• What’s the second worst thing that can happen to a VC?
  They invest in something that fails.
• What’s the worst thing that can happen to a VC?
  They fail to invest in something that succeeds.

In the world of Web applications, every day the VC’s biggest fear gets more and more real.

It is a real eye opener for me to see how fast revenues at Joyent are growing. We’re private, so I won’t give you exact numbers. But it is exponential. Think hockey stick. And this is real revenue in the door, not vague proxies such as number of users. Revenue is growing because prices are good and people are getting real value from using our Accelerators to run their web applications.

How does this relate to the VC’s biggest fear?

There are two reasons.

• First, Joyent is itself a bootstrapped company. Imagine that. Cash flow positive, growing like hell and not a dime of VC money.

• Second, Joyent’s Cloud Computing offering means that more and more web companies will be able to bootstrap themselves into a successful revenue stream. If more companies can bootstrap, why do they need VCs?

One of my favorite web sites is Alarm:clock . Everyday they have stories about companies raising $600+K here and €15M there. Alarm:clock offers a great insight into real pulse of the technology start-ups. It’s also global in focus.

What floors me about the list of fundings, however, is the sheer number of companies that didn’t need to be funded. At least didn’t necessarily need funding yet. Right now, I do not have data to back up this theory. However, if I had data, it would look something like this:

There is some real interesting data that starts to point towards this. Check out this figure from a report by Cindy Moore from SVB Analytics.

If you eye-ball this, it looks likely that companies that were funded before Jan-95 were more likely to IPO. As I understand it, before the Netscape IPO, most VCs wanted to see that companies they were investing had a real product, real revenues and real growth opportunities. Things got bent out of shape when, post 1995, VCs started to simply invest in business plans and “ideas”.

Cindy Moore goes on to say “In Q2 2007, almost half of mergers and acquisitions with disclosed values produced total consideration for the sellers less than the total venture investment”.

Taken together, this implies that bubble and post bubble companies are less likely to return positive investments for VCs on average that pre-bubble companies.

My theory, as high-lighted by the fake data in the table above, is that companies are better off trying to bootstrap for as long as possible before they ever talk with VCs. In fact, it would seem reasonable to me to suggest that the only time you should talk to VCs is when they hunt you down and beg to invest.

I recommend reading Cindy Moore’s report. It’s called SVB Analytics Research Series Volume 2

BTW, I called Cindy Moore yesterday and asked her if she would consider producing a report on how long companies should boot strap before they talk with VCs. She said she would think about it. Please encourage her. Getting actual numbers for the Waiting for Success table listed above would be useful for start-ups and VCs alike.

This isn’t a real fear for VCs - It’s Good News

OK. I admit that I was doing a bit of baiting with that headline. The truth is that VCs are better off when more start-ups can boot strap themselves to a highly profitable business. Then VC capital is only used for the one thing that it is guaranteed to be good at: scale. VC capital can buy you scale, it can’t buy you a market.

Vote for Joyent on The Crunchies

Considering that Joyent is both a successful bootstrapped company, and that it has helped other companies successfully bootstrap, I’d like to request your consideration of Joyent when nominating The Best Bootstrapped Start-up on the Crunchies, 2007 .

I have been tracking the fuss over Facebook’s beacon ad network. The Enterprise Irregulars had a big debate about it.

“The new face of Evil ” That is just silly! Facebook tracks your activities. So does Google, Yahoo, MySpace, Microsoft. Actually any company with an ad network.

Facebook is a business. It plans to generate huge revenue from advertising. Thus, Facebook is an ad network. Facebook’s hook to generate traffic is social networking and user generated content. Google is an ad network. Google’s hook to generate traffic is search.

Facebook has some challenges compared with Google. When users go to Google, they go with intent to leave Google as soon as they have found the link they are looking for. Thus, clicking on a properly targeted ad is as useful to a Google searcher as clicking on the top rated link. In both cases, the search is not 100% certain that the link will give them what they are looking for. This makes it reasonable to consider the ad on par with the search result.

Facebook users, on the other hand, do not go to Facebook to leave. They go there to stay and explore the content. They are thus, less likely to click on ads within Facebook. This only means that the way that Facebook will generate ad revenue will not be identical to Google. This does not mean that there are minimal ad revenue opportunities.

Facebook’s Ad Revenue Methods

• On site banners - have lower click through rates than search results. But are great for general targeted brand awareness.
• Brand engagement ads that leverage the Facebook application infrastructure. Great first cut example is Kinzin’s Are You Normal.
• Beacon - let’s you share your purchases off Facebook with your friends on Facebook. If 8 of your friends all went to see the same movie this weekend, wouldn’t you think about seeing it too? Or at least asking them if you should see it.
• More soon. If you want an idea… go check out Lookery .

The negative reaction to Beacon just shows the power and value of Facebook’s social network. Some people feel that if Facebook tracks their activities to better target ads, that’s one thing, but if Facebook tracks their activities off-site and then shares that with their friends, that’s “scary”. It’s only scary if you do things off Facebook that you want to keep hidden from people on Facebook.

Some bloggers have also complained that Facebook is a walled garden because it does not let users easily move all their data out of Facebook and because the site tends to encourage users to stay on Facebook, rather than go elsewhere.

The ironic this is that the walled garden insulates most users from all the blog based flap. My wife is a huge facebook fan because it helps her to stay in touch with a whole set of friends she normally doesn’t see often. My wife doesn’t like the idea of Beacon, but I had to explain it to her first. She hadn’t heard of it until I told her.

Like most users, she will continue to use and enjoy the site, and ignore the flap over Beacon. While the bloggers gnash their teeth, over on Yahoo!, there is an article entitled “For college students, if it’s Facebook, it’s love ” about two crazy college kids who are madly in love and have announced to all their friends and family on Facebook. That kind of user loyalty isn’t damaged by a one-week PR flap.

Facebook gets to experiment with new ideas, piss off some folks, change course and continue on. What more can you ask for. It only took them one week to learn. Most large companies would be delighted to be able to engage their customers so quickly and be able to react and improve both their product and their revenue potential within just one week.

Enterprise Use

As for “no enterprise use”, anyone who says that is out to lunch.

Facebook is a goldmine for marketing departments and HR departments.

Companies can and will figure out how to make huge money leveraging the demographic data in Facebook to build brand loyalty, target advertising on non-Facebook sites and hire better people. These are core components of any business. And that means Facebook will have an impact on the enterprise.