All the wrong reasons for Stack Overflow's VC chase | Hacker News Reader

All the wrong reasons for Stack Overflow's VC chase

37signals.com

180 pointsmarilyn75 comments

I know that this is 37 Signal's thing. They like to be hip, contrary and different. They take a popular post, and they take an opposing view, stir the pot and raise a ruckus. After all, they are "rock stars". But really, David?

Why do you care what Stack Overflow does? Why do you presume to know more about Stack Overflow's business needs than Joel? Why do you presume to know more about the VC funding process and it's outcomes than Joel? You've run a successful business and you manage a great open source framework. That's to be commended. You chose to not take VC, and you have been successful. Congratulations. (We'll ignore that bit about Bezos investing in you for now.)

But, there are hundreds if not thousands of successful software companies that have indeed taken investor money. Presumably, it was the right decision for them. Why do you insist on criticizing those decisions and put people down for those decisions?

When I worked as an ER nurse in the inner city, we had an expression for this behavior: "Up in someone else's kool aid, not knowing what the flava is".

this is exactly the contrary of what I would expect to read in an "hackers" community. What's wrong with commenting a public post? After all Joel wanted to share with the world why he thinks it is a good idea to get a VC for stack overflow. This was promoted in HN, and is not just free promotion, also exposes you to other opinions, so the only sane way to reply to the 37 Signals post is with counter arguments, if you got some.

There is a value in the 37 signals post that is really not about stack overflow itself. For instance, because Joel is considered to be a business expert, other people running services that are similar business-wise could think it is a good idea to get a VC for the same reasons. This guys deserve to hear another bell (and many others if possible).

Ok, here goes.

1. The Answers market is in a land grab mode

David argued that just because they had a home run in one niche, it didn't mean that they will have success in another niche.

I disagree. The brilliance of Stack Overflow (SO) is that they've come up with a product that takes flows with how the internet works. People type questions into search engines constantly. And, Google gives a high page rank to sites that provide frequently updated, quality content on a specific topic. Stack Overflow has nailed that, and because of that, a large percentage of their search traffic is organic. Stack overflow, has also solved a big problem that Yahoo answers has, which is reputation and trust.

I'm guessing the reason that they are interested in rapidly expanding SO to other markets, is Joel sees that this is how the internet currently works and SO has a 6-9 month lead on them in terms of technology and answer site savvy. It's a good time to exploit that, in my opinion.

David also suggests via straw man argumentation that people typing questions like "How to make swedish meatballs" isn't a market worth chasing. You'd have to ask the people at the Food Network that. Joel might be interested in licensing a "Food Overflow" to the Food Network's set of web sites. Or, perhaps he would be interested in setting up a "Home Repair Overflow" for Home Depot. Or, a "Car Repair Overflow" to Napa Auto Parts. Speaking of which, my 2003 caravan is acting up, and I'd kill for a "Car Repair Overflow".

2. Stack Overflow is like Starbucks

Just because David can't see a reason for Stack Overflow to spend money doesn't mean that Joel cant. SO has grown from zero to 6 million monthly unique visitors in 18 months with a staff of 6 people. I'm guessing that Joel is interested in adding dozens or hundreds of niche specific SO sites. And, yes, if he is going to chase that option, then he needs a lot of capital to hire.

3. Stack Overflow wants to get on Techcrunch

Ummm. No. Read Joel's post. That's not what Joel said. Again, another straw man by David. Joel said that he was interested in publicity. Publicity != Tech Crunch. Publicity can also mean attention from old media outlets like television shows, and newspapers. And, answers site benefit particularly well from media attention and publicity. One of the big reasons that SO was a success was because Jeff and Joel's blogs were so popular. If SO can get some media attention in other markets, I'd wager could see explosive growth for other verticals as well.

David dispariaged expanding SO to other niches by suggesting that SO was going after kids interested in how to find 3 gold rings in Zelda. I'm guessing that Joel is more interested in the consumer that asks "How do I change the alternator on my 2003 Dodge Caravan". Someone asking that question ooking for advice on changing an alternator in a 2003 Caravan, is going to be in the market to purchase that alternator. Advertisers pay a premium to reach people at that point in the sales funnel.

