Venture capital taught Etsy that making money wasn’t a skill it needed to learn early on. Go on, it said, spend the millions. And when you’ve spent those, come back and get some more. So Etsy did. They came back for a B round, then a C round, then D, E, and F rounds. Just shy of $100 million in total.
That experience deluded Etsy into thinking that they, uniquely, could ferry the scorpion across the river without getting stung. That a cool hundred million wouldn’t ever need to be paid back or corrupt its noble mission.
But the party only lasts until the music stops. And after Etsy’s VCs foisted the “growth stock” onto the public markets, those markets eventually grew tired of waiting for said growth and profits. So they demanded change, and change they got by booting the old CEO and installing a new growth-at-all-costs replacement.
When Etsy looks back at the arc of its story, it’s easy to flatter themselves into thinking that everything was hunky-dory until The Evil Capitalists came for their pound of flesh. But give me a break. This story is as old as time, and the outcome perfectly predictable.
Etsy corrupted itself when it sold its destiny in endless rounds of venture capital funding. This wasn’t inevitable, it was a choice. One made by founders and executives who found it easier to ask investors for money than to develop the habits and skills to ask customers.
Etsy wasted the chance to provide a human alternative to Ebay and Amazon all by itself. Now it’s largely the same kind of strip mall hawking the same mass-produced goods. There was a laudable mission at its core, but one that was quickly spoiled by a gluttony for growth and negligent naiveté about scorpions.
In the burnt ashes of what Etsy has become, I hope a new attempt will grow. One that learns its lessons and guards its own destiny with as much zeal as the high-minded ideals.
If you want to understand why so many startups become infected with unhealthy work habits, or outright workaholism, a good place to start your examination is in the attitudes of their venture capital investors.
Consider this Twitter thread involving two famous VCs, Keith Rabois and Mark Suster:
These sentiments are hardly aberrations. There’s an ingrained mythology around startups that not only celebrates burn-out efforts, but damn well requires it. It’s the logical outcome of trying to compress a lifetime’s worth of work into the abbreviated timeline of a venture fund.
It’s not hard to understand why such a mythology serves the interest of money men who spread their bets wide and only succeed when unicorns emerge. Of course they’re going to desire fairytale sacrifices. There’s little to no consequence to them if the many fall by the wayside, spent to completion trying to hit that home run. Make me rich or die tryin’.
The entrepreneurs who sign up for such pressures may have asked for it. If you, knowing their sentiments, ask Rabois or Suster for millions to fund your venture, then you probably should expect to have your vacations, weekends, hobbies, family time, or outings with the kids questioned.
But the pressures don’t stop with the person who signs the term sheet. That shit trickles down. In fact, it’s likely to amplify as it rolls down the hill, like a snowball gathering mass. Because once the millions have cleared, and the headcount has been boosted, it’s usually other people who actually have to make good on those exponential expectations.
The sly entrepreneur seeks to cajole their employees with carrots. Organic, locally-sourced ones, delightfully prepared by a master chef, of course. In the office. Along with all the other pampering and indulgent spoils AT THE OFFICE. The game is to make it appear as though employees choose this life for themselves, that they just love spending all their waking (and in some cases, even sleeping) hours at that damn office.
And if the soma-like inducements don’t work, there’s always the lofty talk about THE MISSION: We’re not just here to capture more attention or steal more privacy in the name of advertising, no, we’re connecting the world! Your single-track life has meaning! All your sacrifices are for a greater good!
Not only are these sacrifices statistically overwhelmingly likely to be in vain, they’re also completely disproportionate. The programmer or designer or writer or even manager that gives up their life for a 80+ hour moonshot will comparably-speaking be compensated in bananas, even if their lottery coupon should line up. The lion’s share will go to the Scar and his hyenas, not the monkeys.
And yet so many continue to go along, because they already went this far. Sunk cost is an easy theoretical concept, but it’s devilishly hard to put in practice. Which is why the yoke of the four-year vesting cliff, the short-exercise window for options, and all the other tricks and techniques employed by cap table-designing masters are so effective. Once the hook is in, the line and the sinker follows easily.
