4 ms·

Looking for Plan B - 'almost no one is seeking to create long-term value or build businesses'

41 points by nickb 18y ago

jfornear 18y ago
We are not really in a recession btw, and as Fred Wilson pointed out in the comments, there are indeed many companies that are building for the long-term. Those companies just don't generate that much buzz because they are focused on making their customers happy instead of hyping their service.
- smanek 18y ago
  A recession is defined as two or more consecutive quarters of negative real GDP growth. According to the official figures, GDP has been just a little above flat (~0.5%) for well over a year now. But, everyone knows that inflation is really far greater than the official ~2.5%/year though. Depending on which methodology you accept, the actual number is closer to 10% and possibly as high as 15% (http://www.shadowstats.com/article/56 http://www.shadowstats.com/article/56 is a decent primer on some of the problems with the government stats). Using a more accurate GDP deflator shows that we've actually been in a recession for a few years now.
  - jfornear 18y ago
    First quarter growth this year was 1-1.6%, and second quarter growth is expected to be around 2-2.5% according to the FT.
    - smanek 18y ago
      The BEA itself said under 1% growth in the first quarter, iirc. And The Economist (http://www.economist.com/countries/USA/profile.cfm?folder=Profile-Forecast http://www.economist.com/countries/USA/profile.cfm?folder=Pr...) estimates less than 1% net growth for the year.
- breck 18y ago
  Exactly. Most winning companies are not out there hyping their companies. Keeping quiet discourage competitors and gives them more time to grow their profits and increase the barriers to entry. Btw in my assessment we are in a recession.
  - iamelgringo 18y ago
    It's all about what makes for "good TV". An economic catastrophe, earthquakes and shootings make for good TV, so you hear a lot about those things. A kid that drops out of college, gets VC funding and flips his startup to GOOG for Bazillions also makes for "good TV". An entrepreneur that plugs away creating a small ISV or a team that creates a small SAS site is rather boring, so you're not going to hear about it. That is unless you have a DHH who is willing to throw rocks at the establishment and gather some press that way. DHH writing "F*ck You" in a 72 point font in a Power Point presentation--that's good TV. The guys over at Shoppify make a decent little SaS product, last I heard it was 4 guys working on RoR and were profitable from the first few months. When I watched a RoR presentation by them last year, they said they hosted 25,000 online stores. No one hears about them, however... why? It's just not good TV.
- nickb 18y ago
  I'd reserve my judgement on whether or not we're in recession until the next administration comes in and opens up books. I wouldn't trust ANY financial numbers that are coming out of this administration. All this reckless running of the printing presses has probably increased the inflation so much that all the GDP has been wiped out. Until you see M3 money supply, don't trust anything Bernanke says. Personally, I think we've been in a recession for half a year at least. Just look at spending patterns... they're all down.
malekov 18y ago
I am. I've just bought some stockoptions from a few mortgage banks. They rock!
markbao 18y ago
Not all businesses need to be long-term. For example, one of the possible goals of a startup is to build technology that offers a lot of value, and then find an exit that makes sense. One of those exits is to be purchased by a company that can utilize your developed technology, or that can further create value and/or revenue for that acquiring company. Where do we see this? MySQL by Sun. Flektor by Fox. WebEx by Cisco. Virtual Ubiquity/Buzzword by Adobe. Zimbra by Yahoo!. Therefore, building a long-term business is not as important as building a lot of value for the market.
- nickb 18y ago
  Horrible examples... MySQL, WebEx, Zimbra had very healthy cash flows before they were acquired. They didn't have to be acquired for them to be very successful. Just look at Zimbra's revenues before they were acquired: http://news.cnet.com/8301-10784_3-9780434-7.html http://news.cnet.com/8301-10784_3-9780434-7.html You need different examples ;).
  - nir 18y ago
    I'm not a business person, but couldn't Sun, for example, get almost everything it got out of buying MySQL by partnering with them, paying much less than $1b (perhaps paying nothing)? I mean, doesn't buying MySQL practically guarantee it will lose the very value it could bring to Sun (more agile process, highly motivated small company, close contact with the OSS dev & user community)? One of the themes in "Burn Rate" is how, once corporations became aware of the Internet, they began purchasing anything they perceived "belongs" to the Internet and was for sale, hoping to somehow own some part of it. Perhaps, at some degree, a similar thing is happening with Open Source now? (Edit: please don't get me wrong, I truly believe Open Source is one of the most important ideas of our time. I'm just skeptic a company can buy its way into it)
    - kleevr 18y ago
      >Perhaps, at some degree, a similar thing is happening with Open Source now? Like Microsoft becoming a platinum sponsor of Apache Software Foundation?
tx 18y ago
I belive that just like WallStreet was driving/encouraging increase in housing prices and spending habits of Americans, Silicon Valley VCs of late have been encouraging build-to-flip ventures.
ojbyrne 18y ago
If a company is trying to create long-term value it is not a high growth company, and doesn't need venture capital - It can (and should) get bank loans based on its cash flow. The venture capitalists are basically screwed because of the disappearance of the IPO market, and the increased importance of angel funding. Fred et all are just spinning things to make it seem like there is still a reason for their existence.
- fredwilson 18y ago
  about half of all the initial investments we've made in the past three years have been angel rounds. i see our firm as bridging the gap between angel investing and venture investing. we can invest $250k in an angel round and scale up to $10mm+ if need be. if there's no reason for our existence, we'll close shop. but right now, we are seeing more deal flow than ever which is certainly an indication that others see a reason for our existence even though you don't
  - ojbyrne 18y ago
    I actually felt like Union Square didn't quite fit my criticism as it is more agile and angel-like. I should have said "those VCs that don't adapt are screwed."
  - tonystubblebine 18y ago
