Small is Beautiful, Too

Over the past few months, Twitterers and TechFlash readers have invented a war between big and small startups, and somehow Redfin has landed on the wrong side of it. I only noticed it last night. The great Josh Petersen of 43 Things compared Adam Doppelt’s fantastic essay on boot-strapping Urbanspoon to a talk Marcelo Calbucci had asked me to give at the Seattle 2.0 awards:

For any aspiring entrepreneur, Urban Spoon’s advice is a lot more actionable and realistic than the recently celebrated keynote at the Seattle 2.0 awards. Glen Kelman’s talk should come with a warning label: if you are listening to an entrepreneur give advice for 20 minutes and he’s talked about raising money and valuations but never mentioned making a profit, look out! In his talk, Glen assumes “sooner or later you are going to have to raise money” because, unlike Urban Spoon, he’s not thinking about living off the money his product makes or holding his spending as low as it can go the way Urban Spoon did.

I agree that Urbanspoon’s advice is more actionable and realistic; I wasn’t trying in the keynote to tell people what to do so much as express how we’ve all felt from time to time. Folks in the audience like Jonathan Sposato and Kelly Smith don’t want to hear from me how to run their businesses, especially not at an awards dinner.

The truth is that neither Adam nor I wrote or spoke much explicitly about how to turn a profit. But I did try to talk about profits from the start, saying that all our anxieties as entrepreneurs turn on whether we can make money. Later, I  encouraged entrepreneurs to build a product good enough that customers would pay for it and to focus on a meaningful problem as a means to profits rather than the other way around. Both Adam and I described working 18 hours a day in a crumby office for no or low pay as being the essential characteristic of life at a startup.
[vimeo 4612670]

Adding on to Josh’s critique, Brad Hefta-Gaub wrote that he agreed with Josh that too much attention has been paid to my (see comment from Brad) a “go big or go home” approach.

Here’s where I want to set the record straight. I have nothing but the highest respect for boot-strapped startups. They’ve done what Redfin tried but failed to do, which is get to profits without spending other people’s money. 

So why do folks think I feel otherwise? I can only assume that this beef began with a blog post I wrote last September, called Honey, I Shrunk the Startups. That essay took issue with two venture capitalists, Fred Wilson and Rob Monster, for arguing that the same big ideas we funded ten years ago for millions could now be launched for $100,000 or even $25,000, because of lower hardware costs and reusable software components.

I just didn’t see how $500-million venture funds can generate meaningful returns from 30 or 40 companies with $5 million exits, a problem which Fred himself has recently written extensively about. And I still worry that some big ideas — which will always take talent and time — have been cut down to size for lack of funds.

But the venture capital industry’s problems aren’t Urbanspoon’s problems. What I said about VCs’ need to get a big return on a few of their deals doesn’t apply to Urbanspoon.

And my preference for big ideas isn’t the same as a preference for big companies. Picnik, in my view is a big idea; can you imagine how hard it is to build Photoshop on the Web? Urbanspoon is a big idea, competing against entrenched competitors like Yelp and CitySearch. Both companies are small.

Given a choice, we would all prefer a startup with a big idea rather than a small idea. We would also all prefer one that spends less rather than more money to develop that idea. But a big idea that can be built for very little money isn’t always easy to come by.

So some of us pick  narrowly focused startups we can build on a dime, while others focus on big ideas that also take a lot of money. My argument has always been that there should be room for both, not just the small idea. As I said in the original post:

Trading college-girl gossip or graphing rock-band popularity is cool but we also need entrepreneurs willing to spend the time and money to f*** with the order of things.

And again a paragraph down:

Of course, some businesses don’t need a lot of money to get big. Others are happy to remain small. But there are big ideas that take time and money…

And a third time at the end:

The (TechCrunch50)  judges may argue over which contestant is the most clever or polished, but for those of you scoring at home, there’s room on the card for another column. Which startup is most likely to f*** with the order of things? We need a few of those too.

So I am not arguing that all startups should be big, or that big startups are better, only that we need startups with ideas large and small. The same Procrustean bed that stretched every startup in the ’90′s to be bigger is now scrunching some ambitious startups down. Big isn’t always better. But smaller isn’t always better either. VC-backed deals are best for some companies; boot-strapped companies are best for others. Arguing for one or the other is just silly.
theseus_procrustes

The only startup I am arguing against is the venture-funded company built to self-destruct in 18 months, which never seeks to generate a profit because its only hope is to get bought before it has to. As I said in the original essay, these days, “most entrepreneurs don’t even aspire to build a self-sustaining business.” Given this emphasis, I’m not sure why Josh says I’m “not thinking about living off the money [my] product makes or holding [my] spending as low as it can go.”

