I agree you shouldn't have to exclusively use your own product. Of course, we all occasionally used AOL to garner competitive intelligence. Our conclusion was that noone would willingly use them and that they would go out of business (this was 1995). I guess we had the competitive part down, just not the intelligence part.:-/
Microsoft *should* force them to use Windows. Then maybe they would be motivated to make it work better.
Seriously, I worked at an ISP. We made all the employees use the service because we wanted them all to know exactly what our customers were seeing. If they hated it, then our customers probably did also, so they were motivated to fix it.
Re:Good riddance to yet another bad business model
on
Eazel Come, Eazel Go?
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· Score: 2
I have to ask it. Why are you so riled up about their business model? I assume you weren't an investor, so you've lost nothing and gained the source for half of a halfway decent file manager.
Seems like a good deal for everyone except the VCs.
Case in point is Burger King. They were actually pretty successful in the '70s. They were then acquired by what is now Diageo IIRC who decided to boost profits by cutting marketing. The resulting downward slide in their market share suggests (but does not prove) that marketing actually convinces people to buy your product.
The flip side is the old advertising expression that good advertising kills bad products more quickly (recent examples are Pets.com and TacoBell - both with amazing brand building campaigns but horrible product IMHO.)
Of course, I didn't think there was any way the MPAA could win against 2600 either. I just wrote emails to all of my congresspeople about the DMCA. This seems like one of those laws with plenty of unintended consequences.
Now *this* is the really interesting question. Why did Gracenote sue Roxio rather than freedb.org? (Of course, the lawsuit is about more than the theft of IP and the DMCA, but that other stuff is pretty dry.)
Maybe Gracenote decided the best way to stop a free software initiative was to sue its 'customers'. After all, what would sueing freedb accomplish? Freedb would go away and somebody else would step in, use the GPLd source and data and recreate it on a server in (Chooseone (Finland Norway Denmark Holland)). I am not going to say that open source interprets lawsuits as damage, etc. because that would be trite, but this is an interesting development alongside MS's verbal attacks. If this lawsuit succeeds on these grounds, there will definitely be a chill on further use of free software in for-profit corporations.
Maybe we can outline a generic theory of the history of innovation (we'll call it the Milo-Coach theory (g).) Let's take machines as the simplest history to outline.
1) Tools are invented;
2) Tools evolve over thousands of years;
3) Simple machines are invented (using a lazy definition of machines as compound tools );
4) Really complicated machines are designed and built.
I know this is simplistic, but the thing that jumps out at me is that all of these steps involved innovation, but nos. 1 and 3 were not resource intensive, they were thought-intensive while 2 and 4 were probably both. Let me know if you think I'm stretching it (I think we're the only people still reading this thread) on 2. I am assuming it was resource intensive in an opportunity cost sort of way (ie. testing out the new spear might lose you a kill.)
So, can we postulate that innovation is an alternation of revolution and evolution, where evolution is expensive and revolution is cheap? Then, my theory is: revolutions are caused by the availability of resource-cheap evolution, resource-cheap evolution is time-cheap evolution, the end result of revolution is the same as the end-result of much expensive and time-consuming evolution.
OK, it's a bit of a stretch and I can think of a few instances where it does not apply right off the bat, but it *is* only a theory. The application here is that what the article is predicting is the advent of cheaper evolution: the availability of the genome, the availability of much cheaper computing power, and the availability of much cheaper biological experimentation equipment. The theory predicts that these changes will result in revolutionary results in the field.
I agree with your first assertion. I may have been overzealous in my original post due to the surreal nature of Microsoft paying any attention whatsoever to Linux (in public, I mean.) Competitive isn't the word. Linux is not competitive in the real world, except in circumstances where it is closely overseen by technical people.
It is amazing, though, how technically competitive it is considering the amount of money Microsoft spends on their product. I suppose, as a relative newcomer to Free Software, I am still amazed at the quality of the software that is out there. Look at the software we have been given and figure out how much it would cost to buy the equivalent in the Windows world. Operating system, editors, compilers... these aren't trivial pieces of software.
There are two conclusions I could draw:
1) The state of the software world has been so stagnant for so long that these pieces of software are worth nothing and so deserve to be given away for free; or
2) Return on investment is not the only driver of innovation.
Obviously I believe the latter. Some innovation does require a great deal of money, some does not. Einstein and Newton, Picasso and Van Gogh did not require huge amounts of money; today's particle physics and architecture does. I am not sure how to characterize these two types of innovation: is there a fundamental distinction of type between expensive innovation and cheap innovation?
