Does Web 2.0 need VCs?

Post ImageI got to this session slightly late, but that’s okay. Jason Fried and Rick Segal are tackling the question of whether or not Web 2.0 companies need venture capital. Jason is, of course, from 37signals, a Web 2.0 company that didn’t take VC. Here are my notes (my comments in italics):

  • Jason says everything they do is profitable.
  • Rick agrees with Jason, if you don’t need the venture capital, don’t take it. Institutional money changes the dynamics of what you’re doing.
  • On the whole, Rick thinks that 37signals is an anomoly. The norm is folks come up with an idea, and then need some cash to get going.
  • If you don’t lose your limited partners’ money, they will love you. There’s a myth that you need to make millions and millions, and its probably not true.
  • Jason says the answer to “how do you monetize this” is “you charge for it.” If you build tools that people want and like, you can charge for them.
  • If you pay for something and you use it, you’ll see the value. There is a disconnect between buyer and user in the enterprise.
  • Rick says in general, free sucks. The problem is that we’ve trained people to do free, and getting people to pay for something is a non-trivial task. Rick says generating revenue quickly is important.
  • Jason says “we like to emulate drug dealers”, you give people a little bit for free and get them hooked. Most of 37signals’ business is from upgrades.
  • Jason says know what you want to do, and build something that you can manage without requiring the headcount to swell. You need to have people on board who share that vision.
  • Rick says there are definite opportunities in Canada. However, there is not enough chest pounding that this is a great place to start a company. This company has a wealth of talent, and there is capital.
  • Rick’s standard offer to any entrepreneur is 30 minutes, no harm, no foul. Rick thinks that every entrepreneur who wants to take a shot should get to take that shot.
  • Jason says to hire the best talent you can, no matter where they are. He says you don’t need to go to San Francisco.
  • The main way to keep costs down is headcount, according to Jason. Also, don’t go buy the server farm before you have any customers. Jason says you should be able to build any product with three people, max. If you need ten people or even five, its too complex, so keep the team small.
  • The way to build an audience is by teaching, according to Jason. Either you outspend your competition, or you outteach them.
  • Finding like-minded people is more difficult. 37signals has done it through the open source community.
  • Rick says that in Canada, there’s lots of opportunities for the “put me in coach” deal, and those people will often work twice as hard. And these people become like-minded, because they are looking to you for guidance.
  • Jason thinks resumes are a waste of time. He doesn’t care where you went to school or if you finished school, as long as you do great work. It’s about fucking time someone important said this, thank you Jason, I couldn’t agree more. The school system is largely a waste of time (with regards to tech) as far as I am concerned.
  • Rick believes very strongly that the Canadian VC market is not taking enough risk, doesn’t fail enough, and doesn’t take enough flyers. The problem is that the community is very small.
  • At the high school and post secondary level, we need to allow people to try things in entrepreneurship, says Rick. If anyone gets a startup camp going, Rick wants to know about it, and he’d be happy to get people and money there.
  • There’s lots of potential downsides to taking money. You might get pushed out, you might be forced to go public, etc.
  • Rick says when he does a valuation on the company, he does two things. How much capital is going to be required to create that success? How can he stage those dollars into the company? Rick doesn’t do participating, preferred, double dip shares or anything. The best deal possible is common shares. The worst thing you can do is make someone feel like they didn’t win. At the end of the day, Rick wants the entrepreneur to feel like he/she has a partner.
  • There has to be a liquidity event for a VC, so after you take money, Rick says there is a meter running to get to that event, so the entrepreneur has to want to sell, or go public.
  • Web 2.0 boils down to service, according to Rick. They are successful with passionate customers.
  • Jason says that founders shares look good for entrepreneurs nowadays.

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