Sequoia Capital: Armchair quarterbacks(37signals.com)
37signals.com
Sequoia Capital: Armchair quarterbacks
http://www.37signals.com/svn/posts/1304-sequoia-capital-armchair-quarterbacks
39 comments
I really agree on the straw man comment. If they wanted to disagree with Sequoia's stance on this, that's fine, not everyone is on the same page. The problem is that they didn't approach this sensibly. Sequoia never really made most of the claims Jason takes issue with. The root of it all is just sustain rather than grow for the time being, which is a fair argument given the circumstances.
I understand the logic that the Sequoia presentation endorses. The problem that I have is with their timing. The signs were clear of bad economic times at least a year ago and probably much earlier than that.
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.
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.
Correction, your interpretation is that it says: Economic conditions vary. In bad times you can't take as much risk. Bad times are here. Stop taking risks.
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 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.
What is your specific objection (if any) to the Sequoia presentation? I assume you have no issues with the data, but its interpretation. Would love to know what you think!
It's not an attack on a straw man. It's an attack on Sequoia's logic and its presumptions -- a valid attack, if you ask me. Except for Sequoia's recommendation for stasis (bad advice in any conditions), all of its suggestions are how you run a startup. If you aren't doing everything that the deck suggests, your startup probably isn't going to do well. As a startup, you should not be taking stupid risks. Smart risks: you need those, even in "bad" times.
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.
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.
I disagree that it's a valid attack. They aren't telling people to stop taking any risks-- they are telling people to prepare for a down market, which DOES affect the trajectory of a startup (even if they are on the right track). Pasting bits from my comment on SvN:
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.
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.
"If you aren't doing everything that the deck suggests, your startup probably isn't going to do well."
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.
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.
A quote from the seattlepi.newsource:
"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.
"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.
I'm sorry, I don't understand what you mean.
It's not like this is the first time Sequoia has said this to their entrepreneurs. They've been doing it in private and in meetings.
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
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
I think it's important to note that this was not a public meeting for all CEOs of all companies everywhere - just their portfolio companies. Sequoia asked the CEOs to keep everything private, but then the notes leaked, then the slides leaked, and then Sequoia was forced to discuss it. Splitting hairs, maybe, but I think it's an important distinction.
Let's be honest - they knew what was going to happen. It's Silicon Valley.
he other point makes the simplistic assumption that because advice is do A, when A is universally good, that it's useless advice.
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?'
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?'
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This seems like blatant linkbaiting from 37signals, and frankly I think it's childish.
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.
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.
Just curious, can you think of another company besides Amazon where 'get big fast' actually worked?
"Get big fast" was actually a rather symbolic phrase for the excesses of bubble spending. It worked for amazon and few others.
"Get big fast" was actually a rather symbolic phrase for the excesses of bubble spending. It worked for amazon and few others.
I'm not on firm ground here, but I would think that ebay, Cisco and paypal are all in that category.
EBay got big slowly...they went almost 2 years between initial launch and VC funding. Also, they're one of the few companies that was profitable before the founder quit his day job.
Cisco grew profitably from before they took Sequoia's money. Some years they grew rapidly, but always profitably until the dotcom crash.
It was used fairly successfully by both of the two most famous early Web cos, Netscape and Yahoo. In fact it was their example that made the idea popular.
facebook, youtube
Technically, Amazon made money but opted to grow faster. Youtube on the other hand didn't make money at all. They were losing money fast. They got lucky Google bought them.
Neither of which have turned much of a profit yet, AFAIK.
i've followed the SvN blog for years, and i've never seen linkbaiting (contrary to TechCrunch or other TC-style blogs)
Then you haven't followed very closely.
37signals have been extremely successful in their niche and I think they have a wonderful product.
However I think their biggest mistake is to try and extrapolate their experience to what seems like all tech businesses and start-ups, with the diversity we see in funding requirements, growth strategies and segments start-ups appeal to chances are slim that the 37signals model is for everyone.
Furthermore considering Sequoia Capitals track record this post is unimaginably arrogant, you need to come up with a better argument than that to take them on in a business model ideology war.
I agree... that blog post came off a bit arrogant and naive TBH. It doesn't sound like Jason has an ounce of experience outside of 37signal's success.
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.
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.
This was a pretty predictable and lazy post... "We were right all along. We are the best in the world, 37s kicks ass!!! We're awesome... we're wildly successful etc etc"
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.
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.
Personally, I like what 37s has to say. It's the same thing people here (myself included) have said to all these "How to survive in hard times" articles (and that is "why do sound business principles only count in hard times?").
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.
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.
Let's say it's boom times and money is cheap and plentiful and there are a stable of eager acquirers looks for companies to buy. Why not grow fast in that case? It didn't seem like it hurt the guys who started YouTube. And there are more examples where that came from. Then, when the economy slows, cut back. Seems like a good approach to me.
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.
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.
Yeah, but Youtube got acquired, and it really hasn't had a business model.
I think this getting big fast is really useful when you want to get bought.
I think this getting big fast is really useful when you want to get bought.
Amazing... the sheer volume of news.YC folks jumping on the defense wagon here. If I wouldn't know any better, I would say that 37Signals personally offended some you.
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.
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.
The sub heading of the article more accurately describes their point about Sequoia as "Monday morning quaterbacks.
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).
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).
Personally I think Sequoia's goal with these slides was to calm people down and provide reassurance during tough economic times. I don't think they were trying to really get people to change their spending or strategies. The people at Sequoia are definitely smart enough to not recommend major business changes based on the events of a few weeks.
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.
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.
We get it: 37signals hates VCs.
Sequoia Capital are a bunch of idiots.
That could be true, but they're a bunch of successful idiots at the very least.
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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.