But it will be in spite of prevailing evidence on the power of sleep, recuperation, and sustainable work habits. Whether you’re a top-flight basketball player, like Kobe Bryant, whose off-season work schedule is limited to just six hours per day:
The Kobe Bryant workout routine features a hefty mix of track work, basketball skills and weightlifting. His off-season workout has been called the 666 program because he spends 2 hours running, 2 hours on basketball, and 2 hours weightlifting (for a total of 6 hours a day, six times a week, for six months).
Since athletes need more sleep than average people, eight to 10 hours of zzz’s a night is recommended, and that’s not just before game day — that’s every evening. After all, the more often and more vigorously you use your muscles, the more time it takes for your body to repair and rebuild them. Roger Federer and LeBron James famously snooze for an average of 12 hours a night, while Usain Bolt, Venus Williams, Maria Sharapova, and Steve Nash get up to 10 hours a night. Federer has said, “If I don’t sleep 11 to 12 hours per day, it’s not right.
After his morning walk and breakfast, Darwin was in his study by 8 and worked a steady hour and a half. At 9:30 he would read the morning mail and write letters. At 10:30, Darwin returned to more serious work, sometimes moving to his aviary, greenhouse, or one of several other buildings where he conducted his experiments. By noon, he would declare, “I’ve done a good day’s work,” and set out on a long walk on the Sandwalk, a path he had laid out not long after buying Down House. (Part of the Sandwalk ran through land leased to Darwin by the Lubbock family.)
When he returned after an hour or more, Darwin had lunch and answered more letters. At 3 he would retire for a nap; an hour later he would arise, take another walk around the Sandwalk, then return to his study until 5:30, when he would join his wife, Emma, and their family for dinner. On this schedule he wrote 19 books, including technical volumes on climbing plants, barnacles, and other subjects; the controversial Descent of Man; and The Origin of Species, probably the single most famous book in the history of science, and a book that still affects the way we think about nature and ourselves.
Neither these athletes or these writers were giving up anything on whatever contemporaries that may have put in more time, more hours, or greater sacrifices. Their contributions to the world were in no way diminished by their balanced approach, quite the contrary.
So don’t tell me that there’s something uniquely demanding about building yet another fucking startup that dwarfs the accomplishments of The Origin of Species or winning five championship rings. It’s bullshit. Extractive, counterproductive bullshit peddled by people who either need a narrative to explain their personal sacrifices and regrets or who are in a position to treat the lives and wellbeing of others like cannon fodder.
Finally, as way of having my own skin in the game, we’ve been running a wonderfully successful business at Basecamp for some fourteen years now. One profitable since the get-go without demanding the total consumption of life force from the people working here. Neither from Jason nor I, nor from our employees.
Hell, right now, we’re working our four-day summer weeks until the end of August. This while servicing over a hundred thousand paying customers, stewarding Ruby on Rails, writing a new book, and ranting with a fervor against the extractive logic of many a venture capitalist. Forty hours or less has been plenty to do all of that since the beginning, and it’s likely to be plenty for you too.
Workaholism is a disease. We need treatment and coping advice for those afflicted, not cheerleaders for their misery.
It’s a crying shame, really. I love Medium. It’s the best writing environment on the web, and they sweat the details like nobody else. The community too is just peach. This could have been a love story for the ages.
But I don’t think we’ll grow old together, Medium and I. I suspect it’ll end quite tragic, actually. $132,000,000 is a lot of money after all, and that’s how much venture capital Medium has been dipped in. Before having a prayer or a song about how to turn into that multi-billion-dollar business it must to satisfy the required rate of return.
The clock started running three years ago when $25,000,000 of Series A growth dynamite was rigged. That means they’re about half ways until the bomb explodes, and so far the company doesn’t seem much luck finding the code that’ll disarm.
All the vanity metrics are up, but it’s clear that there’s no idea how to turn that into actual moolah model. Well, short of following the same brain-dead advertising extraction scheme that Medium was specifically founded to counter. So credit to Ev, at least that strategy seems out — for now.
And credit to the whole Medium team for building that better typewriter. Seriously. That’s hard! There were a bunch of big typewriter makers out there already, and how much can you improve that mousetrap anyway? But improve they did.
It’s just that in Silicon Valley, you can’t merely make a better typewriter and sell that at a profit. No, you have to DISRUPT. You have to REINVENT. Well, at least you need the appearance of that, while you squeeze eyeballs until they pop out enough advertising dollars to give the VCs that 10x return.
