6 ms·

You don't need to look much further than the story of Google. Search was thought to be a "solved problem" and many at the time thought that there was zero money

You don't need to look much further than the story of Google. Search was thought to be a "solved problem" and many at the time thought that there was zero money in search. Plus it was an incredibly saturated market with existing providers. If you took the finances first approach, you would have missed Google. Another good one is AirBnB. Staying in other people's homes was a pretty ridiculous idea at the time. Who would want to stay in a stranger's home? How does a company like that make any money? It's more obvious today but that capital had to be invested in order to open up the market for AirBnB to come in underneath the hotels and cement itself. If you took the finances first approach, you would have missed AirBnB. Yes, my examples are cherry-picked (I know someone is going to bring this up). But you asked for examples and here they are :)

ThomPete 9y ago
I built an Airbnb ish kind of product back in the 90'ies with a friend of mine, he even wrote his thesis about it. I got the idea because some stranger on ICQ from Japan asked me if he and his girlfriend could live with me in Copenhagen for a couple of weeks in exchange for me being able to live with them if I ever came to Japan. The service was called IKIKI (apparently meaning visiting each other and also at the same time a palindrome) However, we ran into a lot of problems with generally getting people to trust each other. I later ended up doing design for a couple of other airbnb ish companies amongst others vacationvalley.com owned by a very young swedish entrepreneur called Martin Schaedel who unfortunately died very early in a plane accident. http://www.businessinsider.com/2009/1/the-internet-says-goodbye-to-a-friend-martin-schaedel http://www.businessinsider.com/2009/1/the-internet-says-good... So I have had my experience with the Airbnb business model and never missed that. It was a timing question not a funding question. It is not a good example as that had more to do with market adaption of social networks and mobile phones plus payment services than product innovation.
- zaptheimpaler 9y ago
  >that had more to do with market adaption of social networks and mobile phones plus payment services than product innovation Not parent, but this seems to be key. Many say tech will be forever as innovative as it has been in past 10-15 years, but now it seems that all of that has simply been the effect of widespread adoption of the internet & smartphones, rebuilding parts of the economy on top it, and things are reaching saturation. Until there is another major breakthrough like that at the hardware level, we will see far less growth and unicorns.
  - coffeemug 9y ago
    So let's fund teams that are likely to come up with the next major breakthrough at the hardware level. "Putting finances first" is probably not the way to do it.
    - ThomPete 9y ago
      Putting finance first means making solid businesses that solve peoples problem. If you don't capitalize on the innovations happening you can't help fund the next innovation. It's not that there shouldn't be innovation done but you can't build a market only on that.
      - eldavido 9y ago
        There's a middle ground here guys. If you're talking about 2-4 million seed rounds, sure, back a great team. But when you're talking about nine-figure equity raises, you probably need a tenable financial model. Another thing: software is high-margin. A lot of dumb VC is getting thrown into low-margin reinvention of relatively old business models (food delivery, hotels, livery), evaluated through software-like metrics. Maybe finances matter in low-margin scale businesses. It's just not as important in businesses based on pure software/design/IP-driven innovation.
jasode 9y ago
>If you took the finances first approach, you would have missed Google. Google Inc is a very interesting situation. I wasn't there as a fly on the wall during the first investment rounds but based on reading multiple sources of Google's history, it seems like there's been a little bit of mythology built up around Google's ascent -- some of which is perpetuated by very persuasive personalities like Ron Conway. For example in the interview[1], Paul Graham asks Ron Conway if Google knew how they would make money and Ron says "no". So just based on that, it seems like investors such as VC firms Sequoia and KPCB made a blind leap of faith based on the sheer force of Larry and Sergei's brilliance. However, other sources say there's actually more to that story. You have to split apart the "monetization" into 2 different strategies: (1) licensing the search engine to others like Yahoo and (2) AdWords. When people say "Google didn't know how it was going to make money", they're likely talking about AdWords. However, Larry did have the idea of "licensing income" from the very beginning. The potential to sell a search engine license to Yahoo was why he was enlisting Ron Conway's help to connect him to the VC firms in the first place. With benefit of hindsight, we now know that Google pivoted from licenses to AdWords and it became the massive cash cow nobody predicted when the company was initially founded. So VCs like Sequoia and KPCB did have "finances first" because they invested with the idea that licenses was a realistic revenue model. Contradicting Ron Conway, the VCs didn't necessarily need a 10th slide that showed the business model -- because they already bought into the licensing idea. Because of the strange way that mythology works backwards from the present, if you ask Sequoia today if they invested in Google without a business model, they will emphatically answer "yes" which reinforces the idealization that they "believe in their founders". It's an interesting feedback loop. If there were Google investors that prioritized the idea over finances, it might have been the very first angel investors such as David Cheriton and Andy Bechtolsheim. Possibly Jeff Bezos as well. If anyone close to the early Google days can correct the story, that would be helpful. [1] deep linked at 16m20s and "Google didn't have idea about monetization" is at 17m04s: https://www.youtube.com/watch?v=1z87RGFGuxQ&feature=youtu.be&t=16m20s https://www.youtube.com/watch?v=1z87RGFGuxQ&feature=youtu.be...
- ThomPete 9y ago
  I am well aware of Google and I have said nowhere that it's either or. My point is that there are a lot of people who ask for funding who don't need it because they aren't actually solving anything fundamental.
mdorazio 9y ago
I think you may be misconstruing what actually happened in your two examples. The majority of the tech innovation for Google's original search engine happened entirely without VC funding. Google as a search engine was already up, running, indexing millions of pages, and providing demonstrably better results than competitors by the time KPCB and Sequoia funded it in mid-'99. I distinctly remember the librarian at my school instructing us to use Google instead of other search engines in '98 due to its higher quality results. "Finances first" may still have held because running the original engine wasn't all that expensive and they didn't have a bunch of engineers to pay, so getting to profitability was not exactly a long shot. In the case of Airbnb, you seem to have ignored that there was already a strong short-term home rental market in place before Airbnb came onto the scene. Homeaway and VRBO both predate Airbnb by several years and had proven the financial viability of the market. What Airbnb did was completely ignore laws and lease contracts forbidding hotel-style short-term stays, and combined it with an easier to use and search interface for both sides. Also, Airbnb had already proven the model before they took funding - they dogfooded it with their own apartment, then used the original 20K investment from Paul Graham to prove the business model before any large venture money was raised. This is absolutely a case where "Finances first" worked.
- askafriend 9y ago
  You have very valid points all around - but allow me to push on some of them a bit. Even though Google's tech was built without VC, their consumer product and fundamental business were far from built and people had written off the entire web search space by that time anyway. It's kind of like if someone came to you today and pitched you something like food delivery with a better algorithm when nearly all major food delivery services today aren't doing so well and people have already developed strong biases against the space. AirBnB isn't only a short-term home rental market though - it's a bit more cavalier of a product than that. Short term home rental does definitely exist on AirBnB and is huge but AirBnB also encompasses the spectrum between staying on someone's couch and straight up short-term home rental. The other difference is that it also covered massive areas that were traditionally ignored by hotels and other short-term home rental services. So in that sense, the VC money was needed to market the product appropriately, build trust with users through insurance guarantees, build liquidity in areas where it was a competitive advantage and do the legal/lobbying legwork. That's the real magic and that couldn't have been accomplished through a traditional finances first approach and certainly couldn't have grown so large so fast. Let me put it this way: whether AirBnB ended up as a cute hipster alternative to VRBO (which was playing in a tiny market) or whether AirBnB ended up as a straight-up hotel-alternative depended on VC money to believe.