In any case, unless you believe option 1 above, I think you have to agree that a huge amount of innovation has occured with very little monetary investment. Going to SourceForge is the proof.
So, a TA is overseeing the final final-exam of the graduating class in the gigantic lecture hall. After the allowed two hours he calls out "pencils down!" Almost all of the students put down their pencils, trudge to the front and deposit their papers in a messy stack. The TA calls out again "pencils down! Anyone who continues will not have their paper accepted!" The rest of the students put down their pencils, trudge to the front and deposit their papers on the stack. Except one, who continue to work on the exam for another fifteen minutes. The he puts down his pencil and trudges to the front.
The TA looks on bemusedly the whole time. When the student arrives up front, the TA says "I'm not accepting your exam, we finished fifteen minutes ago."
"Do you know who I am?" says the student.
"No." says the TA.
"Do you know who I am?" says the student, "Do you know who I am?"
"No." says the TA.
"Good" says the student and sticks his paper in the middle of the stack of papers and walks out of the room.
It has been a few years since I was at an ISP, so prices may have changed somewhat, but total costs per month listed above are in the range of $21-$25 versus revenue of $20/month. This is why it's a losing business unless you are AOL and charge $21/month and have other revenue streams.
Note that Earthlink had an operating loss of $395 million on revenue of $987 million in 2000. Reported revenue per narrowband (ie. telephone access) customer was a little more than $16/month - probably due to customer churn and the free month of service. Operating expenses per narrowband customer were (educated guess) about $22/month.
Also, the $12/month for a telephone line - is that a residential line? Residential lines are typically subsidized by business lines. If it's a business line you're talking about, then either you're in a cheap jurisdiction or prices have fallen quite a bit in the last few years. Either is possible, but Earthlink's financials seem to support my crack-addled comments.
Interesting article in light of the recent comments by Microsoft's Mundie about innovation. He believed that open-source software stifles innovation. I believe that true innovation is more likely with the quick and open spread of ideas that is typical of modern science.
This article talks about innovation resulting from the spread of info about the genetic 'kernel': the more people who have access to the raw data, the more innovation will result.
"When molecular biologists figure out the kernel of biology, innovation by humans will consist of tweaking the parts to provide new services. Because of the sheer amount of information, it is unlikely that a single corporate entity could maintain a monopoly on the kernel. Eventually, as design tasks increase in number and sophistication, corporations will have to share techniques and this information will inevitably spread widely, reaching all levels of technical ability--the currency of the day will be innovation and design. As with every other technology developed by humans, biological technology will be broadly disseminated."
Beneath this statement is the belief that ownership and innovation are at odds. One of the reasons open-source software is so competitive with products backed by tens of millions of dollars of R&D budgets is that open-source allows everyone on the planet to brainstorm a better way to do things. This is not possible where an 'owner' is attempting to control development.
Thinking about the progress of science and the relative poverty of scientists (compared to Bill Gates that is) also shows that innovation is about more than money, something that doesn't need to be explained to the open-source coders. Maybe somebody should explain that to Mundie.
If you are starting an ISP, make sure it's for love not money. The ISP business is a pretty bad economic model (at least as it's configured in the US, I do not know how they charge or what things cost in Australia.) Unless you are big enough to have ancillary revenue streams (ie. co-marketing deals, selling your users' privacy to direct marketers, etc.) it is tough to generate cash.
The costs can be broken down in a few categories:
- equipment (modems, authentication and proxy server, ups, etc.)
- telecomm (telephone lines in, T1 out)
- upstream ISP costs (the T1 has to go somewhere)
- marketing (you're pressing millions of CDs right now, aren't you?)
- labor.
For a large ISP, the non-marketing costs are typically about $10/month per user and the amortized marketing costs are about $11-$15/month per user. Revenue is usually about $20/month per user.
The largest non-marketing cost (on a monthly basis) is the telephone lines in. In the US a line in is about $20/month (depends on locale of course). One of the advantages of scale is that you can more accurately predict your likely usage. Assume, if you are not big, that your peak usage is 50%, so you need one line (and modem) for every two subscribers. This will probably still get you less than raves from your customers because the probability of not getting a dial tone is high (big ISPs shoot for a p95 or higher.)
Marketing costs have been high in the industry because most ISP subscribers do not stay long at any one provider. So, after spending $100 or so to sign one up, the subscriber stays 7-12 months on average (plus, add in a free month of service to the "marketing" cost.)
Hopefully knowing this you can avoid some of these problems. Good luck.
