Comments on: These Aren’t The Companies You Are Looking For

By: Jeff Clavier

Jeff Clavier — Tue, 14 Feb 2006 10:54:59 +0000

It is not true that you have to leave 50% of the company on the table upon the Series A, and therefore you do not need to raise a ton of money at that stage – unless you need to.
Investors will have minimum targets for their ownership in mind, but that does not mean that they will not do less.

By: Patrick Hefner

Patrick Hefner — Mon, 13 Feb 2006 23:05:16 +0000

As an entrepreneur, I too don’t want to be bought. I have had my business since 2002, and have had a hell of a time trying to find a VC that is interested in what we are doing. I don’t want to make a quick buck. I want my company to be the standard with which independent artists distribute their music on the web.

It’s an untapped market, sites like CD Baby and Garageband don’t even come close to what we offer…

By: Chris Yeh

Chris Yeh — Mon, 13 Feb 2006 22:55:24 +0000

Awesome post, Brad. You hit the nail on the head for this whole Web 2.0 mania, which is that the number of exits to date is actually quite small, as is the average size of exit.

This is survivorship bias with a vengeance! There are thousands of failed ventures for every one that succeeds.

By: Runner

Runner — Mon, 13 Feb 2006 20:39:56 +0000

So Digg is now on the block for around 30 Million after raising 2.8 late last year. I seriously doubt they sold 50% of the company for that much given their growth so you can say somewhere between 5-7X ROI. That’s not bad for a short term investment (less than 1 year), but obviously not a game a lot of VCs want to play.

The question is why aren’t these companies being more ambitious? Digg has awesome growth and some good ideas. Why didn’t they raise 4-5 million and try to do something really unique? Why not try to disrupt the news industry? Maybe the entrepreneurs didn’t have it in them to take it to the next level? Or maybe the consumer web VCs aren’t holding up their end of the bargain and funding early companies for the long run? Digg should not sell to Yahoo now. With their growth, why not just wait another year and sell for 5X as much?

By: Ole Eichhorn

Ole Eichhorn — Mon, 13 Feb 2006 20:38:45 +0000

I usually comment when I disagree with you But this time I think you are so right that I had to say so. As an entrepeneur I bristle anytime people ask “who would want to buy you”? I don’t want to be bought! I want to build an awesome business. And I think that’s the way most entrepeneurs feel, and the way their investors feel, too. The idea that a company would be founded just to build a feature for a bigger company is just weird.

By: Dharmesh Shah

Dharmesh Shah — Mon, 13 Feb 2006 17:18:27 +0000

Unfortunately, the VC math calculation for funding (i.e. despite the capital raised in a Series A, they own about 50% of the company) incents the entrepreneur to raise as much as possible (3 on 3, 4 on 4, 5 on 5) as this is the most reliable way to increase valuations (something entrepreneurs seem to always be focused on).

Once the money is in the bank (i.e. you’ve raised $3 million), you’re effectively playing a different game. And, in many cases, its not the game you wanted to play nor should be playing.

By: Jack Krupansky

Jack Krupansky — Mon, 13 Feb 2006 17:10:12 +0000

Thanks for the rant on “build to flip”. Especially fleshing out the non-economics of such deals.

I like the comment that is attributed to Larry Ellison back in the boom: “That’s a *feature*, not a business.”

Alas, I can just hear the response from these “flippers” now: Brad is just *jealous* that we get to have all the *fun*.

Maybe it’s just a battle between the sprinters and you marathon types.

– Jack Krupansky