ThomPete 9y ago

I built an Airbnb ish kind of product back in the 90'ies with a friend of mine, he even wrote his thesis about it. I got the idea because some stranger on ICQ from Japan asked me if he and his girlfriend could live with me in Copenhagen for a couple of weeks in exchange for me being able to live with them if I ever came to Japan. The service was called IKIKI (apparently meaning visiting each other and also at the same time a palindrome) However, we ran into a lot of problems with generally getting people to trust each other. I later ended up doing design for a couple of other airbnb ish companies amongst others vacationvalley.com owned by a very young swedish entrepreneur called Martin Schaedel who unfortunately died very early in a plane accident. http://www.businessinsider.com/2009/1/the-internet-says-goodbye-to-a-friend-martin-schaedel http://www.businessinsider.com/2009/1/the-internet-says-good... So I have had my experience with the Airbnb business model and never missed that. It was a timing question not a funding question. It is not a good example as that had more to do with market adaption of social networks and mobile phones plus payment services than product innovation.

zaptheimpaler 9y ago
>that had more to do with market adaption of social networks and mobile phones plus payment services than product innovation Not parent, but this seems to be key. Many say tech will be forever as innovative as it has been in past 10-15 years, but now it seems that all of that has simply been the effect of widespread adoption of the internet & smartphones, rebuilding parts of the economy on top it, and things are reaching saturation. Until there is another major breakthrough like that at the hardware level, we will see far less growth and unicorns.
- coffeemug 9y ago
  So let's fund teams that are likely to come up with the next major breakthrough at the hardware level. "Putting finances first" is probably not the way to do it.
  - ThomPete 9y ago
    Putting finance first means making solid businesses that solve peoples problem. If you don't capitalize on the innovations happening you can't help fund the next innovation. It's not that there shouldn't be innovation done but you can't build a market only on that.
    - eldavido 9y ago
      There's a middle ground here guys. If you're talking about 2-4 million seed rounds, sure, back a great team. But when you're talking about nine-figure equity raises, you probably need a tenable financial model. Another thing: software is high-margin. A lot of dumb VC is getting thrown into low-margin reinvention of relatively old business models (food delivery, hotels, livery), evaluated through software-like metrics. Maybe finances matter in low-margin scale businesses. It's just not as important in businesses based on pure software/design/IP-driven innovation.