I used to work for one of the largest consumer ISPs in the US. Our lawyers loved to list potential legal problems with pretty much anything we wanted to do or not do. But, we knew that any infringement on what our users had come to expect from the service, no matter how small, would cause a great hue and cry and numerous defections. Given our always precarious financial situation, we cared more about losing a paying customer today than a lawsuit tomorrow.
On a side note, running an ISP has to be the worst job in the world. Even when we did things like change pricing plans from $25/unlimited to $20/unlimited we would get protests. It's hard to teach PR to a bunch of telecomm guys, I guess.
Exactly. Ever notice that when you add up all the percentages of IBM R&D spending the total is about 437%?
Kind of like how IBM's revenue was (what was the exact number?) like 25% e-business related just a year ago... so, is it still? or was that just hype? Or like Gerstner's comment on how IBM's Wal-Mart.com site was so great that it was going to put all the other e-retailers out of business (no, I don't think that's why they're going out of business.)
I agree with you that geeks are often gits, but you can't put the onus for making this work entirely on the VCs. Remember: Greenspun may have lost his entire company, while the VCs lost only one company out of a portfolio of hundreds. Who was hurt worse in the culture clash?
Geeks and VCs working together can sometimes create things that neither could create by themselves. They each need to figure out how to work with the other.
Good venture capitalists are predictable. That's why this story may sound familiar: arrogant genius takes on partners, agrees to terms he thinks are innocuous because they only kick in when really bad things are happening, finds he is reluctant to share control, struggle ensues, he gets booted.
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.)
This is a good summary. Note that the shareholder's agreement is as vanilla as they come - worth looking at if you are ever going to raise VC because it's what you will be asked to sign.
If you plan on raising money from VCs, you should be very aware of what you are doing: you are taking on partners. Not bankers, not investors, not people who are going to sit in their offices and let you run the company however you please, but partners. They have the right to have a say in the business. If you do not want this, do not take their money. Or negotiate your terms up-front. If you want to remain as CEO, put that in the shareholder's agreement, or get an employment contract. If the VCs won't agree to it, get different VCs. Once something is done, it's too late to fix it; creating a lawsuit like this will almost certainly drain the life out of any small company. Taking someone's money is serious stuff. Get a lawyer.
VCs are generally motivated by two things after they make an investment: making the best possible return, and keeping an excellent reputation. VC is a repeated game: maximizing the return on any given round but ruining your chances in future rounds is a bad strategy. The reason reputation is important is that the best potential investees usually have several alternative sources of funds. As a VC, unless your reputation is sterling, you won't be invited to invest. Being relegated to the lower-tier deals makes investing much riskier.
Greylock and General Atlantic are not vulture investors. They are two of the three most respected venture capital firms on the east coast (I would say Patricof is the third) and both are, IMHO, in the top ten in the country. They have also been around for as long as pretty much anyone and are staffed with real professionals (that is to say, they're not Benchmark - a hype-driven latecomer.)
I can't imagine that these two firms would risk annoying their other current and future portfolio companies with a baseless lawsuit.
[full disclosure: I used to be a hardware developer, but now I'm a venture investor, although not with any of the firms mentioned in this post.]
Actually, I was thinking about open-source revealing any potential backdoors, and I think it ain't necessarily so. Remember that the NSA employs a high percentage of the math PhDs in this country. Some of their odd design choices for the DES were not explained and raised some speculation that they might have an obscure way to crack it that no one else had discovered (I believe it was Schneier in Applied Cryptography that raised this issue to my attention).
Although they have a reason to want the net to be unhackable, they also have a reason to be the exception. Given the brainpower they have, they could conceivably know something we don't. Beware of algorithms you don't understand.
One of the things that makes our system possible is trust. If every transaction made had to be documented and reviewed by lawyers, capitalism would be impossible. Sometimes an employer is going to ask you to trust him/her and think you unreasonable if you don't.
Knowing the trustworthiness of the people you are dealing with is key. You should trust them and price yourself based on trustworthiness. Ask people who have done business with them before! Ask the boards! For expensive decisions, you need something in writing. In general, if the value of what you are trying to protect multiplied by the percentage expectation of getting screwed is less than the considerable cost of getting the legal-work done plus the intangible cost of the implicit "I don't trust you that much", then don't bother. Some of these work out, some don't.
Also note that almost all Fortune 500 executives demand written employment contracts from their firms. Even though these firms are reasonably trustworthy (due to reputation concerns), the amount at stake is so high that the executives need the protection. This same basic calculation applies to everyone.
