Sequoia Capital: Armchair quarterbacks
37signals.com
37signals.com
What the Sequoia presentation says is: Economic conditions vary. In bad times you can't take as much risk. Bad times are here. Stop taking risks.
Though I don't endorse Sequoia's conclusions (I don't know how bad the economy will get, or how long it will stay that way), the chain of reasoning is just common sense. It doesn't make them hypocrites, or imply that what they had been telling startups before was wrong.
If a startup can only survive in "good times" (still trying to figure out what that means, given the past eight years), then it probably shouldn't have existed to begin with.
Google, while a startup, added value to the universe and soon enough figured out how to take monetary advantage of that value. Google busted out of the dotbomb era like a bat out of hell.
Pets.com did not. Turns out the world needed a better way to find information/ideas/people, but not a "better" way to order dog food.
This just represented their first public stance on the issue. In good times, it can (but not always) make sense to spend more money on marketing and headcount for experimentation purposes and because a really talented person is available (even if you don't have an immediate role for them). And while most of their advice applies regardless of economic situation, running a business in a recession is not the same as running a business in a boom.
Edit: This was also discussed here: http://news.ycombinator.com/item?id=327937
In a happier financial times, customers are flush and buying. Buyer confidence is high. Growth is easier, your sales/marketing spend can be a touch lower, etc.
In happier financial times, VC-backed startups can count on more investment if they are generally moving in the right direction. Whether you think VC-backed startups are stupid or not, that’s how the game they are playing works. Funding in a down market is scarce and terms are rougher.
In happier financial times, VC-backed startups have a better shot at an exit (IPO, M&A). Again, whether you think it’s stupid or not, that’s the game.
Your Google/Pets.com argument is kinda strawmanny itself. Pets.com died because they didn't create much value. There were times in Google's growth that they would've DIED if they couldn't get funding. Growth costs money and revenue can be realized months or years after smart spending. If you don't have a big war chest and capital is scarce (and expensive) it makes sense to grow a touch slower.
It depends on the business models. Some companies can be built cheap and they can reach profitability quickly. Not all companies can follow this model. Sequoia doesn't just invest in YC style companies that can be built by 2 people over 3 months. I highly recommend you take a look at http://www.sequoiacap.com/company/all-stages
"Google, while a startup, added value to the universe and soon enough figured out how to take monetary advantage of that value."
How do you define "soon enough"? IMHO soon enough at a time where there's plenty of venture capital to go around might be very different from soon enough at a time when capital is scarce. Take a look for example at the story of how Amazon reached profitability. http://seattlepi.nwsource.com/business/158315_amazon28.html Amazon also figured out how to become profitable, but it took them 6 years to do so. That was soon enough back then, it might not be soon enough today.
"What few people understood was that the reason that they didn't make money was that for the previous five years every time there was a trade-off between making more money or growing faster, we grew faster,"
They were making money.
When Sequoia (or anyone) advises to now reduce debt, focus on positive cash flow etc. etc. What they mean is not that these things are suddenly good things. What they mean is that they are suddenly more important. Your ability to raise capital has just sunk. The likelihood of new, highly funded competition has just sunk.
The post just makes a silly sort of a 'positive cash flow? wasn't that a good idea yesterday?'
That said, the presentation says what it says; it talks about the what happened, how we got here, how it's gonna be like what (their) companies are supposed to do now.
And what they're supposed to do now, is exactly what any sane company (outside of SV perhaps?) would be doing from the minute they open shop.
That being said, I still think it's a great time to be working on a startup. I knew the economy was going to tank and yet I still started my company earlier this year. Smart investors who still want to be in the game and yet have fiduciary responsibilities should have been providing at least some warning earlier to their portfolio companies long before it all hit the fan in the last few weeks.
They know quite well (or at least they should) that the reason some companies get a huge cash injection from investors is to grow fast and grab marketshare. This costs a lot of money. It's a risky strategy but if it works it pays off bigtime. The get fast big strategy is obviously not for 37signals, but I'm sure they are aware that there are people in the world that have had success with it. Amazon comes to mind as a classic example.
What Sequoia is saying now is that the get big fast strategy will have to be postponed if you want to survive. And they're right.
"Get big fast" was actually a rather symbolic phrase for the excesses of bubble spending. It worked for amazon and few others.
On the flipside, I've seen wayyy to many inexperienced but well-funded companies burn through cash like it's never ending and with little purpose or direction. So in that regard, I do agree with the general point of his post.
Reading the embedded slideshow was more interesting than the 37s ego post, so thanks for posting that anyway.
The point for me was that before, you could wait maybe 2 years or something building something awesome, building up traction before making profit. Now, you should try to achieve that a lot faster, as investment will be harder to come by. I think that's pretty sound advice.
I'm glad someone with a bigger voice is saying this.
Yes, I understand "get big fast, grab market share" MO–but I guarantee they have portfolio companies that have burned a lot of money with nothing to show for it (revenue or market share).
Yes, Sequoia had to say this given their current situation. But, what's wrong with having an opposing voice to "raise vc/ramp up fast/ignore revenue for now" mentality? It's good to give entrepreneurs both sides of the coin.
A lot of the innovations we take for granted today are the result of people with big dreams and no clear path to profitability. If we didn't have big dreamers and investors to fund them based on... gasp... a leap of faith, then the web would probably consist of nothing more than simple project management services, enterprise chat services, and single page editors.
"If you had to keep borrowing to stay afloat, were those good times?"
I know the good people at 37s understand what venture investment is, but they keep trying to prove that they don't. If you're taking money from Sequoia, you're not borrowing money, you're exchanging money for ownership.
I think this getting big fast is really useful when you want to get bought.
To do some reflection... I can't help but wonder how many adjustments a company such as 37Signals is going to have to make to their operations compared to the average overfunded "innovator" from Silicon Valley...
I know for damn sure who to put my money on.
Armchair quarterbacks would mean that Sequoia is not directly involved in the industry and is chiming in on something they know nothing about (not speaking of something with the benefit of hindsight like the term "monday morning" confers).
Kind of saying "Just stick to the basics and everything will be fine people". As a vc, I would imagine there is some incentive to keep the confidence of your portfolio companies up in tough times.