jasode 9y ago

>If you took the finances first approach, you would have missed Google. Google Inc is a very interesting situation. I wasn't there as a fly on the wall during the first investment rounds but based on reading multiple sources of Google's history, it seems like there's been a little bit of mythology built up around Google's ascent -- some of which is perpetuated by very persuasive personalities like Ron Conway. For example in the interview[1], Paul Graham asks Ron Conway if Google knew how they would make money and Ron says "no". So just based on that, it seems like investors such as VC firms Sequoia and KPCB made a blind leap of faith based on the sheer force of Larry and Sergei's brilliance. However, other sources say there's actually more to that story. You have to split apart the "monetization" into 2 different strategies: (1) licensing the search engine to others like Yahoo and (2) AdWords. When people say "Google didn't know how it was going to make money", they're likely talking about AdWords. However, Larry did have the idea of "licensing income" from the very beginning. The potential to sell a search engine license to Yahoo was why he was enlisting Ron Conway's help to connect him to the VC firms in the first place. With benefit of hindsight, we now know that Google pivoted from licenses to AdWords and it became the massive cash cow nobody predicted when the company was initially founded. So VCs like Sequoia and KPCB did have "finances first" because they invested with the idea that licenses was a realistic revenue model. Contradicting Ron Conway, the VCs didn't necessarily need a 10th slide that showed the business model -- because they already bought into the licensing idea. Because of the strange way that mythology works backwards from the present, if you ask Sequoia today if they invested in Google without a business model, they will emphatically answer "yes" which reinforces the idealization that they "believe in their founders". It's an interesting feedback loop. If there were Google investors that prioritized the idea over finances, it might have been the very first angel investors such as David Cheriton and Andy Bechtolsheim. Possibly Jeff Bezos as well. If anyone close to the early Google days can correct the story, that would be helpful. [1] deep linked at 16m20s and "Google didn't have idea about monetization" is at 17m04s: https://www.youtube.com/watch?v=1z87RGFGuxQ&feature=youtu.be&t=16m20s https://www.youtube.com/watch?v=1z87RGFGuxQ&feature=youtu.be...

ThomPete 9y ago
I am well aware of Google and I have said nowhere that it's either or. My point is that there are a lot of people who ask for funding who don't need it because they aren't actually solving anything fundamental.

mdorazio 9y ago

I think you may be misconstruing what actually happened in your two examples. The majority of the tech innovation for Google's original search engine happened entirely without VC funding. Google as a search engine was already up, running, indexing millions of pages, and providing demonstrably better results than competitors by the time KPCB and Sequoia funded it in mid-'99. I distinctly remember the librarian at my school instructing us to use Google instead of other search engines in '98 due to its higher quality results. "Finances first" may still have held because running the original engine wasn't all that expensive and they didn't have a bunch of engineers to pay, so getting to profitability was not exactly a long shot. In the case of Airbnb, you seem to have ignored that there was already a strong short-term home rental market in place before Airbnb came onto the scene. Homeaway and VRBO both predate Airbnb by several years and had proven the financial viability of the market. What Airbnb did was completely ignore laws and lease contracts forbidding hotel-style short-term stays, and combined it with an easier to use and search interface for both sides. Also, Airbnb had already proven the model before they took funding - they dogfooded it with their own apartment, then used the original 20K investment from Paul Graham to prove the business model before any large venture money was raised. This is absolutely a case where "Finances first" worked.

askafriend 9y ago
You have very valid points all around - but allow me to push on some of them a bit. Even though Google's tech was built without VC, their consumer product and fundamental business were far from built and people had written off the entire web search space by that time anyway. It's kind of like if someone came to you today and pitched you something like food delivery with a better algorithm when nearly all major food delivery services today aren't doing so well and people have already developed strong biases against the space. AirBnB isn't only a short-term home rental market though - it's a bit more cavalier of a product than that. Short term home rental does definitely exist on AirBnB and is huge but AirBnB also encompasses the spectrum between staying on someone's couch and straight up short-term home rental. The other difference is that it also covered massive areas that were traditionally ignored by hotels and other short-term home rental services. So in that sense, the VC money was needed to market the product appropriately, build trust with users through insurance guarantees, build liquidity in areas where it was a competitive advantage and do the legal/lobbying legwork. That's the real magic and that couldn't have been accomplished through a traditional finances first approach and certainly couldn't have grown so large so fast. Let me put it this way: whether AirBnB ended up as a cute hipster alternative to VRBO (which was playing in a tiny market) or whether AirBnB ended up as a straight-up hotel-alternative depended on VC money to believe.