Some agreements are so commonly documented that the failure to get a written agreement is cause for concern: consulting gigs and stock options spring to mind.
In response to the specific article, I would recommend that anyone taking on a partner in a business get a lawyer. A partner includes any other owner or creditor in a small business. There are way too many obscure ways to get screwed to not have a lawyer. A single innocuous-sounding word change in a vanilla document can effectively transfer all ownership in the company's assets from you to them (ie. the deletion of "to my knowledge"). Lawyers know these tricks and watch out for them.
New technologies almost always allow new businesses. This is because established companies find it hard to undermine their existing business by providing a lower-cost, lower-quality product. And then the lower-quality product becomes high-quality quickly and the old business is hung out to dry (Christensen's argument in The Innovator's Dilemma.) This is yet to be proven for the Internet industry in all but a couple of instances, but I see no reason to doubt that it is so.
New technologies sometimes allow new business models. For instance, the wire service model of news dissemination wasn't possible before the telegraph, and transformed the media industry of the time. Again, yet to be proven for the Internet, but there are several examples that pop to mind that are promising.
I think it's too soon to be writing off Internet businesses. Doing so puts you at the same risk as those who trumpeted the 'new economy': being short-sighted. Given the past history of new technologies, I am not going to stop betting that some innovation of the Internet era will be considered revolutionary 50 years from now. The question is, which one?
Sidenote: being a libertarian, you should distinguish between a monopoly won through aggressive business practices (Microsoft) and one granted by the government (British East India Company, at least initially.)
I think there were two sorts of Internet businesses that failed: ones that were bad ideas, and ones that were badly run. Many.com companies could have been successful if they weren't trying to emulate Amazon and build an international brand in two years. My first prediction is that a new round of startups will return to many of the failed Internet business ideas and build profitable, low-overhead companies slowly. Much like almost all brick-and-mortar businesses are built. That will start in 2002, when people start realizing that, contrary to what the popular media says, computers and the Internet are not going away.
Another interesting tidbit, although second-hand: I heard a prominent venture capital lawyer speak a couple of weeks ago, and he said that most vc firm contracts specify that if their funds are not spent within four years, they must be retruned to the investors. I can't imagine that happening, so all those $1 billion+ funds raised in late 1999 and early 2000 will have to be spent in the next three years, and it takes a little time to spend $1 billion. So my next prediction is for the return of venture capital in 2002, no matter what the economic mood is.
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I agree you shouldn't have to exclusively use your own product. Of course, we all occasionally used AOL to garner competitive intelligence. Our conclusion was that noone would willingly use them and that they would go out of business (this was 1995). I guess we had the competitive part down, just not the intelligence part. :-/
Seriously, I worked at an ISP. We made all the employees use the service because we wanted them all to know exactly what our customers were seeing. If they hated it, then our customers probably did also, so they were motivated to fix it.
Seems like a good deal for everyone except the VCs.
The flip side is the old advertising expression that good advertising kills bad products more quickly (recent examples are Pets.com and TacoBell - both with amazing brand building campaigns but horrible product IMHO.)
Of course, I didn't think there was any way the MPAA could win against 2600 either. I just wrote emails to all of my congresspeople about the DMCA. This seems like one of those laws with plenty of unintended consequences.
A Zen machine.
Maybe Gracenote decided the best way to stop a free software initiative was to sue its 'customers'. After all, what would sueing freedb accomplish? Freedb would go away and somebody else would step in, use the GPLd source and data and recreate it on a server in (Chooseone (Finland Norway Denmark Holland)). I am not going to say that open source interprets lawsuits as damage, etc. because that would be trite, but this is an interesting development alongside MS's verbal attacks. If this lawsuit succeeds on these grounds, there will definitely be a chill on further use of free software in for-profit corporations.
Maybe we can outline a generic theory of the history of innovation (we'll call it the Milo-Coach theory (g).) Let's take machines as the simplest history to outline.
1) Tools are invented;
2) Tools evolve over thousands of years;
3) Simple machines are invented (using a lazy definition of machines as compound tools );
4) Really complicated machines are designed and built.
I know this is simplistic, but the thing that jumps out at me is that all of these steps involved innovation, but nos. 1 and 3 were not resource intensive, they were thought-intensive while 2 and 4 were probably both. Let me know if you think I'm stretching it (I think we're the only people still reading this thread) on 2. I am assuming it was resource intensive in an opportunity cost sort of way (ie. testing out the new spear might lose you a kill.)