    Fred, I think the decreased cost of starting a web business is what's causing both the calls for the death of venture capital and the experience you're having of increased deal flow. There's just a lot more of us founders so it's natural that you'd see more deals even if you weren't also doing an excellent job of making a name for yourself through blogging and smart investments. On the other hand, the costs dropped so low that I think you're finding a lot more people jumping in who are driven more by the romantic ideal of building a company rather than just to prove one idea before moving on to the next. I say it's a romantic notion because of a recent thread that PG kicked off where he said that he couldn't imagine working on the same company forever because there were so many other interesting things to do. I think the romantics develop such an attachment to the company they're building that they couldn't imagine ever leaving it. I'm a romantic. For a number of overblown reasons, VC feels antithetical to building a company you want to stay at. There's the pejoratives (lifestyle business, would you rather be rich or a king?) that come from the VC backed startup culture. There's the need for an exit. And more importantly, I think people who think this way would much rather ask customers for money than investors. I think that comes down to preferring to focus on value rather than hype.
paul 18y ago
Why does there have to be only one "right" way to do things?
- nir 18y ago
  Because a system in which companies are intentionally built to be sold for a lot more money than they could ever earn is not sustainable. Moreover, it's not aesthetic. For a while our model was 14th century Florence, now we're 20th century Hollywood, complete with our own starlets and gossip columnists but without an audience willing to buy show tickets.
  - paul 18y ago
    Just because a company is sold before it's profitable doesn't mean that it couldn't ever earn money, or that it doesn't deliver value to the buyer. It doesn't personally interest me, but there is nothing wrong with building a company whose primary value is as part of something bigger. It's like attacking a tractor company for not growing any food. If they can enable farmers to grow more food, then they've created value.
    - davidw 18y ago
      Furthermore, by creating a more complex market in which people can more narrowly focus on what they do best, it allows two types of complementary individuals to flourish: builders and maintainers, I'll call them. If someone's true talent lies in building and growing a company from nothing, they're going to be better off if they have some outs like selling it on. Perhaps the 'maintainers' aren't as good at creating something from nothing, but are better at running a big, mature enterprise, and paying careful attention to profitability. Some people (Jobs, Bill Gates), are good at both, but it stands to reason that not everyone has both skill sets.
    - nir 18y ago
      >Just because a company is sold before it's profitable doesn't mean that it couldn't ever earn money, or that it doesn't deliver value to the buyer. I agree with that, but currently many companies are sold without even having an notion how to earn money (other than "ads"), and those that do have some revenues get GM-sized evaluations. I don't mean to attack anyone - it's markets and currently building to sell is a reasonable choice. At a certain scale it's even sustainable, but currently I think we're in a bubble: the tractor company's customers use the product to increase their revenues. Has Conde Nast increased its revenues after buying Reddit? Will Bebo bring $850m of value to AOL?
jonmc12 18y ago
I blame the media too. With the endless flow of 'XX got funded' or 'YY got bought', its hard to pay attention to the right role models for building a long-term business.
akeefer 18y ago
There's too much money to be made for the VC community to not figure it out; either the IPO market will come back or we'll see something like an increasing number of private equity buyouts of tech firms so the VCs can close out their funds. Companies building for the long-term still often need more than just angel funding in order to have enough runway to hit sustainable revenue levels and to provide a cushion to survive the inevitable vicissitudes of the market, which means there's still going to be a need for VC funding, and companies building for the long-term will offer a rewarding enough financial outlook that the VCs will still invest and just find new ways to get their money back out. That said, I really think the attitude in Silicon Valley is very much around creating products and then getting out rather than creating long-term profitable companies; the latter is just a different deal and involves dealing with all the unglamorous, less fun stuff like figuring out how to grow past a few dozen people, figuring out how to manage multiple products, working on the same codebase for a long period of time over many iterations of a product, figuring out how to manage the transition of people in and out of the company, adapting to changing market conditions over long periods of time, and figuring out how to actually make money sustainably. It's not just the VC side that's been spoiled and will have to adjust; the attitude among most entrepreneurs I run into in the valley is also very much the "build one product for 5 years and exit" mentality rather than the "build a company that makes good products and that can exist for a long time." So both sides need to adjust.
swdesignguy 18y ago
I'm building a web app and have my business model already figured out. I have a free and a paid version of my product and see being in this game for 5+ years, or longer if it is successful.
zmimon 18y ago
I don't think there's anything greatly wrong with the "build to flip" methodology - the right people to run a company long term are not necessarily the right ones to come up with brazen new ideas and start from scratch. Not to say that I'm really fond of VC style funding however. I have seen VC's destroy perfectly good companies that could have otherwise sustain themselves by insisting they go for broke with huge growth rather than just concentrating on a profitable niche with moderate growth.
fauigerzigerk 18y ago
I think the most important thing macro economically is how many people are working at full potential. That's what we should use as a sustainability measure. I'm not using the more established term full capacity, because that refers to the quantity of work and not so much at the quality. So the question is, does this pattern of seeking an early exit increase or decrease the number of poeple working at full potential? It certainly does both. But what's the net effect? Of course there is the other question of how well that work is aligned with what consumers want. That's not easy to answer either, because consumers don't know what they want until they get to try it. It may be that overall it is a good thing to have startup founders incubate ideas and basically throw their fledgling projects at some big corp that tries to sell it to as many consumers as possible. Big corps have less creative potential but a broader reach, so that may work. I'm not sure though.

