If it worked well to self-fund giant companies using the income from small ones, we should see instances of it happening in the wild. There is nothing to prevent that happening now. And yet it doesn't seem to happen. Few if any of the big technology companies grew that way. It seems like if you're good what happens is that your initial lifestyle business just grows bigger. E.g. as has happened to 37signals. But 37signals is not Google or Amazon.
One reason why you wouldn't expect to see this so often in the wild is that by the time you get to be as successful as 37signals, the drive to make speculative bets on shoot-the-moon business plans is diminished. Presumably after your second supercar, you don't so much feel like gambling people's jobs on a Google-killer.
Successful businesspeople may not be risk-averse; they're happy to start electric car companies for the joy of it. Successful businesses, on the other hand, don't think like that.
Yes, I think this is exactly right. The pattern you'd expect to see wouldn't be a small business spawning a large one; it would be one of the principals of the small business cashing out and leaving to start something that eventually got larger.
Ah, but this reminds me. I know three people who have made $500M or more on their earlier businesss who have cashed out and gone on to found new startups. Only one of the three funded the startup entirely out of his own holdings; the other two have other investors involved. I imagine the latter two think that they get more value (advice, connections, etc.) from these other investors (who I think include VC firms) than they give up in equity.
FWIW, the business funded entirely by the one founder eventually failed (I worked there for several years). Arguably, this was a failure of marketing, as we had a small number of wildly enthusiastic customers that never became a large number. Also arguably, had experienced VC firms been in on the deal, they would have made sure that the marketing was done competently.
So I'm suggesting that if you want to start something that you hope will get large, you may be well advised to involve professional VC even if you don't need the money.
Don't forget that you don't have to cash out of a successful business to move on to other things. You can install managers to grow a business once you figured it out and become an owner rather than a doer.
If you're in love with your current business, why would you do that just to take a 1/100 shot at The Next Big Thing? You wouldn't. If you're in love with your current business, you stay. I don't know if most people who get to the "Threadless" level of success with their companies are in love with them, but I bet many of them are.
If you're in love with your current business, why would you do that just to take a 1/100 shot at The Next Big Thing?
Because you might have fallen in love with the idea of creating the next big thing? The thrill, the excitement, the challenge of taking a shot at the next big thing?
Yeah, but at some point it may very well be that you're no longer in love with your current business. It's just become a job. At that point, you can sell it and cash out, or you can hire somebody to run it for you - either way, you move to whatever your Next Thing is.
Ok. I get the strong sense† that Fried and DHH are in love with 37signals. Which may be why they haven't bailed to shoot the moon yet.
So when you say something resembling "you'd expect to see companies like 37signals trying to roll the snowball into something like Twitter but that rarely ever seems to happen", I'm inclined to point out how that misreads the dynamics of companies like 37signals.
† (won't bore you with details, but I have many of them)
I think Fried and DHH are already shooting for the moon in their own way. The kind of people who shoot for the moon are generally not just looking for money, they are looking to "change the world", they are looking for fame.
Fried and DHH make enough money from 37signals. They are shooting for the moon by contributing to open source and writing bestselling business books.
I'd guess those people who attracted investment in the new startups could do so because of the earlier (self-funded? "lifestyle"?) businesses.
Large businesses don't necessarily come from small businesses, but many people who build large businesses were once people who built smaller businesses.
I don't think it's true that people capable of big successes are commonly derailed by the fruits of small ones. Remember how Caesar was particularly wary of thin men? There is something to that. People like Larry and Sergey, Mark Zuckerberg, and the younger Bill Gates are not driven by the desire for luxuries, so no amount of wealth is enough to make them lose interest.
It's not fear that makes Jason Fried/DHH avoid trying to build a really big business quickly. It's a lack of ambition. There's nothing stopping them from taking $10 million from VCs at ridiculously generous terms to try to build a really big startup. Like most rational people they're content to have good jobs and enough money not to have to worry about it.
This is why successful serial entrepreneurs are so revered. It usually takes extraordinary ambition to succeed more than once.
Nobody who sees the new 37signals office will walk away thinking "these people lack for ambition". I don't want to bicker about this point you're trying to make; maybe you're right and there's a different breed of ambition at work in the shoot-the-moonies. But 37signals is not just a "good job and enough money".
Judging a company's ambition by the size or grandiosity of their office is exactly the kind of thing Fried/DHH rail against.
Tons of companies build big pimped out office and justify it to themselves as being necessary for their future plans. It's one of the signs that you have "arrived".
some people don't care about money or being comfortable and just want to change the world
that is the difference between entrepreneurial pioneers and businessmen. for the former, it is never the money (see gates, zuck, sergey + larry, etc. etc.)
That's an interesting point: are there any big tech companies (in the top tier of "big") that didn't take venture capital? I can't think of any offhand.
It'd be an odd result, because there are big companies in other fields that grew by bootstrapping and then reinvesting profits. For example, as far as I can find, Wal-Mart took little to no investment before the IPO. I wonder what makes tech different? Is it somehow more capital-intensive, contrary to the usual assumptions? Or is it that it's a lot easier to get investors in tech, so people aren't forced to bootstrap? Or that alternative financing options are harder to use in tech (no equivalent to Wal-Mart's strategy of opening new stores by taking out loans with existing stores as collateral)?