4. The investor will give you advice, connections, and introductions

David has the balls to give Joel hell for raising money in order to get advice? 37 Signals took money from Bezos to "get his advice". I'm just flat out calling bull shit on that one. I'm really sick of 37 Signals guys talking out of both sides of their mouths about this subject. They really have no room to talk on this one.

And, yes, investors often do have connections that young entrepreneurs can use. I have a number of friends in funded startups that have gotten introductions to airline executives, banking executives, CFO's of large consumer product companies because they found investors that had experience in those industries. It might not be an issue for 37 Signals, because they are sell ebooks, chat and TODO lists to Rails Developers, but if your business has anything to do with medium to large businesses, then the introductions come in really handy.

5. Taking money means big exit or IPO

"I don't know if you heard, but IPO markets aren't all that interested in eyeball companies without the numbers to back them up". Fog Creek makes $1 million a year on a job board that he advertises on his blog. 37 Signals also makes a bunch of money off their job board. There are more ways to monetize eyeballs than just advertising. SO is already doing that.

And, Silicon Valley is full of people that have made a bunch of money off of big exits or IPO's. Have you looked at the real estate market in the area? One of the reasons that it's so high, is because Google's first 1000 employees were all millionaires. Yahoo, Ebay, HP, Intel, Cisco, Sun, Oracle... Living here, you're surrounded by people that have made a killing off of options. Living in Chicago, you'd never see that, so I can see where David's myopia comes from.

The IPO market isn't over, and the merger and acquisition market is warming up. The last 10 years of financial and real estate hubris are collapsing before our eyes, and investors are going to be looking for places to make big returns again. It's just a matter of time before companies like Facebook, Yelp or Twitter IPO, and I'd be wiling things in the tech world will begin to look a lot different. Also, there's a bunch of companies in the economy that laid off a lot of people and they are now sitting on tons of cash. Those companies are going to be interested in growing, and acquisitions are a very nice way to do that.

A founders chances of getting a large company to look at her startup as a potential acquisition are better if they have already been valued at $10 million post money, than if it's 4 guys in their garage with a website. There's a reason that Del.icio.us took investment before they got picked up by Yahoo.

6. Taking VC will make your company successful

Joel said that taking VC makes sense if it meant you could grow the company and the founder wasn't interested in self aggrandizement. Joel has written a number of times that one of the problems that he saw with a self funded company, is that his employees don't have a huge upside potential. Upside can be shared with employees via options and an IPO. A quick acquisition for $6 million based on 3x annual revenues... not so much to share with employees.

I don't get the impression that Joel is doing this because he wants the money personally.

Why do you care what Stack Overflow does?

Ha! Hoist on your own pitard. Don't get me wrong, I tend to think along the same lines as you: who is this DHH and why is he all opinionating everywhere? Why should I care?

But then when what do you and I do? Go opine about it on some forum. Ironic, no?

The way I see it, either you accept the commentariat for what it is (a big, pointless circlejerk) and jump on in, or ignore it and go do productive things in life. No fair bemoaning how lame it all is for others to read.

All anyone knows is what Joel tells them, plus what they can speculate. Joel has made a career for himself by inviting the public into the inner-working of his software company, I mean, we even know what color the tiles are in the Fog Creek shower room, for goodness sake, so I don't think there is anything wrong with DHH's post; it's probably exactly the kind of thing that Joel wants.

I like that expression. It pretty much sums up what they do. It was fun at first but grows old and worse it begins to act against them. Now even if they make a good point against the VC approach I'm less inclined to take their argument for what it really is.

If I were told "Here's several million dollars, an Answers platform, and a mandate to make a super-scalar return", I would immediately start trying to pull off Demand Media, starting each property with a core of content produced by cheap freelancers and then thickening them out with real UGC as they gained traction in the search engines. The million get spent on the freelancers and on having my crack team of engineers build a search prediction algorithm so that I know, e.g., what the top three questions about birdfeeders and the highest payout topics are.

The resulting company looks very, very different than what StackOverflow looks like... but it would make sense, I guess. (Major risk of getting annihilated by Google in the next 12 months but, hey, not my money.)

I generally yield to no one in my agreement against "land grab" economics. However, this space actually is a land grab. Maybe it isn't obvious to DHH because DHH doesn't really need to worry about the nuts and bolts of SEO all that much, but Demand Media can create a page for $15 and sell $40 of ads on it this year (it will still be there next year). That model scales to the effing moon, at least until Google gives them the smackdown.

