| Cash is like the blood running through the veins of a venture. You need it to survive. You also need it to walk and you need more of it to run. There are web businesses that can certainly be entirely bootstrapped, sometimes by a single coder/designer/everything. On the other hand, most businesses that scale need more people and more resources and more of everything. This is where the "it's just a server in a rack" model breaks down quickly. Scaling means, at the very least, hiring people and providing them with all of the resources they'll need to do their work. You could very easily be at a $50K per month burn rate very quickly after launch, say, thee months. That doesn't account for legal fees and other expenses that might not be obvious on first inspection. If you have the money and the ability to scale a business and are willing to risk it all, by all means, do it. You don't need external money for this. Most of the young folks who seem to make-up the HN audience there are lacking three things: money, experience and the business network. All three of these are critical when you need to press on the accelerator and go. Learning while doing is possible but far less than ideal. If a VC can offer smart money this is probably the best bet for young HN'ers. In this context "smart money" means that a VC makes an investment and also contributes experience, guidance and contacts to the process. This can often mean the difference between success and failure. In many ways this concept of a good vs. a bad idea has to be qualified with a set of variables. Off the top of my head: Startup cost
Market
Competition
Barrier to entry
Cost of sales
Capital intensity
Regulatory landscape
Technology risk
Intellectual property ownership
Intellectual property minefield
Domain expertise
Funding
Business operating expertise
Marketing expertise
Local labor requirements
I could go on and I could expand on all of the above but that's besides the point which is that a business that isn't a hobby and can scale is far more than a server in a rack. |
My response: So, when a Web site got popular and a good Sun computer as a Web server cost $200,000, which had to be paid long before the entrepreneur could have received the checks from the advertisers, then equity funding was needed for the servers, room to put them in, HVAC for the room, high speed Internet connections, etc. Okay, but now a much more powerful server is available for $1500 in parts and can be plugged together in a day the first time and an hour or so for similar servers after that. For the room, use a basement or spare room in a house. For HVAC, get a window unit AC. For the Internet connection, 15 Mbps upload bandwidth appears to be common in residences, and that is plenty for enough revenue for much more.
Growing quickly? Why do that? There are some cases, e.g., to exploit a fad, but it's not so clear just why it is necessary.
Cash? Right, it's crucial, but getting that first 8 core, $1500 server live with 15 Mbps upload bandwidth doesn't take much cash.
Then if the project is good, that first server should throw off enough cash for growth to 2, 4, 8, 16 servers, which, if kept busy should throw off enough cash to make a common Series A look a bit silly.
Growth in head count? Sure, but that's for later. For a good project, in the first year of doing well the project should have put enough cash in the bank to start hiring, slowly.
For each of the points you mentioned that need cash and, thus, perhaps equity funding, there are plenty of example projects. And generally your points hold for the 'usual' projects or 'most' projects. But as entrepreneurs, VCs, and HN readers all have learned, projects with good VC funding are like hen's teeth, in a recent comment by A15H, only about 15 such projects a year.
So, instead of 'most' or 'usual', we have to be assuming 'exceptional'. Essentially everything about a successful information technology (IT) project is 'exceptional'. So, I was trying to describe some of what an exceptional project could do. Net, net, from all I can see the VCs want to fund only projects that don't need the money.
E.g., one well known Silicon Valley VC firm wrote me that they want "100,000 uniques" before writing a check. Okay, let's see: 100,000 unique users of a Web site in a month might mean 300,000 users with, say, an average of 4 visits a month. Suppose each visit sees 8 Web pages with 4 ads per page. Assume get paid $2 per 1000 ads displayed. Then the monthly revenue would be
300,000 * 4 * 8 * 4 * 2 / 1000 = 76,800
dollars. One guy. He's now awash in free cash unless he has 50 Lamborghini cars, a 200' yacht, and a Gulfstream G650. Instead, if his car is old and rusty, then he's in line for a new SUV and a new Corvette. A few more months, especially if he is seeing significant revenue growth, and he can be hiring.
Here is a 'sanity check': I know; I know; IT startups are the big, hot, new things. Right. But they didn't invent either sex or business. Instead, the US is just awash, coast to coast, village to big city, in sole proprietorships and family businesses. When one of those gets to $76,800 a month in revenue, with only one or a few workers, they are not out looking for equity funding. Not a chance.
Such busiesses? Actually, can buy a house and support a family just being an electrician. When I needed one on a Thursday, I was up all night getting names and phone numbers and calling, trying to get the work done on Friday instead of Monday. I left about a dozen messages. Only one called back, near dawn, because he was on his way to his Friday morning golf game, but he gave me a name I'd not found. That name came and did well. Look, those guys are working 4 day weeks, don't bother with publicity, and still are being bread winners.
E.g., when I was a B-school prof, one of my students had a good career going managing Wendy's -- so, right, you can guess the B-school. He explained some of how to do well running a Wendy's: Have the staffing meet the demand, not too much (waste money) and not too little (lose business). To do this well, have to watch the weather hourly and watch for special events, say, B-ball games, daily. He said the difference is about $200,000 a year in the pre-tax bottom line, at one Wendy's. So, a guy who is running 5 Wendy's can bring in an extra $1,000,000 a year pre-tax just from careful staffing. He's not interested in equity funding. Instead, banks are perfectly willing to loan him money for new restaurants.
In what little time I spent in yacht clubs, I saw people in rental property, several retail dry cleaning shops, independent insurance, etc., but I never saw anyone in IT with equity funding!
Bringing up a Web site will make any auto body repair guy, auto repair guy, pizza shop owner, coin laundry guy, etc. highly jealous because that $1500 server is chump change compared with the equipment they need to be ready to serve their first customer. Heck, on my street, the guys mowing the grass arrive in a truck with a trailer with their gas powered mowers -- truck maybe $40 K, trailer maybe $10 K, and mowers maybe $15 K each. Gee, for just one of their mowers can buy 10 of those 8 core servers at $1500 each.
It is looking to me that bringing up a Web site that runs ads is a much nicer business than nearly any of the millions of successful small businesses in the US. Yes, the Web site needs traffic, and if it is to be really successful, say, $1+ billion market cap, some careful thinking and/or a lot of luck. I do suspect that somehow the guys mowing grass, and speaking poor English, are getting by without a lot of legal expenses! If they can, so should a guy running a Web site.
What I'm describing, has it been done? One example is the Canadian match making site Plenty of Fish. For some years it was one guy, 2-3 old Dell servers, ads just via Google, and $10 million a year in revenue.
For one more, when my cable TV and ISP guys were last at my house, they looked at my software and mentioned that they know of another customer who bought three houses in a row. Why? Just to get the residential price for their upload bandwidth for their Web site.
For now, I'm glad I'm an entrepreneur and not a VC: I get to design my project just from a clean sheet of paper while a VC is essentially forced to wait for something good to arrive in his e-mail inbox. Yes VCs like to try to map out the promising 'spaces' for the future, but to me that is a form of intellectual self-abuse. And nearly no VCs have backgrounds that are exceptionally good as a foundation for picking and executing a good project.
It's true that the VCs can't evaluate my project, and that's beginning to look like good news; that is, the entrepreneurs the VCs fund couldn't understand or compete with my project either.
I'm failing to see much of a future for US IT VCs: Computers are too cheap, and the VCs are insisting on buying a ticket on the planes after they have already left the ground. Besides, as in a Fred Wilson post at his AVC.com a year or so ago, on average US IT VC returns over the past 10 years suck.