The Problem With VC-Funded Startups

Raising money upfront puts you in the wrong frame of mind. A ventured-backed company has to spend money. A self-funded, bootstrap company has to make money.
  • Transcript


Question: How is your company's approach different from that of other firms in Silicon Valley?

Jason Fried: A lot of those companies in Silicon Valley and even on the East Coast now are VC-funded, venture-funded.  And I have a fundamental problem with raising money upfront because I think it sets the wrong... it puts you in the wrong set of—or frame of mind.  Basically the difference is this.  A ventured-backed company on day one has to spend money.  They have money in the bank and they have to spend it.  A bootstrap company, like ours, we are self-funded, has to make money.  And I think on day one, if you have a choice, do you want to make money or do you want to spend money, you’re better off as an entrepreneur learning how to make money and not learning how to spend it. Because just like anything, the things you do more often are the things you’re going to get good at.  So if you get really good at spending money, you’re going to be really good at spending money.  If you have to work on making money from day one, day two, on year two, year three, you’re going to be really damn good a making money.  And that’s what you need to be as an entrepreneur.  You now, this is a business. So that’s why I think the whole venture-backed thing is the wrong way to start.  I think if you have a great idea that’s working well and down the road you want to get some money to do something or take some money off the table or whatever.  Okay.  But upfront, you need to have that... I believe you should have that pressure on you to learn how to make money.  And just like anything, just like playing the piano or anything.  The earlier you start the better off you’re going to be and it just takes practice and I think making money is that sort of thing.  Same sort of skill.
Question: How does 37signals compare with Google and Facebook? 
Jason Fried: Well, I don’t really compare anybody to us or us to anybody because I don’t think it really matters.  But, since you asked the question, let me kind of go into it.  I mean, to me, companies like Google and Facebook, and even Apple, which I love, those are exceptions to the rule.  These are phenomenally successful, sort of—I mean, you could say, is Facebook successful?  I don’t really know yet.  I mean, there’s rumors that they’ve generated a lot of revenue, but are there profits, I don’t know yet.  Google’s clearly profitable, Apple’s clearly profitable, Amazon, those kinds of companies, but those are really the exceptions to the rule.  Most companies are not mega huge massive companies.  Most companies are small.  And so the rules that govern these big huge companies and people look to Google as the example.  And Google did it this way and it worked.  And it probably doesn’t apply if you’re four people.  You know?  It doesn’t apply if you have a lot of outside funding.  It doesn’t apply if you don’t have the most brilliant search algorithm in the past 10 years, you know.  So those lessons aren’t, I think, valuable lessons for entrepreneurs for small businesses.  So to compare, I mean, my point is that you should look for a sort of, if you’re going to look for, not heroes, but people you think you should sort of learn something from, look at people who are sort of in your realm and don't try to compare, like cross-compare a small company with a big company and try to draw lessons.  I think if you’re small, look to other small companies who are doing well. If you’re big, look to other big companies who are doing well because the strategies are totally different.
Question: Is Web entrepreneurship now primarily a “start it and flip it” enterprise? 
Jason Fried: For me, like I love the business I’m in so I want to do it.  If I sell the business then I am not doing the business anymore.  So, okay, so I have $20 million, or $100 million or half a billion, whatever you get.  What are you going to do now?  What you end up seeing... first of all, it’s great to that that money, so I’m not like discounting money like that, but what are you going to do next?  A lot of these people go back to starting another business.  They can’t stay out on Mojito Island very long.  They go back to starting another business and in a lot of cases their second idea is not as good as their first idea.  And so I think our idea, this might be my best idea.  So why should I give it up?  Why shouldn’t I ride my best idea for 30 or 40 or 50 years if I can?  So, that’s sort of the problem I have with people flipping, because maybe they have a great idea and maybe that was their best idea with then were 27 and not like they’re searching for something new and meaning in their life and they can’t find it because they had that great thing and now it’s gone.  The other problem I have with generally flipping, but building to flip is that you really only have a few customers.  You have Google, Apple—and Apple doesn’t buy many people—Yahoo’s not buying anyone anymore.  I mean, Microsoft, maybe.  There aren’t a lot of buyers, really, for software companies.  So if you don’t win the lottery, then what?  And the answer is, you’re probably going to go out of business because you were only planning on that. So I think you’re better off building a business that can stick around, it’s sustainable, it can last for 20 years, 30 years, and then if someone wants to buy you and you want to sell, you have that option, but it’s not your only option.  And that’s why I think it’s great to build a company on your own with your own revenue.
Question: Can IT business ideas work for brick-and-mortar businesses? 
Jason Fried: Some of them certainly can.  But what I think is interesting is, is that the main thing that we were just talking about, which is profits, applies to every business except, for whatever reason, these technology businesses.  So what I’m actually suggesting is not radical.  It’s how most businesses are run.  It seems to be radical in my industry where people think, "Wow, you can actually make money by selling things?"  Like that’s a radical notion in our industry.  But in most industries that’s how it actually is.  So I do think a lot of these ideas apply.  As far as, you know, being in the office or working remotely, obviously if you’re a cashier you’ve got to be there and things like that. But if you’re in the back office, you know, or you are a consultant or something like that, I think a lot of these stay away from people, don’t interrupt people, those sorts of ideas apply regardless of the industry that you’re in. 

And I should say that one of the really cool things has been "Rework" has been received, our book, by a lot of people all across the spectrum.  So we knew technology companies would like it, but we’re hearing from, you know, people in their 80s, we’re hearing from—we heard from some hairdressers actually who’ve read it and loved it.  A lot of restaurant owners from big huge manufacturers.  There’s a spring company out in Chicago that just sort of, they make springs.  They’re like an industrial manufacturer and they’re like, "These ideas are great.  We’re going to try working on some of these."  And other people have written this and saying, "I’m glad I’m not the only one who thinks this way.  You know, I’ve had this business for 20 years now making this, that and the other thing and we’ve been working this way too, and everyone’s been telling me we’ve been crazy."  So it’s great to sort of hear from all these other different people in different industries who think these ideas do work for them as well.

Recorded on July 22, 2010
Interviewed by Peter Hopkins