This is the key to it. Technology development isn't the point of an investment in a company like this (though some new tech will be needed and created). You need to find editors, create partnerships, advertise (as dirty a word as that may be) and provide runway to iterate. A question site on graphic design might be different than one on cooking and even more different from one on the finer points of SQL. I do think the land grab comparison is fair. If you can get into the verticals quickly and establish a lead in content it is that much harder for the next guy.

I like 37S, but I don't get the compulsive need to criticize anyone that takes funding or sells their company as a sell out.

there is a difference between Demand Media and StackExchange...howto sites get linked to, Q&A sites do not. eHow is a PR8 site, while SO is a PR6 site. Original content will always outrank Q&A.

I covered it here: http://news.ycombinator.com/item?id=1128146

If you want I can talk your ears off about the Demand Media model, but one very smart thing they did was jump ahead of the curve by buying under-monetized sites aimed at middle American ladies which had existed for a decade, and then started building them out. StackOverflow, by comparison, has no decade old links because it has not even existed for two years yet. I don't think it is necessarily a question of link richness of the audience or linkability of the content there (as a matter of fact, I'd guess that StackOverflow probably accumulates links much faster than eHow -- like, order of magnitude faster, despite the fact that eHow has 40 times more monthly visitors).

That post was deleted, linking to this I presume: http://blog.styleguidance.com/post/391922539/stackoverflow-g...

yes that was it.

Apparently my blog got permabanned on HN for outing that Techcrunch intern.

Really? Although I found it to be in very poor taste it was on your own blog and I'd be surprised and disappointed if this was the case. Any moderators willing to confirm or deny?

it was submitted to HN too(made the front page)...got an email from pg for it...called me an asshole and said that he was embarrassed that such meanness was posted on HN

"got an email from pg for it...called me an asshole and said that he was embarrassed that such meanness was posted on HN"

Good on you, PG!

It wasn't exactly your finest hour.

That said, I (perhaps naively) assume that the HN community is strong enough to self heal sans permaban - the intent of flag, innit?

I think most news.yc users overestimate the value of voting. It's in your face, you see the numbers on every item, so it's easy to assume that's the most important thing. It isn't. It's just a guide, that indicates what the users are currently thinking. Sadly, it doesn't work to put too much stock in what they're thinking.

Pretty much every site on the internet where users gather and talk has eventually turned into a cesspool of angry arguments and spite, just before imploding altogether. Clay Shirky wrote the definitive essay on the subject:

http://www.shirky.com/writings/group_enemy.html

So the evidence is pretty clear: leave the users to their own devices, and they'll eventually destroy the community. pg and the editors are well aware of this. So they curb bad behavior, behind the scenes. Many, many users and submissions get banned or killed. If it wasn't that way, this community definitely would not have survived for three-plus-years now.

And if you ask me, pg did absolutely the right thing banning that blog entry. It was exactly the sort of ugly, spiteful thing that sends a community spiraling into its death throes. I'm glad it's gone.

I suppose flag is a form of voting, but I think you underestimate the value of HN culture. Angry arguments and spite have rarely been tolerated here.

It appears PG didn't ban a blog entry, but rather a domain, and one which had previously been a source of useful content. If we apply this same standard we ought start banning entire domains left, right and centre: first cab off the rank should be techcrunch.com

As a matter of fact, many domains have been banned. Hundreds. Again, perfectly necessary to keep the peace.

just a small correction, he didn't just ban that blog entry, he banned the entire domain.

I think the one thing that SO is missing is one of their claimed features, being a "community wiki". If they could somehow leverage that content in more of an article format then they could have that "article site" aspect. Right now they just look Q&A.

Reading the original post, I thought pretty much the same thing. The whole idea of getting VC money is to jumpstart the next phase of a company/product's life. Facebook was a college kid's side project that looked promising but VC money made it top 3 site on the web. YouTube would have been impossible for 3 typical 20-somethings to afford out of their personal/family savings. They needed VC funding because they were burning through $1m/month in cash. What exactly is it about Stack Overflow that Joel can't pay for himself with his own funds? What kind of hiring does he want to do to make it any bigger?

