Why I get aneurysms from tech media and incubators
Jun 22, 2011
There seems to be two dominant schools of thought surrounding startups in the current media. The dominant voice comes from the TechCrunches of the world, worshipping startups who are born and bred into the world of venture capital, an ethereal realm where the operating currency is ‘millions’, or perhaps more recently, ‘billions’. The other voice is less prominent, not featured regularly in Silicon Valley media, and is sidelined by most startups (at least among those who are publicised – catch 22?). This voice suggests startups ground themselves in profitable business models rather than a reliance on investor cash until they someday reach profitability (interestingly, two of the three most recent tech IPOs – Groupon and Pandora – are both still not turning a profit even after going public, though this, of course, has many different factors behind it).
The interesting thing to note is these two voices are usually promoted as being mutually exclusive – either you raise venture capital, or find your own way to pay the bills. Of course, there are many tech companies that still receive venture capital whilst being profitable (i.e., Facebook), and use the funds injection as a quasi line of credit to hire people, upgrade hardware, build datacenters, kick off new projects etc. It works.
On the other end of the table, advocates of profitability over venture cash (like 37Signals) call out the hysterics of startup founders blindly racing towards the goal of signing to a big VC firm, rather than considering profitability right from the start. Makes sense, right? But here’s the deal: many ideas that have furthered innovation and growth, even spawned new markets on the Internet had no viable business model (other than the brown cow advertising model) to play with at first. Take Foursquare for example: charging people to use the service is definitely out of the question as there’s no real convincing value proposition upfront, rather it is acquired through empirical experience and critical mass. Charging merchants to ‘own’ their Foursquare venue is also dubious for much the same reason. Advertising? Nah, people hate ads. What other option do they have but to seek investor funding? Only recently has Foursquare been able to tap into some fiscal nectar through partnerships with blue-chip firms like Amex and American Eagle. Still, marketing theory says partnerships are most effective as a method of gaining market entrance and increasing brand equity, not really for generating wads of cash. But still, it’s progress. And progress they wouldn’t have been able to attain without funding. Furthermore, Foursquare is arguably one of the flag-bearers of location based services, a whole new industry in the mobile web space that we’re only beginning to understand. Brought to you by venture capital.
No doubt every starry-eyed startup founder’s pipedream is to create the next Foursquare, or Facebook, or Twitter. And why not? Innovation drives progress, and even though most ideas fail, the aggregate effect is that society moves forward, technology moves forward, and every now and then a magical idea will catch the world’s attention, and maybe even take its breath away. It’s a net win (no pun intended). Plus, hey, it’s a hell of a ride (I’m guessing, can’t talk from experience) and it must be exhilarating to be a part of something that impacts so many people. Unfortunately, exceptional companies are just that, exceptions. By definition they can’t pop up every week.
So what is a startup founder to do? Well, what I’m really saying is there is not a blanket approach that can apply to all startups. Some ideas are still undercooked and need some funding to help mature the idea and get it out there. Other ideas that aren’t necessarily revolutionary but solve a source of pain and frustration for a consumer or business can safely target profitability very early on in the game, and likely succeed. My opinion is, we need both. The “butthurt” in this rant is that the media portrays venture capital as sexy, and profitability as boring. Companies like 37Signals are rarely seen in tech media. Heck, even Github, perhaps one of the geekiest startups around – profitabile from day one I might add – has been featured on TechCrunch a whopping five times in the 3+ years since its birth. And of those only one post had Github as its main focus. Yes, they won a “Crunchie” in 2009. For best “bootstrapped” startup (read: “very good dear, you drew that big picture all by yourself! Here’s a gold star. Mummy’s gonna go sit with the grownups now, ok?”).
Incubators are equally to blame. At a recent startup event in Sydney I attended, a few Y-Combinator-like incubators presented opportunities to participate in programs that will teach you the gems of succeeding in business. Don’t get me wrong, it’s a good thing, however, the worry kicked in when they listed classes on things like “how to incorporate in Delaware”, or “how to give a knockout investor pitch”, rather than “Accounting 101”, or “Market Segmentation”. All this and more, for $1000 per head. Pfft, fuck that noise. I’m not saying it’s a hustle, but frankly, for $1000 I can attend a world-class conference on innovative marketing strategies and learn about the real challenges in starting a business rather than how to dress like Mark Zuckerberg, or avoid corporate income tax.
Despite my satirical tone, I am actually not opposed to venture funding. This should be clear if you actually read this article instead of tl;dr’ing to here. For the lazy ones I’ll repeat: some ideas need money thrown at them to find their identity and value. Innovation needs people who are open enough to see the potential and help nurture it. Plus, it’s expensive. Other ideas, however, have potential to capture a real market and profit from their product or service very early on. I mean, come on, the web industry has the lowest barriers to entry of all industries. You can get yourself an EC2 instance (if that’s how you roll) or a small VPS for $20/month that can handle reasonable traffic. Knock up a prototype and start offering a real-albeit-buggy product. People will pay if it helps their life. I digress…
What I am calling for is credit where credit is due. It’s not easy to build a profitable business, of any kind. Even when I was freelancing, with virtually no operating expenses and a very high margin, it took hard work and good advice to keep the bank happy (I got my fair share of bad advice too).
Startup culture should be more balanced, and whether your business needs investor cash to create the next great mobile experience, or whether your startup is seeking to help mum-and-dad shops deal with the stress of “normal” life, your successes and battle scars deserve a story on GigaOm, and a pat on the back by the Arringtons of the world.
So, good readers (all three of you), this rant reaches a conclusion. I don’t really like ranting, so I hope my point was clear. Also, sorry to TechCrunch for singling you out, but we Aussies are clinical tall-poppy syndrome sufferers and you’re an easy target. No hard feelings?