The other day I had lunch with a colleague and he brought up Matthew Woodward’s epic rant against WPEngine and he also mentioned Jason Cohen’s rebuttal post “Growth is Hard” and that set us off on a long discussion around today’s tech biz climate (which is almost synonymous with the “start-up” culture, because these days everybody expects to sell their companies before they ever “grow up”)
While this post isn’t intended to single out WPengine as typical of what I’m talking about, Cohen’s rebuttal, while earnest, did seem to me to miss a point.
That point is if your growth rate is a big factor impacting your customer experience, then possibly (strictly heretically speaking), you’re growing too fast. (Jim Collins wrote a dynamite series of books, Built to Last, Good To Great, and How the Mighty Fall and Great By Choice in which he found an inverse correlation between overclocked growth-for-the-sake-of-growth rates and what he termed “10X companies” – companies that grew organically and then outperformed their industry index by 10X over a significant window of time).
It’s not that growth is bad per se. I’ve always identified more with value investing than “serial entrepreneurship” and value investors have a phrase called “GARP”, which means “Growth at a Reasonable Price”. To me the words “reasonable price” mean more than just the money.
When you embark on a high-growth track it usually comes accompanied with serial funding rounds and it irrevocably changes the dynamic of your business. The question you need to ask is if the control you’re giving up over your company, is switching tracks to a new agenda, is switching gears from long-term to short-term and taking the focus off the customer and putting it on the next liquidity event a reasonable price to pay in exchange for the funding round and associated additional market share now? Everybody has to answer that for themselves.
But in general terms, it seems to me like we haven’t come too far or learned very much since the big bust of the .COM bubble back in 2000. I remember watching “StartUp.com” back then and remarking to my girlfriend (now wife) “I think these guys have confused their funding round with actual profits”. They were so gleeful and self-congratulatory over how big their VC round was, faces lighting up when they corrected a commentator “We didn’t raise 18 million, it was actually 20 million!” Ooh Yeah Baby. They hadn’t earned a dime yet and when they actually tried to light up their platform it ignomiously exploded.
We have less of an excuse today for being short-sighted about how we approach business, especially in the technology sector. Back in 1999 there were minimal ways to actually “collect money” online. Payment processing technology was in pre-alpha stage (the only companies successfully charging online were mainly cyberporn), and so it seemed the only way to actually “make money” doing the whole “internet thing” was doing the serial funding round game, raising multiple rounds at successively higher valuations until passing the entire thing off in an IPO or monster acquisition (leaving that final entity holding a big bag chock full of “goodwill” .. most of which would be written down in the wake of the ensuing tech collapse).
Today we have online payments all over the place, NFC, stripe, paypal, bitcoin! the list goes on. If ever there were ample opportunities to create viable, coherent, sustainable business models online and have the means available to execute them, that time is now. You would think we would find all kinds of profitable, sane business models all over the place. But no, those are the exception, not the norm (at least according to the tech media. Maybe the sane, profitable niche players are the majority but we never hear about that because that’s boring when you compare it a Silicon Valley start-up going from zero to 3 billion valuation in under a month). What is in fashion today (again? still?) are glamor club 2.0 businesses and irrational exuberance that is even more palpable now than in February, 2000.
These days if you’re over 8 months old and you aren’t in somebody’s acquisition pipeline, you’re old news. If you haven’t done a couple of up-round fundings in 18 months, you’re behind the curve. If you don’t have the right rock stars on your Board you’re a nobody and if you don’t have any revenues, let alone profits…well, nobody cares about that.
As Accidental Empires author (and easyDNS customer 😉 Robert X Cringely lamented in The Exit Trap , all anybody cares about these days is “The Exit” – what’s your exit plan? You’re supposed to know how you’re going to get out of a business before you’re even in it.
“Were it not for demanding investors the exit question would be asked less often because it isn’t even an issue with many company founders who are already doing what they like and presumably making a good living at it.
What’s Larry Ellison‘s exit strategy?
Larry doesn’t have one.
Neither did Steve Jobs, Gordon Moore, Bob Noyce, Bill Hewlett, Dave Packard, or a thousand other company founders whose names don’t happen to be household words.
What’s Michael Dell’s exit strategy? Dell, who is trying to take his namesake company private — to de-exit — wants to climb back inside his corporate womb.
There was a time not long ago when exits happened primarily to appease early investors. The company would go public, money would change hands, but the same people who founded the company would still be running it. That’s how most of the name Silicon Valley firms came to be.
Marc Benioff of Salesforce.com has no exit strategy. Neither does Reed Hastings of NetFlix. You know Jeff Bezos at Amazon.com has no exit strategy.
But what about Jack Dorsey of Twitter or even Mark Zuckerberg of FaceBook? I wonder about those companies. They just don’t have a sense of permanence to me.”