So, we are shifting our resources and attention to defining a new model for writers and creators to be rewarded, based on the value they’re creating for people. And toward building a transformational product for curious humans who want to get smarter about the world every day.
It is too soon to say exactly what this will look like.
Wut? Five years is not enough time to think about how we should make any money in a way congruent with our founding values? That just doesn’t compute. But the convoluted language and indirection does, and the ticker is spelling S. H. I. T!
This is tragic, but also expected. Medium rigged that VC bomb and is failing to disarm. And just like most other VC bombs, it too will explode and take with it the prospect of a lovely, smaller, important typewriter business.
The web, of course, will go on, if murder is indeed what she’ll write. Especially for anyone who moved to Medium but hedged their bets by keeping their own domains. A quick dump and nothing will break — except our hearts. Again.
Cheers to none of this actually happening, and Ev finding a diamond in the rubble before it’s too late. But if you’re a publisher on Medium, I’d dust off the contingency plans none the less.
It didn’t have to be this way. Ev could have RECONSIDERED. He surely had enough in the bank from previous exploits. Started slower. Not hired 150 people before there was a path to profitability, let alone sustainability. Maybe you will.
Employees can still benefit from a sale or liquidity event without offering equity or options. Here’s how we do it.
A few years ago at one of our semi-annual Basecamp company meetups, the topic of options/equity came up. Since we don’t offer equity or options, people wanted to know how they could benefit on the upside if we ever sold the company.
So David and I started thinking about it. We consulted some other business owners, Jeff Bezos (who owns a small piece of our company), and our accountants and lawyers. We wanted to get a pretty full picture of the implications of an equity program.
The more people we talked to, the more complex it started to sound. The complexity was both psychological (social company dynamics + anxiety of variable value) and economic (options/equity doesn’t really mesh well with an LLC corporate structure). And since we have no intention of selling Basecamp or going public — the two scenarios where options/equity really make sense — equity just didn’t seem like the right fit.
However, we were determined to come up with another way so everyone could participate in the unlikely event of a sale or IPO. You never know, so we wanted to have a system in place just in case.
Some of the considerations included:
It needs to be simple to administer. The closer we could get to zero administration, the better.
It should be easy to understand and explain.
It shouldn’t be a day-to-day thing, or create daily habits — like the ritual of checking stock prices.
It should reward current employees. This was about who was at the company at the time of a sale/IPO, not people who worked here years ago.
It should reward loyalty. The longer you’ve been here the more you would participate in the upside.
The plan would be consistent from day one until the last day. Some companies grant lots of options in the early days and then barely trickle them out later. We wanted the same opportunity for all new employees forever.
We didn’t want to discriminate by position. Every employee, no matter the position, participates in the same way.
There were other considerations as well, but those were the key things we kept in mind as we developed the program.
Here’s what we came up with in the event of a sale or IPO:
At least 5% of the ultimate sale price (or, in the case of an IPO, the fair market value of the capital stock) would be set aside for an employee bonus pool.
Each current employee will be credited with one unit for every full year they’ve worked at Basecamp, starting after the first full year. The maximum amount of units one person could earn would be five units. So if you worked at Basecamp for two years you’d get two units. Three-and-a-half years, three units. Four years, four units. Five years, five units. Seven years, five units. Etc.
We would divide the total employee bonus pool dollar amount by the total number of units held by all employees. This would determine the unit value.
Each person would receive the unit value multiplied by their units.
We’re pretty happy with how this turned out. We think it’s a simple, clear, and fair system. And it’s a great alternative to the organizational complexity of option grants, acceleration, strike prices, conversion into shares, private markets vs. public markets, dilution by outside parties, partial vesting, etc.
One other thing: We treat this entire idea purely as a bonus in the unlikely event of a future sale/IPO. We don’t even discuss it with new hires. It’s not part of the overall compensation package (we don’t pay a smaller salary and try to make it up for it with this program). I wouldn’t be surprised if many employees have forgotten about it or don’t even know about it at all.
Since we implemented the program about 5 years ago or so, we’ve sorta kinda used it once. Back in July 2012 we sold Sortfolio, a web designer directory we launched a few years prior. The selling price was $480,000. But rather than distributing just 5% of that sale, we ended up giving 100% of the proceeds to our employees.