Redfin is not a venture-bloated bully looking down its nose at other little startups. We aren’t looking down our nose at anybody. We’re fighting to get profitable and serve our customers well. We look at all the great startups in Seattle and we try to learn from everyone. Already this morning here at Redfin, we were all abuzz about what we could learn from Adam’s essay.

Of all the venture-funded companies to characterize as a goliath, Redfin must be the last choice. We started as a bootstrapped company with the first map-based real estate search and no money when we suddenly found ourselves staring down the barrel of two new map-based search companies run by terrifyingly brilliant people that would ultimately raise $120 million from Accel, Benchmark, Sequoia and a handful of hedge funds.

We’ve raised a sixth of that, even though our model is less capital-efficient: only Redfin has to hire actual customer service personnel in every city we serve. Maybe others think it was dumb for us to have chosen this, or just plain too expensive, but it was the only way we thought we could really change the game.

[youtube T6MhAwQ64c0&hl]

Who knows whether Redfin will succeed. I think everyone would agree though that there’s a need to make big bets and small bets, and that Seattle will be better off when a decade from now one of today’s startups becomes a company like Microsoft, Real or Amazon, one that can buy other startup companies too. That’s still worth shooting for.

Many thanks to all the folks who showered kind words on the keynote. And thanks to Josh Petersen for giving us a reason to set the record straight.

Discussion

  • http://www.rescuetime.com Tony Wright

    “Big isn’t always better. But smaller isn’t always better either. VC-backed deals are best for some companies; boot-strapped companies are best for others. Arguing for one or the other is just silly.”

    Amen.

  • http://konamoxt.com Brad Hefta-Gaub

    Glen, I want to clarify, I didn’t say “too much attention has been paid to my “go big or go home” approach.” What I actually said was… “there’s a lot of attention paid to the VC/Go Big or Go home approach, and it’s always refreshing to hear the alternative perspective”.

    I think I have a pretty balanced view on the benefits of each approach.

    I’m not willing to say that raising VC money never makes sense. That would be crazy… I’m in the place I am today because I was an early employee at RealNetworks… clearly a VC based company.

    I found your speech to be very inspiring, and I found Adam’s list and Josh’s story of 43 Things to be equally inspiring.

    Anyway, keep up the great work! Keep being you man! It’s great stuff!

  • http://blog.redfin.com/blog/author/glenn%20kelman Glenn Kelman

    My mistake Brad. I just thought you were +1 on Josh’s comment, which attributed that PoV to me.

    I’ve never read Josh’s story of 43 Things, but would like to. Where is it?

  • http://konamoxt.com Brad Hefta-Gaub

    Glenn,

    I’ve never read the full story of 43 Things anywhere, but Josh and Daniel are both really nice peeps (as is the entire Robot Co-Op team) and I’m sure they’d gladly sit down with you over a cup of coffee and trade war stories.

    -Brad

  • http://rondiver.com Ron Diver

    Good post, Glenn. Thanks for the mention in your opener, though clearly my tongue-in-cheek re-tweet of Hillel’s comment didn’t come off as intended.

    You’ve addressed the matter at hand eloquently. I would only add that some ideas – big or small – necessarily require deep pockets if they are to be attempted at all. An infrastructure play like the Picken’s clean energy plan is a classic example, but fundamentally transforming the broadly entrenched industry norms that we find in real estate also qualifies.

    From a personal perspective, I’ve seen both sides. We started CareSystems during the last downturn. Although that climate was less severe than current conditions, financing terms were very dear and we were essentially forced to bootstrap – no mean feat for an enterprise SaaS solution targeting healthcare. To this day I’m thankful that we didn’t receive early funding. The process forced both a fiscal discipline and a laser-like focus on delivering real customer value on fair terms. The result was a product that absolutely rocked customer expectations.

    We had the VC trifecta of traction, team/execution history, and product (h/t Mark Maunder). In addition, the competition were generally still nascent web offerings or flat-footed incumbents. Scaling in that category requires feet on the street, and we should have sought outside investment at that point in order to capitalize on the asset and a window of opportunity. Instead the founder elected to maintain it as a lifestyle business, and at that point if you’re able to shift focus from market leadership to quality, small can be beautiful too!

    My key take-away is that even if stars of preparation, market opportunity and luck align, the ability to pivot into a VC-backed growth stage requires a team with a clear understanding of why they are and what they want from the company.

    Keep up the good work.

    Ron Diver

  • http://blog.redfin.com/blog/author/glenn%20kelman Glenn Kelman

    So I’ve heard. I just them a note (josh at 43things I presume), so hopefully we get together. Thanks for the encouragement Brad!