Cringely’s observations seem even more salient today, and when you take this phenomenon across all the individual companies and funds operating along these growth-for-growth’s sake, get-me-out-of-here fast exit-cution strategies, it adds up to a macro level zeitgeist defines the current landscape. One which none other than BlackRock CEO Larry Fink recently chided as being overly obsessed with “short term thinking”:
“Blogs, polls, the story of the moment – that is what drives peoples’ thinking, he says. That means investment decisions and political moves are based on what’s happening now, and not long-term goals. The economy will bear the cost of this short-term obsession, and so will investors, Mr. Fink warns.”
What all this does is take the focus off of the customer and amalgamates it under an amorphous obsession with “market share” and “valuation”. What typically happens in a lot of cases is a company will go balls-to-the-wall to gobble up market share, even succeed at it, and they will lose money every step of the way. But if each successive funding round occurs at a higher value then all is going according to plan.
Again, this isn’t to poke a stick at WPEngine. If I had to name names there would be plenty but to pick one that is always on my radar it would obviously be Godaddy – the 800 lb Gorilla of the domain name space. When they filed their S1 back in 2006, it was surprising to many (but not me) to learn that they were losing money. I never watch the Superbowl, so I have never seen one of their fabled commercials, but these days I can’t drive anywhere in Toronto without seeing their billboards on the Gardiner Expressway or take a bus without seeing one in all the bus shelters. Yes, they are everywhere and seemingly hell bent on eating the entire domain space.
It’ll be interesting to see what the next S1 holds which will undoubtedly be out soon. After shelling out a couple billion and change to purchase the GorillaDaddy, those private equity firms are going to want their exit. ( interestingly enough, one of the PE firms that bought Godaddy uses us for their DNS. Just sayin’ ) [Breaking: It’s out now (June 9/14) – looks like they lost ~ 200M in 2013 and 280M in 2012, stay tuned and I’ll post more on this after I read the S1]
All of these companies grow at a phenomenal clip, that is for certain – and I will be the first to admit that easyDNS – hasn’t (nor has easyPress) – and perhaps therein lies my point. Easy has gone through periods of explosive growth punctuated by longer periods of stable trend (and yes, a couple periods of actual stagnation and decline, which sucked, but we got through it). The big upmoves have correlated with economic contractions – the aftermath of the .COM blowup was our greatest accelerated growth phase and then after the Global Financial Crisis we did quite well again, at the expense of the overpriced enterprise players. It’s a boring story during those interim plateau years (but stay tuned, because I think we’ve got another economic meltdown barrelling down the tracks at us again).
Defenders of the always-on hyper-growth business model will euphemistically use terms like “customer benefit” or “enhanced value” when they proudly trot out their press releases announcing their C,D, E and F rounds and make the case that the bigger and the faster the company grows, the better off it’s customers will be.
Experience tells us that the exact opposite is almost universally the case. While each successive funding round enriches the early stage investors, the founders and the rock star imports, the customer experience almost inevitably degrades. Each funding round dilutes the ethos of the original founders and the culture they imbue to the early stage employees. Then that final acquisition finally obliterates it. The exceptions are rare and too often there may not even be an original culture to dilute because too many companies are “built to sell” or “built for funding” from the word go.
I am also skeptical of the “enhanced shareholder value” aspect of the New Economy model because what this really resembles most is some hybrid mutation of a ponzi scheme crossed with a manic game of musical chairs: fueled by hot money and a culture of myopic hype. (And if you read the Jim Collins books I mentioned earlier, he provides a lot of empirical data to back this up).
Finally at the end of the chain the monster acquisition occurs and then reality sets in. How is this final 800 lb. gorilla going to recoup? That’s when things really start to deteriorate and then it’s not unheard of to just see these acquired units unceremoniously kevorked a year or two later (just look at the bodies buried in Yahoo’s garden, for one example)
I know easyDNS is not without it’s own problems, and maybe we could have solved some of them faster if we simply did a funding round and threw a brick of money at them. But once a company does a single VC funding round, the dynamic has irreversibly changed. It is (ironically) no longer about profits – (which are derived from the simple alchemy of delivering more value to your customers than they pay you for that value, and doing it without spending more money than you earn). It is now about market share, it’s about valuation, it’s about the next funding round and it’s about THE EXIT.
Now I didn’t always eschew this type of short term thinking. Credit goes to easyDNS co-founder John Schmidt for throwing cold water on every hair-brained investment and merger scheme that came through the door in those early years, because I wanted to do every single one of them. He always vetoed it, driving me crazy in the process. But I’m grateful for that today because had it been up to me I would have flown easy into the side of a mountain ages ago and we’d have been long gone by now.
Overall VC’s are typically not interested in owning pieces of sustainable businesses over a long period of time. They want their exit, and they want it within 18 months to 5 years, max.