Some interesting data to see would be: what's the biggest tech company that has never taken outside investment? Are there any significantly bigger than 37 Signals?
VMware. Diane Greene funded it with the proceeds from her (much smaller) startup VXtreme, sold to Microsoft. The first outside capital we took, IIRC, was in 2002 or so, when VMware was already hundreds of employees, profitable, with several products, etc., and it was from Dell and IBM rather than typical VC firms.
Also the industries aren't comparable directly on revenue numbers. Walmart had net sales of $340 million but the net income after tax was $11 million. That's a very low margin business compared to software, where a typical result might be $55 million in revenue to make $11 million.
> are there any big tech companies (in the top tier of "big") that didn't take venture capital?
That's an interesting question. I'd be curious if anyone knows if,when, and how much venture capital companies like Intel, HP, Microsoft, IBM, AT&T, Motorola, and Tektronix took.
I can't tell for sure (Wikipedia has no info, and http://www.fundinguniverse.com/company-histories/Microsoft-C... only talks about their IPO), but it certainly looks like MSFT was bootstrapped when they nailed their big licensing deals. They then IPO'd after 9 years incorporated to get some more cash on hand, presumably.
Microsoft took a mezzanine round a few months before the IPO. The reason usually given is so that they'd have connections to investment bankers to manage the actual IPO, as well as people with a stake in making sure that the IPO price was as high as possible.
I think that the differentiator for tech is that there is a massive skew towards providing free services via the web.
Because many companies work as "media" companies which rely on attracting eyeballs for ads, people get used to not paying for things online which perpetuates the need for VC.
You also don't see very many bootstrapped TV stations.
You hear these examples a lot. But I think if you look closer you see that these are examples stories being more complicated than their stripped down versions, not counterexamples. The stripped down version still holds to the pattern.
The "real" beginning of Starbucks was an entrepreneur buying Starbucks and merging it with another couple of coffee shops then expanding immediately at serious pace. It went public 5 years after the purchase.
Mcdonalds is a similar story. Bought and expanded.
It's hard to measure the exact beginning of these businesses, they weren't founded with the intention of raising capital and going big. They did however join that trajectory at some point. The interesting thing is that they joined it very close to the launch point - these weren't small companies that slowly became medium then big, these were tiny companies that stayed small for decades, then they became giants very quickly, almost instantly.
edit: BTW, it is definitely possible of finding companies that grew slowly over decades. But in those cases you probably won't find that they were small businesses for a long time. They spent roughly equal amounts of time as 5 person companies, 10, 100, 1,000 - so you don't here so much about their heritage as a small business. They might have only spent a few years that way.
Something I noticed after I read your comment: The funny thing about both Starbucks and McDonalds is that, in both cases, it took an outsider who became an employee, _not a founder_, to grow the company. Two companies don't a pattern make, but it does make you wonder...
I think the right way of reading it is to put consider the outsider the founder and otherwise consider their takeover as the founding. It would be like Bill Gates buying a 4 person company that made Basic interpreters instead of starting one, it's not fundamental to the story.
If you looked at a graph of Starbucks and another startup going public at the same time the would look like this
What happened between founding and acquisition in company #2 isn't really part of the story. The day after aquisition though is pretty much the same after the day of founding company #1.
I think timescale plays a part here. It's all well and good to open up a restaurant, then another, then two more the next year, then 5, then 20, then 50, then 200...Problem is, you're looking at at least a decade before you're large-scale. McDonalds is a 75 year-old company. Starbucks is 45 years old. OTI, the pace of growth (and failure) is much higher. Facebook is ~6 years old. Who knows if it will be here in another 10?
That kind of growth takes money. It's nearly impossible to scale from 3-4 people to 3000 in a couple years if you're self-funded. Now, the article was arguing that that kind of growth is unnecessary; that it's perfectly acceptable to have a business making 100-200k/year. That't true, but it in no way negates the need for VCs and angels.
The more that I think about this, the more I wonder why we don't hear more about companies that succeed in this way. Surely they're out there but they're just privately piling up revenues? I'm amazed we can't name more.
Is 37 signals artificially limiting their size or are they growing organically?
It would be neat to profile them wouldn't it? Im betting a large portion of them have found that the start-up scene and growing large is great at the beginning of your career, but perhaps stability comes into play? Kids, Wife, Health?
It seems like a self-selection effect. We hear about the ones buying PR and pumping up their value. Those that are organically growing value don't need fertilizer.
If it worked well to self-fund giant companies using the income from small ones, we should see instances of it happening in the wild.
We don't have much of a history to work from, and the majority of the enabling tools available to us simple did not exist prior to or during the emergence of the current economic and business environment.
I think developments such as Kickstarter provide a glimmer of where things are headed.
A different way of looking at it is that there are disruptions in progress (less capital required to reach 'giant', new funding options) that are making this significantly more likely.
You're looking to the past. It's recently become much easier to build a lifestyle business.
Also, I wasn't suggesting that bootstrapping Amazons and Googles would become the norm. Just that you're in a much better starting position when you already have a successful business paying the bills. Especially when it comes time to negotiate terms.