We haven’t sold any businesses since then, so we haven’t had to revisit the plan.
It’s easy until you make it complicated. So don’t.
Back in June of 2013, we launched Know Your Company. We built it in a few months with a small team of 3. A few months after launch it had generated a couple hundred thousand dollars in revenue, so there was definitely a good business brewing.
Later that year we made the decision to focus our business exclusively on Basecamp. That meant we’d either sell, spin-off, or roll bits of our other products into Basecamp. These products included Highrise, Backpack, Campfire, and Know Your Company, among others.
Jumping ahead, we decided to spin-off Know Your Company into a separate company. And we knew the perfect person to run it: Claire Lew.
Skipping over the why to get to the how
There’s a long back story about how we met Claire, why we decided she’d be right to run Know Your Company, etc. But I’ll save that for another post. I want to get right into how we structured the deal.
But first, there are a million ways to spin-off a company. And most of them are fucking complicated. Complicated stuff is anathema to us at Basecamp, so anything messy, extensively lawyer-y, protracted, knotty, or otherwise elaborate was off the table. So what was simple?
How we structured the deal
At the moment of the spin-off, Basecamp owned 100% of Know Your Company. The product had generated a few hundred thousand dollars of revenue at that point, so it was a nice growing business, but it was still young and mostly unformed. Its best days were way ahead of it.
So we decided to give Claire half of it. We’d own 50%, she’d own 50%. Her 50% wouldn’t cost her anything.
We wanted her, she was up for the challenge, and the money that she would have to normally come up with to buy-in wasn’t an amount that mattered enough to us to put any hurdles in the way of making it happen. Plus, we didn’t have to mess around with silly valuations either. Why complicate things?
We’d maintain that 50/50 partnership until she generated $1,000,000 in new sales. It could take 3 weeks, it could take 3 months, it could take 3 years. The $1,000,000 was cumulative — she’d hit it whenever she hit it. And when she did, we’d flip the partnership in her favor. She’d now own 75%, and we’d own 25%. And that’s how it would run in perpetuity.
It was that simple.
Here’s the actual term sheet to prove it:
It was signed on November 20th. She hasn’t hit the $1,000,000 marker yet, but she’s real close (over $700k so far)!
These things can be simple
Talk to enough people about spinning things off, putting deals together, writing up agreements, coming to terms with people, etc. and you’ll inevitably hear how complicated it is. But it’s not inherently complicated. It often becomes complicated. Just about everything can be made complicated. In fact, spend enough time doing business and you’ll notice that making things harder than they need to be comes naturally to most people.
I believe simple is actually the natural state of things. It’s simple until you make it complicated. This goes for just about anything in life and work.
I hope the way we structured this deal — simple terms, a single one-page plain language agreement, a handshake, and a ‘we’re here to help any time’ will serve as an example of how simple a deal can be.
It’s been a blast to see Claire grow the company, improve the product, and service the customers. We get together a few times a year and riff on ideas, help her think through some challenging product decisions, and talk shop. And in between the face-to-face stuff, we have a Basecamp project set up where we discuss finer details, review numbers occasionally, share ideas, and get updates from Claire when she has something to share. It’s perfect.
CHICAGO — December 1, 2015–Basecamp is now a $100 billion dollar company, according to a group of investors who have agreed to purchase 0.000000001% of the company in exchange for $1.
Founder Jason Fried informed his employees about the new deal at a recent company-wide meeting. The financing round was led by Yardstick Capital and Institutionalized Venture Partners.
In order to increase the value of the company, Basecamp has decided to stop generating revenue. “When it comes to valuation, making money is a real obstacle. Our profitability has been a real drag on our valuation,” said Mr. Fried. “Once you have profits, it’s impossible to just make stuff up. That’s why we’re switching to a ‘freeconomics’ model. We’ll give away everything for free and let the market speculate about how much money we could make if we wanted to make money. That way, the sky’s the limit!”
A $100 billion value for Basecamp is “not outlandish,” says Aanandamayee Bhatnagar, a finance professor and valuation guru at Grenada State’s Schnook School of Business. Bhatnagar points to a leaked, confidential corporate strategy plan that projects Basecamp will attract twelve billion users by the end of 2016.
How will the company overcome the fact that there are only 7.3 billion people alive today? “Why limit users to people?” said Bhatnagar.
