Don't Take the Money
It turns out that Fog Creek Software doesn't want venture capital. Good! We often turn away businesses like Joel's because they often don't really need venture money. If a company is on a steady organic growth track, can finance product development out of revenues, isn't involved in a highly competitive market where the first mover can achieve significant lock-in, and doesn't have a high-risk, high-return profile, it has no need for venture financing.
Many businesses can and do benefit from additional capital, especially those developing complex semiconductors, systems, communications gear, drugs and so forth. As Joel acknowledges, his advice to entrepreneurs largely only applies to software/web companies, and only those that can be bootstrapped. Venture capital is often required for software that has to developed on a rapid schedule to keep up with changing hardware, or requires an expensive direct sales channel, or is competing in an application with strong first-mover advantages and network effects. In some cases, entrepreneurs like to involve experienced venture investors simply for corporate oversight and advice.
Some entrepreneurs whose businesses could benefit from venture capital worry about a mis-alignment in the risk profiles of the two parties. In practice, this tends not to happen as much as one would expect -- most businesses don't really have the ability to trade off high risk and high reward for low risk and low reward without significant changes to the model, and most entrepreneurs only start businesses that they believe have a low risk (relatively speaking), high reward position. Of course, many of them happen to be wrong, but such is the way of startups.
Another concern Joel raised about VCs is their perceived short-term mentality, but generalizing about all the different kinds of venture investors is like generalizing about bloggers. It's safe to say that most experienced, early-stage investors recognize that the early part of the hockey stick can be very flat, and that it can take a long time to build a great company. In fact, most know that the majority of the value in successful investments is created AFTER the company goes public. Most venture funds have a lifespan of 10 years or more, to reflect the long term nature of building early stage businesses.
Another VC practice that runs into some criticism is that of not getting to know entrepreneurs in advance or chasing down new companies. That's incorrect -- a lot of time is spent just meeting and keeping in touch with interesting people, or approaching interesting companies. However, the filter has to be pretty strong here -- just as a busy blogger can't reply to every comment, we prioritize based on referrals, relationships, or simply exciting product demos available on the web.
It's also believed that since VCs have to reject so many companies, they end up doing so for capricious reasons. Perhaps this is true for some, but realize that often what seem like capricious reasons are often a cover -- it's hard to tell someone that their business baby is ugly. Sometimes spot observations are important because they are guides to the capabilities of the individual, and one has to get good at pattern matching based on immediate data. As an insightful blogger once wrote, "it is much better to reject a good candidate than to accept a bad candidate."
There are some valid criticisms about some VC practices -- we're not fans of exploding termsheets or no-shops around here either, and some of the more onerous antidilution clauses are usually unwarranted. Liquidation preference is often maligned, but is no different than VC carry compensation or stock options granted to employees in public companies -- in all cases, the proposition is that you only get compensated for value that you create above and beyond the existing asset value, in this case, cash.
Different rules apply to different worlds, in software and in venture capital. Software businesses that can be built slowly, organically, aren't
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If you enjoyed reading Joel's article on venture capital, here is the other side of the story from VentureBlog. What a wonderful world of blog!... Read More
Joel on Software - Fixing Venture Capital: Here's a good article about why your company should or shouldn't seek VC money. It's long, but it gets very good down below the graphs — the bit about the four curves getting Read More
Joel on Software - Fixing Venture Capital: Here's a good article about why your company should or shouldn't seek VC money. It's long, but it gets very good down below the graphs — the bit about the four curves getting Read More
Andrew Anker says Don't Take the Money. An interesting post in response to Joel's Fixing Venture Capital article.... Read More
Quite frankly, this article is patronizing and self-serving. I cannot tell whether the author is intentionally intellectually dishonest or simply has spent so much time defending venture capital that he does not distinguish between spin and legitimate arguments.
The first paragraph is a not-so-subtle jab at Joel Spolsky.
The second paragraph is mostly true; some businesses can benefit from venture capital (I believe) and the reasons given are fair on their face. The final sentence is true although, sadly, somewhat naive of the entrepreneurs. Whether experienced venture investors *actually* provide good corporate oversight and advice is certainly questionable. And, what, if any, actual qualifications experienced venture investors have that would make them any better than the average entrepreneur at good corporate oversight and advice has to be wondered about.
