You seem to be explaining the common theme that
(1) an entrepreneur has some work done that is
sufficiently promising as the beginning of a
big, successful business and (2) needs equity
funding to scale quickly.
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.
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.