In order to determine the valuation of companies, Bhatnagar typically applies the following formula: [(Twitter followers x Facebook fans) + (# of employees x 1000)] x (total likes + daily page views) + (monthly burn rate x Google’s stock price)-squared and then doubles if it they’re mobile first or if the CEO has run a business into the ground before. Bhatnagar admits the math is mostly a guess but points out that “the press eats it up.”
To help handle the burdens of an increased valuation, Basecamp hired former YouTube exec Craig Mirage as Chief Valuation Officer earlier this month. Mirage hopes to replicate YouTube’s valuation success at Basecamp. “Of course, the investment comes with great expectations. But you should see the spreadsheet models we’re making up. Really breakthrough stuff,” said Mirage.
“Basecamp will lead the new global movement filled with imaginary assumptions on growth and monetization potential,” he continued. “We’re excited to roll out a list of unconfirmed revenue possibilities that involve crowdsourcing, claymation emoticons, 4D touch, in-app garage sales, goofy looking goggles, social stuff, and an app store. Also, everything we make will include a compass.”
About 12 years ago, I co-founded a startup called Basecamp: A simple project collaboration tool that helps people make progress together, sold on a monthly subscription.
It took a part of some people’s work life and made it a little better. A little nicer than trying to manage a project over email or by stringing together a bunch of separate chat, file sharing, and task systems. Along the way it made for a comfortable business to own for my partner and me, and a great place to work for our employees.
I was recently speaking to a class at a local university and the topic of valuations came up. One student asked me what our valuation was. I gave her the honest answer: I haven’t a clue.
How is it possible that a successful software company today doesn’t know its worth? A valuation is what other people think your business is worth. I’ve only ever been interested in what our company is worth to us.
Startups these days are bantered about as if they were in a fantasy football bracket. Did you hear Lyft raised another $150 million at a $2.5 billion valuation? But Uber got tossed another $2.8 billion at a $41.2 billion valuation! Then there are the companies barely off the ground getting VC backing with 25x valuations, despite having no product or business model.
Entrepreneurs by nature are competitive. But fundraising has become the sport in place of the nuts and bolts of building a sustainable business.
The last time I considered Basecamp’s valuation was nearly a decade ago. We’d been approached by dozens of VC firms looking to invest. But with a solid product, a growing consumer base, and increasing profitability, we didn’t entertain any offers.
Then, in 2006, I got an email from Jeff Bezos’s personal assistant. Jeff wanted to meet. I’d long admired him for what he was building at Amazon, and how he generally sees the world. I took the meeting.
After a visit to Seattle and a few more calls, Jeff bought a small piece of our company. I didn’t take the cash out of some fantastical desire to turn Basecamp into a rocket ship. Instead, his purchasing shares from me and my co-founder took a little risk off the table and gave us direct access to the brain of one of today’s greatest living entrepreneurs.
In the years since, we’ve been approached by nearly 100 private investors, VCs, and private equity firms. They want to put money into our company, but we don’t want it. It’s not hubris; it’s the cost that comes with the cash. I want to deliver a product that our customers want, not one that our investors want. I want to grow our company according to our timetable, not one dictated by a board. For many startups, funding has worked to their detriment — unnecessarily raised stakes, a path to unnaturally rapid growth. Venture capital is not free money.
Years ago, during the investment discussion with Jeff, we had to place a financial value on our company. The process of constructing a valuation was pretty silly, to be honest. We drew up charts, made some educated guesses, negotiated back and forth, and ultimately came up with a figure. We made it up, as everyone does. Let’s just admit it right now: Financial projections are big, fat guesses. They are best-case scenarios. Since they’re hypothetical, why not pull a number out of a hat?
Jeff knows this. All investors know this. Yes, you can look at revenue and profit and multiples, but so many tech company projections these days aren’t based on anything real. They’re based on fantasy. And too often, the more profit you have, the lower your valuation is. Because nothing pops the valuation bubble like reality.
My not knowing how much our company is worth doesn’t affect our business on a daily basis. I know our revenue and our profit. I know how fast we respond to customer service inquiries and how many people signed up for Basecamp last week. Those are real numbers to me. A valuation is an invented number that ebbs and flows on the basis of how much someone else thinks you’re worth. It’s nothing more than a distraction.