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Back to the VC world

That earlier thread about VCs has morphed into being about doctors instead, so here's coming back to the topic:

Joel's article was very interesting and here's another "engineer" view:
http://www.spectrum.ieee.org/WEBONLY/resource/sep01/speak.html

One point raised in Erik Sink's blog at http://software.ericsink.com/20030605.html#10100 is that "Joel correctly observes that most VC firms don't have much to offer people who want to build solid, long-lived companies.  Don't expect this situation to change anytime soon.".

The deal seems to be that VCs need to make money FAST. Either that, or LOSE all the money - there's no middle ground. No money for the companies that have patience - those will have to find money from the business itself, or do an IPO.

Deepak Shenoy
Friday, June 06, 2003

people that choose to grow slow in general don't have a need for VC.  why should a VC choose 5% gains in a risky business when they could get close to that investing in I-bonds?


Friday, June 06, 2003

"Patience" here doesn't mean "5%". There are lots of companies that make 30-40% growth annually without taking on insane risks. It'll just take longer to get the same annual growth, compounded from day one. So instead of 6 years, they'd have to wait 10, but the return is the same in percentages.

Deepak Shenoy
Friday, June 06, 2003

My only real experience with VC is by being a victim of a VC funded buyout at a previous (now defunct) employer.  Nevertheless, as I read Joel's article I had the impression that his comments were spot on.

But as I got about 2/3 of the way through the article, I started getting the impression of "OK, but so what?"  I think we can postulate the following grouping of startup companies:
1 -The entrepenuer with a Big Idea who wants to grow fast, have a bit IPO, and get rich quick.  This is the VC type of business.
2 - The individual who wants to start and grow a company that will be around for a long time.  This type gets funding from savings and bank loans and bootstraps itself up.

Hmmm, this is mostly what Joel said.  So what's the lesson?  That we should only go to a VC if we are type 1?  That there is a type 1.5 that needs something in between?  Or that there needs to be a new kind of funding source for type 2?  Is there really any problem at all with this funding model?

In the end I am not sure I learned anything, except to confirm my impression to stay away from VC.

mackinac
Friday, June 06, 2003

I thought Joel's article was very interesting.  However, I thought his references, especially the IEEE one, identified VC problems more accurately aligned with our VC's faults.  Joel emphasized that VC's have a risk/reward/time outlook which is not conducive to successful product development.  I don't take issue with that - as it could be true in many cases.  However, I've seen lots of money and patience (some comapanies now 6-10 years running, without a clue).

As the IEEE article specifically pointed out, VC's are not experts in technology.  That, and I would add, they don't seem to want to pay close attention to detail.  That's what their CEO and executive are supposed to do: run the company.  It appears to me that they want someone to sprinkle fairy dust over an idea, bless it, and it will grow like a weed.  Too often, they chose their CEO and executive staff based on some pedigree (also noted in the article) which is tangential to technical competency and execution.  I really thought that the IEEE article nailed VC's failings acurately and completely.  You can find the link at the bottom of Joel's article.

Nat Ersoz
Friday, June 06, 2003

Is it really about building a sustainable company?  I think the more important question for VCs is finding a software market that has high capital barriers to entry, since that's where money's advantage is.  A Joel or Erik can reliably find a niche to build their companies, since shrinkwrap software has vanishingly small barriers.

It's not like all VCs are insane.  Last I heard from a friend, he was counselling firms funded by his VC on sustainable practices.  (Which is sort of crazy, I wonder how that turned out).

Still, I think VC blogs and Joel's criticisms can only lead to good things.

Tj
Friday, June 06, 2003

"There are lots of companies that make 30-40% growth annually without taking on insane risks"

Care to elaborate?  I haven't seen anything out there that had that type of growth rate.  Or maybe you define 'insane' as 99% probability of  failure?  Or maybe there's growth but 0% profit margins?  Or maybe the total volume is insignificant?

Please clue me in, I've got some money to burn.

Josh Sampsen
Friday, June 06, 2003

I work for a company (privately held) which has had an average of 30% growth year-over-year for the last 20 years, without (IMO) taking "insane" risks.

So its an achievable goal, in my opinion.

Steven C.
Friday, June 06, 2003

You don't have to tell me the company name, just the industry and the service you provide.  What's the company's revenue?

Josh Sampsen
Friday, June 06, 2003

We must be careful not to confuse "gains" with growth. To counter 5% gains with 30% growth is comparing your 'arse to the clouds.

Stephen Jones
Friday, June 06, 2003

http://www.ghs.com/corporate/financial_info.html

(Note that that page lists us as having 18 years of 30% growth, whereas the referring page said 20 years -- choose whichever makes you happier, I'm not positive which is more accurate).