41 points by nickb 18y ago

We are not really in a recession btw, and as Fred Wilson pointed out in the comments, there are indeed many companies that are building for the long-term. Those companies just don't generate that much buzz because they are focused on making their customers happy instead of hyping their service.

smanek 18y ago
A recession is defined as two or more consecutive quarters of negative real GDP growth. According to the official figures, GDP has been just a little above flat (~0.5%) for well over a year now. But, everyone knows that inflation is really far greater than the official ~2.5%/year though. Depending on which methodology you accept, the actual number is closer to 10% and possibly as high as 15% (http://www.shadowstats.com/article/56 http://www.shadowstats.com/article/56 is a decent primer on some of the problems with the government stats). Using a more accurate GDP deflator shows that we've actually been in a recession for a few years now.
- jfornear 18y ago
  First quarter growth this year was 1-1.6%, and second quarter growth is expected to be around 2-2.5% according to the FT.
  - smanek 18y ago
    The BEA itself said under 1% growth in the first quarter, iirc. And The Economist (http://www.economist.com/countries/USA/profile.cfm?folder=Profile-Forecast http://www.economist.com/countries/USA/profile.cfm?folder=Pr...) estimates less than 1% net growth for the year.
breck 18y ago
Exactly. Most winning companies are not out there hyping their companies. Keeping quiet discourage competitors and gives them more time to grow their profits and increase the barriers to entry. Btw in my assessment we are in a recession.
- iamelgringo 18y ago
  It's all about what makes for "good TV". An economic catastrophe, earthquakes and shootings make for good TV, so you hear a lot about those things. A kid that drops out of college, gets VC funding and flips his startup to GOOG for Bazillions also makes for "good TV". An entrepreneur that plugs away creating a small ISV or a team that creates a small SAS site is rather boring, so you're not going to hear about it. That is unless you have a DHH who is willing to throw rocks at the establishment and gather some press that way. DHH writing "F*ck You" in a 72 point font in a Power Point presentation--that's good TV. The guys over at Shoppify make a decent little SaS product, last I heard it was 4 guys working on RoR and were profitable from the first few months. When I watched a RoR presentation by them last year, they said they hosted 25,000 online stores. No one hears about them, however... why? It's just not good TV.
nickb 18y ago
I'd reserve my judgement on whether or not we're in recession until the next administration comes in and opens up books. I wouldn't trust ANY financial numbers that are coming out of this administration. All this reckless running of the printing presses has probably increased the inflation so much that all the GDP has been wiped out. Until you see M3 money supply, don't trust anything Bernanke says. Personally, I think we've been in a recession for half a year at least. Just look at spending patterns... they're all down.

