Exits vs. Enduring Companies

VCs and angels may talk about changing the world, but their business model rests on a more prosaic calculation: Buy low, sell high. They invest in companies they think will become more valuable, so they can sell their stake for a sizable profit. From the time that VCs invest in a company, they have five years—10 at the most—to sell their entire position, hopefully for many times more than their original investment. After that, it doesn’t matter to them whether the company survives a year or a century.

To put it another way, the VC model is based on creating wealth for investors, not on building successful businesses. You buy into a company early on and sell out a few years later; if you pick well, you can make lots of money. But your profits don’t accrue to the company itself, which could implode after your exit for all you care. Silicon Valley is full of venture capitalists who have become dynastically wealthy off the backs of companies that no longer exist.

Felix Salmon “For High Tech Companies, Going Public Sucks

Marc Andreessen’s selection as “The Man Who Makes the Future” in a recent Wired cover and interview highlighted five key idea and related project or companies he started as a result:

  1. 1992: Everyone Will Have the Web  (Mosaic at NCSA)
  2. 1995: The Browser Will Be the Operating System (Netscape)
  3. 1999: Web Businesses Will Live in the Cloud (LoudCloud)
  4. 2004: Everything Will Be Social (Ning)
  5. 2009: Software Will Eat the World (Andreessen Horowitz)

It’s interesting that there is no mention of Jim Clark recruiting him to start Netscape, he does have an interesting aside as to how ephemeral even significant products can be:

Andreessen: One of the first times Zuckerberg and I got together, in 2005 or 2006, he stopped me in the middle of conversation and asked: “What did Netscape do?” And I said, “What do you mean, what did Netscape do?” And he was like, “Dude, I was in junior high. I wasn’t paying attention.”

Felix Salmon offered a less enthusiastic endorsement than Wired:

“In many ways, Andreessen’s entire fortune has been built on the greater-fool theory: if you build something trendy enough, there’s probably going to be a huge lumbering company out there somewhere willing to overpay for it. Hence the buzziness of the Wired interview — clouds! social! SAAS!”
Felix Salmon in “The Problem with Marc Andreessen

Salmon’s assessment echoes Chris O’Brien 2009 profile, “The Curious Case of Marc Andreessen” written just prior to the launch of Andreessen Horowitz, which triggered a Curious Case of Marc Andreessen Part 2. Some excerpts

And then there’s Marc Andreessen, the businessman, who seems to me to be — how can I put this charitably? — a bit of a dud.  […]

I don’t want to imply he’s a failure, because he’s not. But when I look at Andreessen’s business track record, I’m less interested in his checking account than the financial statements of his companies. As far as I can tell, Andreessen has never started or operated a profitable business, with one exception: Netscape turned an annual profit, back in 1996 when it posted a $19 million profit. Of course, that was when the company still charged you $49 to buy a copy of Netscape Navigator. Once Microsoft started giving its Explorer browser away for free, that was all she wrote. Andreessen and Netscape couldn’t figure out another business model, and vanished a couple of years later in a complex deal with Sun Microsystems and AOL that was announced November 1998.

[…]

Andreessen’s reputation has only risen as he has emerged as a leading angel investor for the Web 2.0 industry, advising or investing in companies like Facebook and Twitter. These companies reflect the philosophy of service and technology over revenues and profits.

[…]

Of course, at some point, these priorities have to change. A company has to actually make money. Innovation can’t be sustained by creating a venture-backed Ponzi scheme where one money-losing start-up is sold to another, which is then sold to another.

Losing money indefinitely isn’t just a financial failure. It represents a failure to truly understand how a service or product is creating value for a customer, how to communicate that value, and how to persuade the customer to pay above and beyond for that value.

That, all too often, is where the valley still falls short: Failing to innovate around the business to the same degree it innovates around the technology.

Three years after O’Brien’s article his assessment seems prescient.

3 thoughts on “Exits vs. Enduring Companies”

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