Aaron Huslage

For the longest time Venture Capital firms have said to their CEOs and partners: “Don’t worry about cash flow or profitability, just get it right.” This is absurd on the face of it from the perspective of an outsider who tends to ask the question “What kind of business do you have if you don’t make anything or make any money?” From the CEO’s perspective it seems like a gift horse which they definitely won’t look in the mouth. From the VC’s perspective it sounds like payday.

The view that the VCs put forth for so long was extremely loaded. On the one hand there was the feel good “We’ve got your back” sentiment that made CEOs and employees of their companies feel like they had the complete support of their investors. On the other hand it allowed VCs to increase their leverage over a very short amount of time. This is no doubt a sinister play on the VC’s part. But to illustrate this, I need to tell the story of what I see as a typical startup that these guys fund.

Say I start up Xcorp to make the next great web application. I have no cash of my own, but I have a super idea and a few folks who will come along on this adventure with me. The “team,” as it were, puts together some powerpoint slides and a “business plan” (sometimes these are one-and-the-same) and takes off for Silicon Valley to hock their wares. At this point our new company has no product, but definitely some slick presentation fu.

After countless meetings, hiring some Silicon Valley lawyers and signing term sheets the VC deposits some ungodly amount of cash in our bank account. And then the fun starts. The VC comes to our newly acquired hipster office space and tells us not to worry about making money, just make something that people want to use. Follow through with your vision. We’ll stay out of the way.

After a few months, Xcorp has a product that is launched to the world. Since we don’t throw lavish parties anymore (that is SO 2001) we just grab some beer and open the doors to whomever walks in to check things out. Everything is going great. We’re about halfway through the cash that the VC gave us and they are “thrilled” at the amazing progress we’ve made. On the first week 100,000 people sign up to use our product that is already starting to revolutionize things. We hack on.

A few months later the VC firm asks us to come to Silicon Valley to catch up and show everyone at the firm our progress. We buy tickets (expensive last-minute ones) and jet on out. We hang out at their posh Palo Alto offices for a couple of days. The VC folks give us warm fuzzies and watch us hack on the stuff for a while. Suggestions are made that we talk to this or that person to get more help and to make things move faster. A recruiter is hired back at home-base to work out deals with some folks. We have 250,000 users now and things are feeling really good. The only problem is that we need more servers to make sure the service stays solid.

8 or 9 months into this adventure we have 400,000 users, 20 servers, 10 employees and zero revenue. The cash will be gone in 4 months or so. Back to Silicon Valley to ask for more money. Another transfer of cash is made, new investors are welcomed to the fold and my own personal stake in the company has gone from an initial 75% to somewhere around 50%.

The new folks come out, sit down with us and ask us when we’re going to start working on revenue. We say we want to make $2m this year, down from initial projections because of external market conditions and slowing adoption. This makes them a bit unhappy, but they go with it because they trust us. After all they invested in the founding team, not just the company.

A year in and we have enough cash to last us for another two…at least on paper. We’re at 30 people, 500,000 users and have made about $20,000. At some point we realized that our usage statistics were wrong and that our user base…those who actually use the product…is somewhere along the lines of 50,000 people. Online advertisements are purchased and it’s time to see what that 5 person marketing team can do to earn their keep.

3 months later and our actual user base is up to 150,000 and we’ve made an additional $20,000. The VCs are frustrated. They send in the clowns to clean up things and get us back on track. Ultimatums are made and we are forced to lay off 15 folks, including one of the founders. Further tranches of money are canceled pending our getting our act together. We secure a bridge loan from one of our sympathetic investors so that we can stay in business.

These actions take their toll on my personal stake in the company. I’m now down to around 40% of the company. Additionally, I’ve bought enough Tums to fill up my house twice over and my family hasn’t seen me in weeks.

One month later and plane trips back to Silicon Valley become routine. Meetings with investors and potential purchasers of the company become de rigeur. We have layed off all but the most important folks…down to 5 people. The office has been closed and people are working from home. The user base growth has plateaued. Life is hard.

A deal is struck that brings us to the end of this adventure. We are purchased for an amazingly paltry sum by a third-tier search engine. This may pay off my back taxes and the back payments on my car. We work for this company for a year and then it’s off to do it all over again.

Unfortunately this is an all-too-common story in the tech world. I see it as completely broken, dehumanizing and plain wrong in a lot of ways. Venture Capitalists have gone off their rockers. They leave little room for allowing companies to truly innovate. They “guide” companies to do things that make no long-term business sense. They take more equity away from the founders every time something goes funny. There is no reason for this nonsense. They force good people to do bad things in the name of profits that have very low probabilities of appearing because of their expectations set in the beginning. They treat PEOPLE as objects to be “dealt with”.

Up until recently, VCs have been going about their business as normal: raising capital and dispersing it to a decreasingly successful or interesting portfolio of companies. Things have profoundly changed over the past months. They are still happy to give the axe to some folks. They are still happy to take more equity from the founders based on short term budgetary constraints.

Sequoia Capital recently gave a presentation named “RIP: Good Times” that tore down many of their own widely held beliefs. This is really very interesting in many ways. It exposed them for the cronies that they are. They are cynical bastards hell bent on making money without any regard for their companies or, more importantly, the folks that work for them.

On slide 47 entitled “OPS Review” there is a bullet point that says “Decrease headcount for next version” and later on “What payments can be deferred.” These points illustrate how disconnected these people are from the realities of life. In an economy where BANKS don’t trust each other, how can one be expected to entrust their money to a firm that so obviously wants to defraud their accounts and devalue their human resources. All of this in the false hope that somehow a rabbit will appear and make their portfolios profitable.

This was supposed to be a piece about how Sequoia “gets it” and finally has decided to turn to profitability in its portfolio companies. As I thought about it more I saw the cracks in the system for what they were. I see this presentation as illustrative of a larger problem in this global economy we have created. The example of the VCs further illustrates to me that our economy is a house of cards.

We have created a monster that we can’t control and the VCs are but a small part of this. If we can’t trust those that fund our most innovative technology companies, then who can we trust? Credit runs both ways. Further confirmation of the ideas that the VCs espouse in this presentation just tells me how crazy we have gotten in this world. A few questions to these VCs are in order as a result of this revelation:

• How much money does it take to make you feel valuable?
• What is the ceiling for greed?
• How much do you NEED to have and how many people’s lives do you have to destroy to get it?
• What are the moral boundaries that must be crossed to make you feel like whatever you are doing is OK?

Honestly I have no clue as to the answers to these largely rhetorical questions. They are probably asked any time there is some economic crisis. We must remember that these crises happen as corrective actions to a market that has lost its way. I don’t think this is some Marxian devolution of capitalism, but I’m sure that the VCs are going to hurt for their excesses.