Joel listed all these vague reasons that sort of sound good without actually saying concrete steps / changes that would come out of VC funding. I would definitely like to hear what it is that he, despite being one of the most popular tech bloggers with a boatload of notoriety and savings, can't do with Stack Overflow that somehow VC money can.

I used to play high limit poker and it is quite common in the poker world for the best players to "share" themselves in a tournament or, more likely, in a game where the stakes are huge.

Being able to self-fund isn't always reason enough to self-fund. In this case, Joel may want to expand into 10,000 niches, but may worry whether the venture will be profitable. I'm just speculating. If there is VC willing to take some of the risk with him, for an equity share that he accepts and thinks is a good deal, is it still wrong for him to accept it? I don't think so.

They've created a great platform and established no way to make money off it. It is like Twitter in the early days, but like DHH said, it has the disadvantage of being on a thousand different niche websites instead of one aggregate.

One possible way to still make a good return off it is take the Twitter path of getting VC money with the hopes of finding some revenue stream down the road. Maybe they can come up with a similar search deal?

Where do you get the idea that stackoverflow doesn't make money? It appears to make enough money to pay for its own hardware, its bandwidth costs, the salaries of several employees, and more.

StackExchange certainly doesn't make any money, and they've promised their customers that they'll have 45 days warning before they start charging.

Even then, almost none of their SE customers could afford the proposed fees based on their current income.

You confuse StackOverflow (the company with 3 employees and Joel as a founding partner) and StackExchange (a product of Fog Creek based on the SO code). StackExchange's revenue is less important than the revenue from StackOverflow which is currently derived from ads and the careers site.

   It is like Twitter in the early days

It's like Twitter now.

What exactly is it about Stack Overflow that Joel can't pay for himself with his own funds? What kind of hiring does he want to do to make it any bigger?

These are the precise questions that we can't presume to know the answers to. Joel probably has very good answers to these and more questions, and is using them during VC pitches right now. Just because his ideas are not obvious to us doesn't mean he doesn't have something good in mind.

Maybe I'm a cynic, but I wouldn't presume Joel has great answers for these questions. As DHH says in his post, he may just want to capitalize on the service's early success and take some money off the table.

I don't think many VCs let you "take money off the table" in the Series A. It has been done, but it's rare, and it's a sign that a founder doesn't believe in the business prospects that they're asking everybody else to invest in.

I guess you are getting a lot of people throwing your old posts back at you, but...

Why not? You say yourself that the 1 in 20 shot at a lot doesn't usually make sense for an entrepreneur with other options. If you prefer a partial cash while betting big with the other piece, why should this mean you don't "believe in the business prospects that they're asking everybody else to invest in?" It doesn't mean this when anyone else does it.

> It has been done, but it's rare, and it's a sign that a founder doesn't believe in the business prospects that they're asking everybody else to invest in.

Fred Wilson (avc.com) disagrees. He thinks that letting founders take money off the table is a great idea in several circumstances.

You don't want founders looking for/taking an exit too soon.

Fred is one of the many believers in the so-called "secondary" raise, but NOT for Series A.

http://www.avc.com/a_vc/2010/01/the-tug-of-war-between-ma-an...

I found PG's essay on this pretty interesting too: http://paulgraham.com/vcsqueeze.html

Charles H. Ferguson, High Stakes, No Prisoners: A Winner's Tale of Greed and Glory in the Internet Wars (W. W. Norton & Company, 2001).

Does anyone NOT think Joel is going to get one of the best VC deals of all time? He's insanely well connected and has a proven product. He'll get meetings with all the top angels and VCs no problem then start a bidding war. I bet he gets a great valuation with good terms on control and equity.

I got the impression that Joel just wants to give the big risk venture with a big payoff for success a go. As he says Fog Creek is build the safe slow constant growth way and he always has that to fall back on.

I think you might be right. Bootstrapping a start up is damn hard and damn stressful. And it takes a long time. As someone mentioned earlier, 37s is a 10 year old company that is now highly profitable, but it took a long time for them to get there and build up the following they have now. There's something to be said for trying to grease the skids on Act II and get there a little quicker than with Act I, especially when you were successful with Act I.

Quoting from the article:

"There are a few indicators for the type of company that I believe can benefit from, and should take, VC."

Which means, the list in his article of companies that can benefit is more academical, and each of these may not apply to StackOverflow.