malekov 18y ago

I am. I've just bought some stockoptions from a few mortgage banks. They rock!

markbao 18y ago

Not all businesses need to be long-term. For example, one of the possible goals of a startup is to build technology that offers a lot of value, and then find an exit that makes sense. One of those exits is to be purchased by a company that can utilize your developed technology, or that can further create value and/or revenue for that acquiring company. Where do we see this? MySQL by Sun. Flektor by Fox. WebEx by Cisco. Virtual Ubiquity/Buzzword by Adobe. Zimbra by Yahoo!. Therefore, building a long-term business is not as important as building a lot of value for the market.

nickb 18y ago
Horrible examples... MySQL, WebEx, Zimbra had very healthy cash flows before they were acquired. They didn't have to be acquired for them to be very successful. Just look at Zimbra's revenues before they were acquired: http://news.cnet.com/8301-10784_3-9780434-7.html http://news.cnet.com/8301-10784_3-9780434-7.html You need different examples ;).
- nir 18y ago
  I'm not a business person, but couldn't Sun, for example, get almost everything it got out of buying MySQL by partnering with them, paying much less than $1b (perhaps paying nothing)? I mean, doesn't buying MySQL practically guarantee it will lose the very value it could bring to Sun (more agile process, highly motivated small company, close contact with the OSS dev & user community)? One of the themes in "Burn Rate" is how, once corporations became aware of the Internet, they began purchasing anything they perceived "belongs" to the Internet and was for sale, hoping to somehow own some part of it. Perhaps, at some degree, a similar thing is happening with Open Source now? (Edit: please don't get me wrong, I truly believe Open Source is one of the most important ideas of our time. I'm just skeptic a company can buy its way into it)
  - kleevr 18y ago
    >Perhaps, at some degree, a similar thing is happening with Open Source now? Like Microsoft becoming a platinum sponsor of Apache Software Foundation?

tx 18y ago

I belive that just like WallStreet was driving/encouraging increase in housing prices and spending habits of Americans, Silicon Valley VCs of late have been encouraging build-to-flip ventures.

ojbyrne 18y ago

If a company is trying to create long-term value it is not a high growth company, and doesn't need venture capital - It can (and should) get bank loans based on its cash flow. The venture capitalists are basically screwed because of the disappearance of the IPO market, and the increased importance of angel funding. Fred et all are just spinning things to make it seem like there is still a reason for their existence.

fredwilson 18y ago
about half of all the initial investments we've made in the past three years have been angel rounds. i see our firm as bridging the gap between angel investing and venture investing. we can invest $250k in an angel round and scale up to $10mm+ if need be. if there's no reason for our existence, we'll close shop. but right now, we are seeing more deal flow than ever which is certainly an indication that others see a reason for our existence even though you don't
- ojbyrne 18y ago
  I actually felt like Union Square didn't quite fit my criticism as it is more agile and angel-like. I should have said "those VCs that don't adapt are screwed."
- tonystubblebine 18y ago
  Fred, I think the decreased cost of starting a web business is what's causing both the calls for the death of venture capital and the experience you're having of increased deal flow. There's just a lot more of us founders so it's natural that you'd see more deals even if you weren't also doing an excellent job of making a name for yourself through blogging and smart investments. On the other hand, the costs dropped so low that I think you're finding a lot more people jumping in who are driven more by the romantic ideal of building a company rather than just to prove one idea before moving on to the next. I say it's a romantic notion because of a recent thread that PG kicked off where he said that he couldn't imagine working on the same company forever because there were so many other interesting things to do. I think the romantics develop such an attachment to the company they're building that they couldn't imagine ever leaving it. I'm a romantic. For a number of overblown reasons, VC feels antithetical to building a company you want to stay at. There's the pejoratives (lifestyle business, would you rather be rich or a king?) that come from the VC backed startup culture. There's the need for an exit. And more importantly, I think people who think this way would much rather ask customers for money than investors. I think that comes down to preferring to focus on value rather than hype.

