All the wrong reasons for Stack Overflow's VC chase

http://37signals.com/svn/posts/2159-all-the-wrong-reasons-for-stack-overflows-vc-chase

by marilyn • 16 years ago

180 75 16 years ago

sabat3• 16 years ago

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.

mrduncan• 16 years ago

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...

pavs2• 16 years ago

> 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.

jsolson• 16 years ago

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".

100k3• 16 years ago

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.

dpcan2• 16 years ago

"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.

_delirium2• 16 years ago

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.

tptacek3• 16 years ago

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.

statictype• 16 years ago

>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.

sabat3• 16 years ago

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.

lyudmil• 16 years ago

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

chime• 16 years ago

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.

sabat3• 16 years ago

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.

mikebo• 16 years ago

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.

frederickcook• 16 years ago

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?

InclinedPlane• 16 years ago

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.

Sukotto2• 16 years ago

   It is like Twitter in the early days

It's like Twitter now.

rodyancy• 16 years ago

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.

swombat• 16 years ago

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

VC funding makes no sense for Stack Overflow.

necrecious• 16 years ago

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.

netcan3• 16 years ago

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.

patio113• 16 years ago

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.

KWD2• 16 years ago

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.

jasonlbaptiste• 16 years ago

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

patio113• 16 years ago

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.

replicatorblog• 16 years ago

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.

vaksel4• 16 years ago

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

keltex• 16 years ago

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.

blasdel2• 16 years ago

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

patio113• 16 years ago

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).

ojilles• 16 years ago

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.

Timothee• 16 years ago

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.

robryan• 16 years ago

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.

yankeeracer73• 16 years ago

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.

jmm• 16 years ago

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.

iamelgringo2• 16 years ago

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".

jayair• 16 years ago

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.

euroclydon• 16 years ago

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.

antirez• 16 years ago

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).

iamelgringo2• 16 years ago

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.

hyperbovine• 16 years ago

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.

goodgoblin• 16 years ago

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.

dpcan2• 16 years ago

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.

100k3• 16 years ago

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).

100k3• 16 years ago

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.

mrphoebs• 16 years ago

DHH is strongly typed.

All the wrong reasons for Stack Overflow's VC chase

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