So, can we postulate that innovation is an alternation of revolution and evolution, where evolution is expensive and revolution is cheap? Then, my theory is: revolutions are caused by the availability of resource-cheap evolution, resource-cheap evolution is time-cheap evolution, the end result of revolution is the same as the end-result of much expensive and time-consuming evolution.
OK, it's a bit of a stretch and I can think of a few instances where it does not apply right off the bat, but it *is* only a theory. The application here is that what the article is predicting is the advent of cheaper evolution: the availability of the genome, the availability of much cheaper computing power, and the availability of much cheaper biological experimentation equipment. The theory predicts that these changes will result in revolutionary results in the field.
It is amazing, though, how technically competitive it is considering the amount of money Microsoft spends on their product. I suppose, as a relative newcomer to Free Software, I am still amazed at the quality of the software that is out there. Look at the software we have been given and figure out how much it would cost to buy the equivalent in the Windows world. Operating system, editors, compilers... these aren't trivial pieces of software.
There are two conclusions I could draw:
1) The state of the software world has been so stagnant for so long that these pieces of software are worth nothing and so deserve to be given away for free; or
2) Return on investment is not the only driver of innovation.
Obviously I believe the latter. Some innovation does require a great deal of money, some does not. Einstein and Newton, Picasso and Van Gogh did not require huge amounts of money; today's particle physics and architecture does. I am not sure how to characterize these two types of innovation: is there a fundamental distinction of type between expensive innovation and cheap innovation?
In any case, unless you believe option 1 above, I think you have to agree that a huge amount of innovation has occured with very little monetary investment. Going to SourceForge is the proof.
The TA looks on bemusedly the whole time. When the student arrives up front, the TA says "I'm not accepting your exam, we finished fifteen minutes ago."
"Do you know who I am?" says the student.
"No." says the TA.
"Do you know who I am?" says the student, "Do you know who I am?"
"No." says the TA.
"Good" says the student and sticks his paper in the middle of the stack of papers and walks out of the room.
Cheers,
Note that Earthlink had an operating loss of $395 million on revenue of $987 million in 2000. Reported revenue per narrowband (ie. telephone access) customer was a little more than $16/month - probably due to customer churn and the free month of service. Operating expenses per narrowband customer were (educated guess) about $22/month.
Also, the $12/month for a telephone line - is that a residential line? Residential lines are typically subsidized by business lines. If it's a business line you're talking about, then either you're in a cheap jurisdiction or prices have fallen quite a bit in the last few years. Either is possible, but Earthlink's financials seem to support my crack-addled comments.
This article talks about innovation resulting from the spread of info about the genetic 'kernel': the more people who have access to the raw data, the more innovation will result.
"When molecular biologists figure out the kernel of biology, innovation by humans will consist of tweaking the parts to provide new services. Because of the sheer amount of information, it is unlikely that a single corporate entity could maintain a monopoly on the kernel. Eventually, as design tasks increase in number and sophistication, corporations will have to share techniques and this information will inevitably spread widely, reaching all levels of technical ability--the currency of the day will be innovation and design. As with every other technology developed by humans, biological technology will be broadly disseminated."
Beneath this statement is the belief that ownership and innovation are at odds. One of the reasons open-source software is so competitive with products backed by tens of millions of dollars of R&D budgets is that open-source allows everyone on the planet to brainstorm a better way to do things. This is not possible where an 'owner' is attempting to control development.
Thinking about the progress of science and the relative poverty of scientists (compared to Bill Gates that is) also shows that innovation is about more than money, something that doesn't need to be explained to the open-source coders. Maybe somebody should explain that to Mundie.
The costs can be broken down in a few categories: - equipment (modems, authentication and proxy server, ups, etc.)
- telecomm (telephone lines in, T1 out)
- upstream ISP costs (the T1 has to go somewhere)
- marketing (you're pressing millions of CDs right now, aren't you?)
- labor.
For a large ISP, the non-marketing costs are typically about $10/month per user and the amortized marketing costs are about $11-$15/month per user. Revenue is usually about $20/month per user.
The largest non-marketing cost (on a monthly basis) is the telephone lines in. In the US a line in is about $20/month (depends on locale of course). One of the advantages of scale is that you can more accurately predict your likely usage. Assume, if you are not big, that your peak usage is 50%, so you need one line (and modem) for every two subscribers. This will probably still get you less than raves from your customers because the probability of not getting a dial tone is high (big ISPs shoot for a p95 or higher.)