Steven C.
Friday, June 06, 2003

Maybe I don't know how growth is figured...

If GHS had around 200K in sales in 1983, at 30% growth per year wouldn't they have ~300M  in sales instead of $45M? 

Josh Sampsen
Friday, June 06, 2003

Sorry, I took it out to 28 years instead of 18.  Still, just doing a quick spreadsheet I've got 30% growth for 18 years with an initial value of 200K to be a little over $173 million in sales.

Josh Sampsen
Friday, June 06, 2003

I really can't say why your spreadsheet is giving you those values, but:

1.3 ^18 ~= 146
1.3 ^ 20 ~= 247

So starting at $200k, we would end up with either $30 million (18 years) or $49 million (20 years), which dovetails nicely with the figures on that web page.

Steven C.
Friday, June 06, 2003

Dear Josh,
                Don;t go into financial analysis, and stick to binary; you seem to have problems with zeros in decimal!

                  30% growth from 200K in eighteen years will give !7.3 million, not 173 million.

                    As they claimed AT LEAST an annual growth rate of 30% then their figures are fine.

Stephen Jones
Friday, June 06, 2003

Dear Steven,
                    You're making the wrong calculation. After 18 years you multiply by 1.3^16 since the first year is 1 and the second year is 1.3^1

                      After 18 years you get $200K*(1.3^16) which is $17.3M and after 20 years the figure is  $29M

Stephen Jones
Friday, June 06, 2003

Yeah, that looks right. Anyway, my numbers were close ballpark so it all works out. *grins*

Steven C.
Friday, June 06, 2003

But it says 30% growth PER YEAR. 

that would mean:

year 2 = year 1 * 1.3
year 3 = year 2 * 1.3

and so on,

Right?

Josh Sampsen
Saturday, June 07, 2003

I'm missing something.  How does 1.3 ^18 ~= 146 equate to 45M?

Josh Sampsen
Saturday, June 07, 2003

"I'm missing something"

yep, you're right Stephen, it's the decimal!

Josh Sampsen
Saturday, June 07, 2003

Ventureblog has an interesting reply.
http://www.ventureblog.com/articles/indiv/2003/000120.html

I think technical people have an enormous distrust of VCs because they were behind so many psychopaths who thought they could build the next ebay, in spite of reality.  Plus, though their reply was accurate, they've enjoyed a large information advantage over those who'd use them.

That book High St@kes No Prisoners was somehow suspicious though.  An author can make himself look quite bright if he writes well.  A lot of uncaring programmers have contributed to the public's belief that we're overrated, and the same can happen with VCs.

Tj
Saturday, June 07, 2003

Josh,

Year 1 is $200k.
Year 2 is $200k * 1.3 (= 200k * 1.3^1)
Year 3 is $200k * 1.3 * 1.3 (= 200k * 1.3^2)
Year 4 is $200k * 1.3 * 1.3 * 1.3 (= 200k * 1.3^3)

See?

Oh, and the person who said it should be 1.3^16 for 18 years, you had the right idea and the wrong math: you were off by one. Year 18 would be 1.3^17 (you can see the pattern above). Regardless, clearly, the numbes are reasonably close to their reporting.

Brad Wilson (dotnetguy.techieswithcats.com)
Saturday, June 07, 2003

Yep, you're right. I should have run 200,000*1.3^16 through the worksheet to check. It's 1.3^17

Stephen Jones
Saturday, June 07, 2003

Yes Brad, don't know if you've been keeping up, but that's what I said in my previous post.  I missed the decimal.

Josh Sampsen
Saturday, June 07, 2003

To get back into the original conversation ... growth does not equal return on investment.  You can grow 100% year after year and never see a return on investment. 


Saturday, June 07, 2003

Wow, tons of replies over the weekend! I'm in India, and here 40-50% growth was not uncommon in the IT world. A company here called Infosys (www.infosys.com) have grown at nearly those rates till 2001 - sometimes even a 100% year on year. Sure, that's a public company, but with what I've known the risks they've taken have been very well calculated.

There are some private IT firms I know that have been very successful at 100% growth - but the data isn't public so I can't point you to anywhere. My company has grown at around 40% y-o-y over the last 5 years, but we started really small so that's not much of a comparison.

(And in all these cases it isn't revenue growth I'm talking about - it's net profit growth)

One more thing - it is true that growth is fairly independent of ROI. You can grow from a 200,000 revenue to 1 million in a year, but if you have 100 million invested, it's not all that big a deal. But, if you have low debt and low capital (something i've seen common among private non-VC-funded IT companies) ROI is going to be much higher than net profit growth.

Deepak Shenoy
Monday, June 09, 2003

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