Slashdot Mirror
Greenspun On ArsDigita
Eponymous, Showered writes: "Following up on the depressing tale of ArsDigita and its takeover by nursery school miscreants, Philip Greenspun gives his take on the recent turn of events recently covered on Slashdot. He even provides a nice aD history in a nutshell for those of us who were vacationing on Uranus for the last several years."
Except that it's not at all clear that the new management team doesn't know what they're doing. It's absurd to talk about the declines in AD's profitability without considering it in the context of what the industry as a whole is seeing. Plenty of companies are seeing losses and having to lay people off. Plenty are just folding up and dying completely.
Look at what's been happening to software service companies recently and tell me honestly that the management team that replaced Philip is solely responsible for the decline in AD's fortunes. You can't. Despite the the big-name clients Philip likes to cite, a hell of a lot of AD's revenues were coming from little dot coms flush with VC cash of their own. Now that the gold rush has died down, it's no surprise they are suffering -- just like nearly every other software company that depends significantly on service revenue, and many that don't.
Giving Philip all the credit for past profits and the current management all the blame for present losses requires that you willfully blind yourself to changes in market conditions.
Here are a few things you should expect from venture capitalists:
- they are not tech experts. They may be pretty conversant, but what they do is demanding in its own right, so they don't have time to keep up. The longer they have been VCs, the further away from the nitty-gritty they will be;
- they are in it to make money. If asked, a good VC will sit you down and bluntly explain that they are in it to make money. If you want someone whose first priority is to create something extraordinary and new, get money from Intel or Cisco or somebody who is investing in R&D, not cash return;
- VCs expect somewhere around a 35% annual rate of return on all their money invested. If 2 out of 10 companies fulfill their growth plans, 3 out of 10 go sideways, and 5 out of 10 go bust, but the VC doesn't know which is which beforehand, then they have to *plan* for each of their investments to have a 84% growth in value per year, sustained for the average investment holding period of 5 years, or a 20x growth in value. These growth needs mean VC-backed companies have to swing for the fences - slow, measured growth won't get the VCs the returns they need;
- VCs are paranoid about control for good reason. I was told by a lawyer that every clause in a contract is a result of someone at some time getting screwed;
- VCs do not *want* to run the company. They are usually involved with up to 10 companies at a time and looking for more, as well as being involved in running their own firm. They do not have time to run the investee. They want to oversee. The only time they try and replace management is when they think things are drastically off-plan, or with the buy-in of management.
There are alternatives to venture funding. Strategic investors, as mentioned above, are one of them. Bank financing of receivables is another (especially if the company has top-notch clients and is profitable, as aD was.) Do not get venture funding unless you believe you can (and want to) put all your chips on the table and roll the dice. Even if the odds are heavily in your favor, you can still lose it all.
If you are a technologist or visionary type, find a person who believes in your vision and who you trust but knows the ins and outs of finance, law and business, and hire them. You may scoff at the MBAs, but if this happens to you, you'll have wished you had one on your side. (And, yes, MBAs that know and love technology exist, they are just hard to find.)
Milo