The response from 37signals is a bit presumptuous in the sense that it assumes Joel means //all// of these apply to StackOverflow.

Exactly. I'm surprised this didn't come up more in the comments and that even Joel Spolsky, when commenting himself, didn't mention it. He was not saying that StackOverflow is in a similar situation as Starbucks', just that Starbucks was one of these cases where it makes sense to take VC money.

It may be that DHH's last point (taking money off the table) is the crucial element here. I.e., this could be an easy way for Joel and Jeff to get their second or third homes without destroying their baby and their darling developers at Fog Creek.

I don't know why Joel used Starbucks as his example of why land grab makes sense for StackOverflow. Starbucks, like McDonalds, is all about location/location/location. So it is literally needing capital for a land grab.

Websites are never about a land grab. Especially when talking about creating just a network of sites for individual niches.

Starbucks wasn't about a literal grab for land. it's not that hard to find locations for coffee shops. It was a grab for a piece of culture.

The US didn't have enough coffee houses with good coffee and that kind of an atmosphere. If Starbucks had taken 10 years to get to LA, there would have been Starbucks-like coffee houses there by that time.

I don't even think Starbucks needed the culture, except for branding. If they make it into your morning ritual, you -- one individual customer -- are worth $1,000 a year. Every store they drop down is just another vending machine to recruit $1,000-a-year walking bags of money. This gives them expansion imperatives similar to a bank's desire to situate branches, or a cell phone company's desire to site stores.

That is more or less what I meant by culture: to become a part of a city/office/industry/person's culture. The culture was forming and if they didn't become part of it, some other cafe would have been the place where you go for your morning brew, George and Jenny meet on Tuesdays or the theatre school people go to use the internet.

I agree. One problem with the analogy is that Starbucks is all about coffee. StackOverflow is about a Q&A platform. It'd be like Starbucks using their store model to be a donut shop, a hamburger stand, and a BBQ joint. In my opinion, the 37 signals post nails it with the problems.

If I may permit myself a pun, DHH is right on the money.

VC funding makes no sense for Stack Overflow.

DHH is strongly typed.

I think DHH's post raises a valid question about the land-grab analogy. What land exactly is being grabbed here?

I guess that is the real mystery, as other commentators have pointed out. I assume there is some kind of grand business plan which yahoo answers and expert exchange missed and which Joel et al have not missed. It would not be the first time they took a 'solved' problem - bug tracking software - and built a successful business off of it.

It's like any real estate on the web. The best of the best are NOT hanging around Yahoo Answers. I've tried to get answers there and it's pitiful. You have to create a place where the most talented congregate. Location location location.

I think the land grab is for Q&A that doesn't suck. Yahoo Answers is a punchline and Experts Exchange sucks and has already been eclipsed by Stack Overflow (that was SO's raison d'être).

I don't get why they don't raise a small amount (750-1mil) from some insanely smart angels.

I'd take DHH's opinion more seriously if he had any actual experience with VC or startups. 37 Signals is not a startup -- they crow about that fact themselves. 37 Signals is a small business.

David's points all presume that he fully understands what Joel is planning; he clearly cannot, since Joel hasn't laid out a detailed business plan.

Your point about DHH having no experience with VC is somewhat valid (they don't think Bezos counts), but your point about "small business" versus "startup" is completely devoid of meaning. You don't need to take VC to be a startup, and you don't need to exit inside of 5 years to be a startup either.

An uncharitable summary of your argument: 37signals has been too successful to know what they're talking about.

>An uncharitable summary of your argument: 37signals has been too successful to know what they're talking about.

That's not a completely unreasonable argument to make. The fact that they were able to achieve success without having to take in investor money, in some ways disqualifies them from giving advice on when its ok to take investments.

Were they successful without taking investors money? I mean, they took investors money, so how do we know? We don't know how much Bezos gave them, it could have been millions. I don't know. Maybe someone knows, but to say they were able to achieve success without having to take investor money isn't entirely accurate, because they did.

DHH explicitly said they didn't receive operational cash from Bezos in his interview with Steve Blank's class. They took the money to get tight with Bezos and to trade some equity for risk mitigation.

I don't find this argument compelling. It doesn't matter why you take the money. It matters that you took the money and keep saying it doesn't matter. If it doesn't matter, why did they take it? For the benefits and they did benefit from it, so they can't keep saying they haven't taken investors money and be credible.