paul 18y ago

Why does there have to be only one "right" way to do things?

nir 18y ago
Because a system in which companies are intentionally built to be sold for a lot more money than they could ever earn is not sustainable. Moreover, it's not aesthetic. For a while our model was 14th century Florence, now we're 20th century Hollywood, complete with our own starlets and gossip columnists but without an audience willing to buy show tickets.
- paul 18y ago
  Just because a company is sold before it's profitable doesn't mean that it couldn't ever earn money, or that it doesn't deliver value to the buyer. It doesn't personally interest me, but there is nothing wrong with building a company whose primary value is as part of something bigger. It's like attacking a tractor company for not growing any food. If they can enable farmers to grow more food, then they've created value.
  - davidw 18y ago
    Furthermore, by creating a more complex market in which people can more narrowly focus on what they do best, it allows two types of complementary individuals to flourish: builders and maintainers, I'll call them. If someone's true talent lies in building and growing a company from nothing, they're going to be better off if they have some outs like selling it on. Perhaps the 'maintainers' aren't as good at creating something from nothing, but are better at running a big, mature enterprise, and paying careful attention to profitability. Some people (Jobs, Bill Gates), are good at both, but it stands to reason that not everyone has both skill sets.
  - nir 18y ago
    >Just because a company is sold before it's profitable doesn't mean that it couldn't ever earn money, or that it doesn't deliver value to the buyer. I agree with that, but currently many companies are sold without even having an notion how to earn money (other than "ads"), and those that do have some revenues get GM-sized evaluations. I don't mean to attack anyone - it's markets and currently building to sell is a reasonable choice. At a certain scale it's even sustainable, but currently I think we're in a bubble: the tractor company's customers use the product to increase their revenues. Has Conde Nast increased its revenues after buying Reddit? Will Bebo bring $850m of value to AOL?

jonmc12 18y ago

I blame the media too. With the endless flow of 'XX got funded' or 'YY got bought', its hard to pay attention to the right role models for building a long-term business.

akeefer 18y ago

There's too much money to be made for the VC community to not figure it out; either the IPO market will come back or we'll see something like an increasing number of private equity buyouts of tech firms so the VCs can close out their funds. Companies building for the long-term still often need more than just angel funding in order to have enough runway to hit sustainable revenue levels and to provide a cushion to survive the inevitable vicissitudes of the market, which means there's still going to be a need for VC funding, and companies building for the long-term will offer a rewarding enough financial outlook that the VCs will still invest and just find new ways to get their money back out. That said, I really think the attitude in Silicon Valley is very much around creating products and then getting out rather than creating long-term profitable companies; the latter is just a different deal and involves dealing with all the unglamorous, less fun stuff like figuring out how to grow past a few dozen people, figuring out how to manage multiple products, working on the same codebase for a long period of time over many iterations of a product, figuring out how to manage the transition of people in and out of the company, adapting to changing market conditions over long periods of time, and figuring out how to actually make money sustainably. It's not just the VC side that's been spoiled and will have to adjust; the attitude among most entrepreneurs I run into in the valley is also very much the "build one product for 5 years and exit" mentality rather than the "build a company that makes good products and that can exist for a long time." So both sides need to adjust.

swdesignguy 18y ago

I'm building a web app and have my business model already figured out. I have a free and a paid version of my product and see being in this game for 5+ years, or longer if it is successful.

zmimon 18y ago

I don't think there's anything greatly wrong with the "build to flip" methodology - the right people to run a company long term are not necessarily the right ones to come up with brazen new ideas and start from scratch. Not to say that I'm really fond of VC style funding however. I have seen VC's destroy perfectly good companies that could have otherwise sustain themselves by insisting they go for broke with huge growth rather than just concentrating on a profitable niche with moderate growth.

fauigerzigerk 18y ago

I think the most important thing macro economically is how many people are working at full potential. That's what we should use as a sustainability measure. I'm not using the more established term full capacity, because that refers to the quantity of work and not so much at the quality. So the question is, does this pattern of seeking an early exit increase or decrease the number of poeple working at full potential? It certainly does both. But what's the net effect? Of course there is the other question of how well that work is aligned with what consumers want. That's not easy to answer either, because consumers don't know what they want until they get to try it. It may be that overall it is a good thing to have startup founders incubate ideas and basically throw their fledgling projects at some big corp that tries to sell it to as many consumers as possible. Big corps have less creative potential but a broader reach, so that may work. I'm not sure though.