing to embrace SaaS solutions. In Rework they admit they chase the common case because of the money involved. But targeting larger customers in more entrenched industries (such as health) is not as simple as making an attractive landing page + an edgy slogan.