I disagree. Manager-types call the years where you spend more money than you should "investment years", as in, you're investing in the business. If they took the money and are sitting on it, they clearly are't running the standard VC company playbook.

You're making too many assumptions. Who says they are sitting on the money? Who says they didn't spend it on rent and salaries when they didn't have any other money coming in? Maybe they spent it on publishing their book or adwords or off shoring. Who knows?

your point about "small business" versus "startup" is completely devoid of meaning

Small businesses usually aim to stay small businesses; 37signals is not going to grow to 500 employees and become like Salesforce. Startups, whether or not they take funding, aim for larger success and an exit, either a buyout or an IPO (whether it's within 5 years is beside the point). Those differences account for a big difference in management strategy.

An uncharitable summary of your argument: 37signals has been too successful to know what they're talking about.

You've misunderstood me. Since I think that there's a big difference in running a startup vs. running a small business, I don't think it makes sense for DHH to presume to give business advice to startups. Jeff Bezos? Sure, he could give advice; he's had a startup.

Until recently, I hadn't actually heard that definition of startup, at least outside of VCs talking to each other (because obviously VCs only care about the subset of startups that involve VCs and, ideally, large-multiplier exits). But in general I've thought of a "startup" as simply a new business based on technology. Some subset of startups were funded by venture capitalists, and a subset were aiming to grow huge and have quick exits. But others aimed at medium-sized businesses, or even smallish businesses. A large proportion of the people I know who've founded startups actively don't want an "exit", because they built it, and they aren't going to give it up anytime soon.

I'm not even really sure how it became that people assumed that startups ought to aim for large funding and under-5-year exits. Is that just a legacy of the fact that anyone with eyeballs could (and therefore, often did) get funding in the first bubble, so it just became assumed that it was the norm?

37signals has taken an investment from Bezos Expeditions. As Jason Fried explains in the blog post, it was certainly not the standard VC deal though - http://37signals.com/svn/archives2/bezos_expeditions_invests...

Considering that they're successful taking that route, though, they do have some first-hand experience to back up their claim that you can be successful without going the VC/startup route.

> 37 Signals is a small business.

Are they really a small business? I have the impression that they have a large user base - and IMO a better set of products than Stack Overflow.

The point is that 37signals explicitly claims not to be a startup. Their line is that they're a profitable 10 year old company.

I once asked DHH in a Q&A his opinion on working on a startup outside of Silicon Valley. He corrected me.

That's not to say they were not once a startup. Every 'startup' should have the objective of becoming a sustainable business. Eventually the startup tag will go away, but that's not to say they were not once there. Microsoft was once a startup. Apple was once a startup. It makes me laugh here on HN where some guys weekend project can be considered a startup when it really has no potential to ever be a business.

"Better set of products than stack overflow"

This doesn't make any sense. That's like saying the Yankees have a better team than the Saints. Apples and oranges.

I don't use any 37s products, I have email.

However, I find StackOverflow invaluable. I will spend 20 minutes searching the web for answers, and when all hope is lost, I can ask a question on Stack, wake up in the morning and someone will have generously shared their knowledge, providing a perfect solution.

It is simply incredible.

Small business in the sense of few employees and little in the way of capital assets.

Just because you're making money hand over fist doesn't mean you're implicitly a "big business".

I guess I am trying to find out whats HN's definition of small business. Not sure why I am getting downmodded.

I too am wondering the HM definitions. Big/small business versus startup. What is the definition of startup? I don't understand why businesses that go for VC funds have the monopoly on the term "startup".

The definition I've seen given by PG is anything that scales up. In other words, a business that sells a product that can be used by many users. A small business is usually something that offers a service (a restraunt, a barber shop, or a consulting firm).

Funding has nothing to do with it.

I would say any business with fewer than 50 employees is a small business. According to Wikipedia, 37signals has 16. There are technical definitions in various countries of "small business", based in some cases on number of employees and in some case on revenues or other economic metrics. Any way you slice it, 37signals is a small business.

There is a talk by DHH where he shared stories about his jobs prior to 37Signals. These jobs were at VC funded, dot-com companies (something involving games) and he claims to have learned some lessons there. He talks about this in the beginning of the Q&A session here:

http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2334

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