I learned this from direct experience, years ago when I was looking for funding to buy out John and Colin (the other easy co-founders), I ended up going through this process. VC’s were very interested in easyDNS, but they were ambivalent about the long term prospects. Before we had even agreed on our own initial deal, they were already looking out toward a subsequent funding round within 6 months. I found this insane, the company was already profitable and growing. It didn’t need a funding round, I just wanted to buy out my partners.
But the VC’s were adamant on an “exit plan”, what was it going to be? When I explained my idea: that they would be collecting quarterly dividend cheques….forever. Their eyes glazed over. It didn’t interest them. Finally one of them took me aside and explained, “Nobody here cares about dividends or long term profitability, we aren’t in this for the long haul. These funds are setup with 3 to 5 year windows. After that, we return the capital to our investors because we no longer get paid for managing the investments.” Which meant that they had to have “exited” all of the fund’s investments before the fund was “wound up. They would of course, have already started another fund in the interim.
This fast exit uber alles mentality carries right through to the lumpenvestor shareholders who eventually buy the stocks of these companies that make it all the way to high-flying ipos. They aren’t in it for the long haul much less the dividend yield and they feel cheated if they don’t get a fast double ( like inside 6 months ). The typical holding period for a human investor these days has contracted to under 6 months, and now since more trading is done by high frequency robots and algos, it’s a few milliseconds.
No Exit Investing / No Exit Businesses
Over lunch my friend wondered out loud if I’ll ever sell easyDNS? To this I replied that exits make no sense to me. Especially in this climate. I’ve received numerous overtures to sell easyDNS over the years, including a few standing offers but I don’t see the point in taking any deal that’s come along so far.
Never mind that “growth is hard”. Eating a super-sized thick crust pizza in a few bites (called Series A, Series B and Series C) would be.
What is harder is to build a successful company. By this I mean a company that is self-sustaining, maybe a few off years here and there but for the most part healthy and profitable.
It’s also hard to build a brand. So at the prospect of selling off a successful company and a brand for a pile of money, the big question I can never answer is Then What?
With interest rates at Zero for the foreseeable future, thanks to worldwide government interventionism and central bank incompetence, all asset classes are malignantly distorted beyond recognition. What the hell is one supposed to do with the proverbial briefcase full-o-cash? You’ll hand 25% to 40% of it over to the government, and what’s left then carries a near negative yield because that same government has a “targeted inflation” policy.
Start all over again? With your negative yielding cash and a non-compete barring you from the one business you know best and your customer base and brand gone? The only asset I can possibly think of that produces the kind return on equity that easyDNS has for me, is easyDNS itself, so why sell it?
The only other choice is (as Citigroup’s Chuck Prince once put it, quite presciently, mere moments before the global financial meltdown) “as long as the music is playing, you’ve got to get up and dance” and start rolling your money through a series of CoolKidCo pump-and-dumps?
That’s not for me, I’m happy to sit on the sidelines.
Don’t get me wrong, I’m not complaining about any of this. I’m a curmudgeon, not a suck. While I’m sure somewhere there are laws against predatory pricing, etc I’m the last guy to want some kind of “government policy” to rectify all this, because I’m a free market nutcase with a long term perspective. That means I believe that over time, all of this will sort itself out. In fact it already has, a couple of times over the history of easyDNS, which is why we’re still here and lot of the fast buck chasers from yesteryear aren’t.
We’re 16 years old this year and we’re still going to be here long after a lot of these CoolKidCo’s are gone. Considering I don’t actually “work” (unless you consider writing rants like this “working”), it’s not a bad life.
What we are doing here, given that we’re getting on in years, is moving toward an employee ownership model, and eventually we will make ownership available our members. It’s a model we’re working on that we are calling the “Transition Company” which is loosely based on the Transition Town movement.
As always, the emphasis will be on sustainable, profitable operations over time and a reasonable return on equity. We would always be more concerned with the dividend and the sustainability than the share price.
Why are we doing “this”? (And not doing “that”?)
Because times, they are a changing. The decisions we make as businesses add up and with other factors and the sum total becomes “where civilization is headed”. Right now, where we are is in a convergence of three colossal forces, at the climax of their supercycles, all intersecting, globally and at the same time, for the first time in history. Those three macro factors are the Economy (the impending collapse of global monetary system), Energy (Peak Oil) and the Environment (pollution/etc) – for more information see Chris Martenson’s Crash Course.
The goal of a Transition Company is to survive and thrive through the disruptions that will occur as this plays out (the simplest way to describe what’s ahead is Chris Martenson’s prediction that “The next 20 years are not going to be a simple extrapolation of the last 20 years”), and they primary keys to success are to favour long term thinking over short-term.
Watch this space for more on that. It’s still a few years out but the Transition Company model is something we can talk about sooner than later.