Marketing costs have been high in the industry because most ISP subscribers do not stay long at any one provider. So, after spending $100 or so to sign one up, the subscriber stays 7-12 months on average (plus, add in a free month of service to the "marketing" cost.)
Hopefully knowing this you can avoid some of these problems. Good luck.
On a side note, running an ISP has to be the worst job in the world. Even when we did things like change pricing plans from $25/unlimited to $20/unlimited we would get protests. It's hard to teach PR to a bunch of telecomm guys, I guess.
Kind of like how IBM's revenue was (what was the exact number?) like 25% e-business related just a year ago... so, is it still? or was that just hype? Or like Gerstner's comment on how IBM's Wal-Mart.com site was so great that it was going to put all the other e-retailers out of business (no, I don't think that's why they're going out of business.)
Who does their PR for them? Zippy?
Geeks and VCs working together can sometimes create things that neither could create by themselves. They each need to figure out how to work with the other.
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.)
So you're saying that since you're one of the three people in America that doesn't drink Coke or Pepsi that advertising doesn't work?
If you plan on raising money from VCs, you should be very aware of what you are doing: you are taking on partners. Not bankers, not investors, not people who are going to sit in their offices and let you run the company however you please, but partners. They have the right to have a say in the business. If you do not want this, do not take their money. Or negotiate your terms up-front. If you want to remain as CEO, put that in the shareholder's agreement, or get an employment contract. If the VCs won't agree to it, get different VCs. Once something is done, it's too late to fix it; creating a lawsuit like this will almost certainly drain the life out of any small company. Taking someone's money is serious stuff. Get a lawyer.
Greylock and General Atlantic are not vulture investors. They are two of the three most respected venture capital firms on the east coast (I would say Patricof is the third) and both are, IMHO, in the top ten in the country. They have also been around for as long as pretty much anyone and are staffed with real professionals (that is to say, they're not Benchmark - a hype-driven latecomer.)
I can't imagine that these two firms would risk annoying their other current and future portfolio companies with a baseless lawsuit.
[full disclosure: I used to be a hardware developer, but now I'm a venture investor, although not with any of the firms mentioned in this post.]
Although they have a reason to want the net to be unhackable, they also have a reason to be the exception. Given the brainpower they have, they could conceivably know something we don't. Beware of algorithms you don't understand.
Knowing the trustworthiness of the people you are dealing with is key. You should trust them and price yourself based on trustworthiness. Ask people who have done business with them before! Ask the boards! For expensive decisions, you need something in writing. In general, if the value of what you are trying to protect multiplied by the percentage expectation of getting screwed is less than the considerable cost of getting the legal-work done plus the intangible cost of the implicit "I don't trust you that much", then don't bother. Some of these work out, some don't.
Also note that almost all Fortune 500 executives demand written employment contracts from their firms. Even though these firms are reasonably trustworthy (due to reputation concerns), the amount at stake is so high that the executives need the protection. This same basic calculation applies to everyone.
Some agreements are so commonly documented that the failure to get a written agreement is cause for concern: consulting gigs and stock options spring to mind.
In response to the specific article, I would recommend that anyone taking on a partner in a business get a lawyer. A partner includes any other owner or creditor in a small business. There are way too many obscure ways to get screwed to not have a lawyer. A single innocuous-sounding word change in a vanilla document can effectively transfer all ownership in the company's assets from you to them (ie. the deletion of "to my knowledge"). Lawyers know these tricks and watch out for them.
New technologies sometimes allow new business models. For instance, the wire service model of news dissemination wasn't possible before the telegraph, and transformed the media industry of the time. Again, yet to be proven for the Internet, but there are several examples that pop to mind that are promising.
I think it's too soon to be writing off Internet businesses. Doing so puts you at the same risk as those who trumpeted the 'new economy': being short-sighted. Given the past history of new technologies, I am not going to stop betting that some innovation of the Internet era will be considered revolutionary 50 years from now. The question is, which one?
Sidenote: being a libertarian, you should distinguish between a monopoly won through aggressive business practices (Microsoft) and one granted by the government (British East India Company, at least initially.)
Another interesting tidbit, although second-hand: I heard a prominent venture capital lawyer speak a couple of weeks ago, and he said that most vc firm contracts specify that if their funds are not spent within four years, they must be retruned to the investors. I can't imagine that happening, so all those $1 billion+ funds raised in late 1999 and early 2000 will have to be spent in the next three years, and it takes a little time to spend $1 billion. So my next prediction is for the return of venture capital in 2002, no matter what the economic mood is.
Planes don't "crash" anymore. Now they "blue screen."