Raising money for StackOverflow
Sunday, February 14, 2010
A few people heard me on This Week in Startups (starting at 15:45) asking Jason if we should take money from the first VC who fell into our laps, or spend time doing the Sand Hill Road rounds, meeting more VCs, and doing a road show for the other firms that might be interested in investing.
Jason (and his guest James Segil) both agree that we should take more time picking the right partner. We’re going to be in bed with these guys for years, they say, and we have to approach this like picking a spouse.
Anyway, people emailed me in shock and surprise that we would even consider VC, considering the things I’ve written.
Why are we seeking venture capital for StackOverflow?
Almost ten years ago, I wrote about two kinds of companies, the Ben and Jerry’s type of company, which grows carefully and organically, and the Amazon type, which uses huge amounts of investment capital to get big quickly.
At the time, I had no doubt that I wanted Fog Creek to be a Ben and Jerry’s type of company, and that model has served us well. By staying profitable and growing carefully, we’ve managed to survive two big downturns and we’ve grown into a stable, 34-person company that’s a great place to work and is likely to remain stable, and a great place to work, for a long time.
StackOverflow, though, is a bit of a different story.
There are a few indicators for the type of company that I believe can benefit from, and should take, VC.
- There’s a land grab going on. The business is in a new field with no competition, but the field has proven itself, and is obviously going to get very crowded very soon, so the faster you can grab territory, the better.
- There is a provable concept that’s repeatable. I always point to the example of the Starbucks IPO, which was brilliant because it was so simple. Every new Starbucks store that opened in Seattle became profitable in a matter of months. They tried a couple of stores in Chicago and Washington just to make sure it wasn’t a Seattle thing, and those worked even better. Thus, the formula of opening as many stores as possible was as close to a sure-thing as possible, so raising money was a no-brainer.
- The business itself could benefit from the publicity of getting an investment from someone who is thought of as being a savvy investor.
- The investor will add substantial value to the business in advice, connections, and introductions.
- The business can potentially have a big exit or become a large, publically traded company.
- The founders are not in it for their own personal aggrandizement and are happy to give up some control to make the business more successful.
There are counter-indicators, of course: signs that you shouldn’t consider VC. Here are just a few off the top of my head:
- If the founders are risk-averse and are willing to trade a much smaller payout for lower risk.
- If the founders are technical without substantial business experience and wish to maintain absolute control forever.
- If the investor is mostly “dumb money,” i.e., someone who doesn’t know about the field. The proverbial dentist, who is happy to give you a half million bucks, but doesn’t know the first thing about CPMs and CPCs and CTOs, so you might as well not bother.
- If you’re going into an established field with a lot of competition, there’s no benefit to speed; you’re better off slowly building a niche business and growing from there, quietly taking one customer at a time away from the competitors.
- If the product is immature and unproven, in which case, expensive marketing efforts will be wasted proving to the world how bad your product is.
- If the founders don’t have enough of the right kinds of industry connections, or the idea is not compelling enough, so that raising VC would take months or years
- If there is any other way to raise the kind of money you need, for example, by selling actual products to customers.
When I put all these things together the conclusion is that StackOverflow is one of those rare companies for which VC can really work. Jeff and I started out with a goal for StackOverflow of changing the way programmers and system administrators get answers to their questions on the Internet, which was deeply broken. In 18 months we’ve accomplish that: we’ve got 6 million unique visitors every month. Now we’re biting off the bigger goal of changing the way everyone gets answers to their questions on the Internet, and that’s something we can’t do alone.
So, off I go, on a StackOverflow road show. I’ll be in Silicon Valley Feb 24-Mar 3; drop me a line if you want to get together.
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