The third paragraph is really just anecdotal. The author does not give any particular reason why businesses wouldn't be able to trade high risk and high reward for low risk and low reward. The phrase, "In practice", essentially translates into, "In [the author's] opinion". Would VCs even know if this is true that you cannot trade one for the other? It is not apparent why VCs would investigate (or be experts more than anybody else) in this area. And, it is curious that the author hedges himself with the phrase, "without significant changes to the model". So? What does that have to do with anything? Nothing, as far as I can tell. The last sentence is just a patronizing jab at entrepreneurs, for no apparent reason.
The first sentence in the fourth paragraph is fair although, in any article that deals with ideas, some amount of generalization must take place. It would not be fair to ask Joel Spolsky to provide statistics; there just aren't any metrics for measuring short-term mentality. As for the rest of the paragraph, it provides anecdotal and very, very indirect evidence. The author again hedges himself with "It's safe to say..." and "In fact, most know..." Do they? And, even assuming they do, do these few generic, vague "facts" drive VC's short-term versus long-term mentality? Hard to say. Do most venture funds having a lifespan of 10 years or more indicate that VCs don't have a short-term mentality? Yes, a tiny bit, I suppose.
The fifth paragraph is rather vague. "Interesting" is a curious word choice and seems oddly out of place. Apparently, "keeping in touch with interesting people" is the same as "getting to know entrepreneurs in advance." And, apparently, "approaching interesting companies" is meant as "chasing down new companies." But, if I remember Joel Spolsky correctly, he *wasn't* saying that VCs don't talk to anybody and don't approach companies; he was saying (to paraphrase) that VCs spend a lot of time talking to the same group of people and looking for companies in areas that are innovative on familiar concepts (but not revolutionary). The author's last sentence seems to confirm that, yes, VCs sometimes do not have time to get to know entrepreneurs in advance or chase down new companies.
The sixth paragraph is apparently meant to be the humanistic paragraph. To paraphase, it says that VCs offer capricious reasons because they care about the entrepreneur's feelings. Perhaps. The second half of this paragraph is simply inscrutible (to me, at least). The final sentence seems to be saying, yup, VCs sometimes reject good businesses. He agrees with Joel Spolsky.
The seventh paragraph starts with a few opinions. His defense of liquidation preferences for VCs is acceptable though the "fairness" of liquidation preferences is probably highly dependent on the specific legal language used.
The eighth and final paragraph is the conclusion. The author gives the obligatory nod to Joel Spolsky: some businesses should not take money. The final line is self-aggrandizing and silly.
This article fails to rebut any of the points of Joel Spolsky's article. To be fair, it is a blog and blogs often contain rambling emotion-based opinions of their authors, rather than reasoned arguments. This appears to be the case here. I have completely discredited this piece and shown that it has little to offer its readers in terms of rebutting Joel Spolsky.
One thing I think you're missing from Joel's piece is that the VC model isn't quite serving a lot of entrepreneurs with profitable businesses that arent HYPER growth. Perhaps a VC fund could make money by extending its timeline a bit, lowering its risk profile, and lowering its expected return somewhat? But that wouldn't be any fun.
Anon,
Consider August Capital when they falsely state on their homepage, "In particular, August Capital's portfolio companies demonstrate sustained, profitable growth - and prove that they can define technology and market standards." Come on AC, we all know you, like all VC, have a few bad apples in your basket. Take Metawave which filed for chapter 11. Who are you trying to fool? Be real. You strive to make good investments, but making a statement that implies your portfolio is a basket of all winners - no way.
Oh, I totally agree with Naval's post here and am surprised at the comments. I thought Joel's article was actually the one that was self-serving! Of course you should bootstrap if you can and it makes sense. Why take money you don't need? It's interesting to see the reaction to VCs in the post-boom/bust cycle, as if entrepreneurs and inventors have suddenly all found religion (independent of the fact that they CANT raise money) and now understand that VCs are "bad" and going it alone is "good". C'mon.
Microsoft didn't need or spend the VC money it took.
This article contains more VC cliches than I've ever read in so few paragraphs.
Here's a short list, just from the first few sentences:
organic growth track
first mover
significant lock-in
high-risk, high-return profile
strong first-mover advantages
network effects
misalignment in the risk profiles
the early part of the hockey stick
I gave up copying them...sorry. Back in about 1999 it was enough to string together a few paragraphs like this and make few million bucks. I know this, because I did it.
But I thought these days were over. Is it now possible again to provide meaningless cliches and succeed in business without really trying? That would be good news indeed.