  • http://joshp@robotcoop.com Josh Petersen

    One of the most common fallacies in argument is ‘the straw man’, what Wikipedia usefully describes as “to create the illusion of having refuted a proposition by substituting a superficially similar proposition (the “straw man”), and refuting it, without ever having actually refuted the original position.”

    If you read my comments on John Cook’s blog, I start an argument about whose advice entrepreneurs should listen to. I have nothing to say about how a company is funded, be it VC dollars or an entrepreneur’s savings. But, in reply to my comparison of Glen’s advice to Adam’s, Glen responds and switches in the straw man:

    @29: ” I certainly don’t have any beef with boot-strapping”;
    @36 “There’s a difference between a small company trying to do something big and a big company. A big idea is better than a small idea. Doing it with less money is better than doing it with more.”
    @ On this blog, ” I have nothing but the highest respect for boot-strapped startups. . . . So why do folks think I feel otherwise?”
    @ anin the comments, “My mistake Brad. I just thought you were +1 on Josh’s comment, which attributed that PoV to me.”

    But who attributed this view to Glen? Since I haven’t said a word about bootstrapping in this debate, I certainly didn’t say he doesn’t respect bootstrapped companies. I just said he give inferior advice than Adam. And how is it we now have a bootstrapping vs. VC funded debate instead of the Adam is much wiser than Glen debate? That’s Glen’s straw man – he’s transformed the debate about who entrepreneurs should listen to, into a debate about bootstrapping vs. VCs.

    Now I do get Glen’s point that the speech he gave was meant to be reflective and entertaining, and it was. But it was also full of advice for entrepreneurs such as: “why not do something big” rather than some “rinky dink” little thing (which is an interesting discussion, if we have examples of who is big and who is small, and entrepreneurs who mistakenly did the rinky dink thing) . He also gives us that novel advice that you should imagine the person your corporate board will replace you with and compete against that fictive doppelgänger every day. Isn’t that why you decided to take the leap to start your own venture? To have the chance to be sweated through the day by an imaginary lackey of your corporate overlords.

    My set-up between Adam’s article and Glen’s talk is just that – a set-up. It isn’t a fair comparison (and not just because Adam’s advice blows Glen’s away). Glen was trying to be reflective and entertaining. His goal wasn’t to give practical advice, and no one should mistake it for that. That’s why it might need a warning label!

  • http://imedexchange.com Bob Crimmins

    Glenn,

    I found your performance at the Seattle 2.0 Awards to be entertaining, inspiring and sage.
    I took the spirit of your comments RE what has been interpreted as “go big or go home” a bit differently than I’ve head expressed elsewhere; I also make no pretense of suggesting that I properly inferred the true intent of your words. But, after all, advice is always subject to the interpretations of the receive so I also make not apologies for taking away something that may not have been there in the first place. In any case….

    When you talked about taking on big problems I took you to mean that your chances of making mistakes and still surviving are commensurate with the size of the problem/market you’re addressing… not that you just shouldn’t waste your time with small stuff. Rather, I took you to be saying, “look, do yourself a favor and limit your risk of failure and improve your potential upside by working on stuff that would be so valuable to consumers and investors that you can get away with some bone-head decisions and missed opportunities.” The point is that the margin for error in a small thing is equally small — especially relative to the potential return on the inevitable commitment and sacrafice that you personally will have to make. If you have a filter you apply to the various opportunities that you could choose to get involved in then it makes good sense to consider the scope and scale of the problem you’re gonna take on before you commit to it. The way I see it, it just cannot be the case the every idea is both a good one AND worth committing your life to for several years at a time. The second part of that conjunction is the oft overlook piece of the formula that I think many would-be entrepreneurs either don’t or can’t think about in the right way… or at all. The reality is that there are lots of “good” ideas that should never be built except perhaps as a hobby/passion (and, yes, I think those efforts can be rewarding and worthwhile in their own way). The challenge is finding a good idea that is also a great business opportunity… and that means, in part, that it solves a problem big enough to warrant allowing investors to put money in — whether the investor is you, your mother or a VC.

    Sometimes when I hear entrepreneurs describe their admittedly good (i.e., cleaver, novel, useful) idea it sounds as if they have never even asked themselves the question whether it could also be a great business as well, let alone run the numbers on what success would look like or even identify what risks there could be. I think we all have blind spots and part of becoming a successful entrepreneur is to become aware of more and more of your blind spots and, where possible, expanding your field of view. Glenn, your remarks about big ideas/businesses having more error forgiveness built-in is a valuable insight that many would-be entrepreneurs would do well to heed.

    One lesson at a time,

    Bob Crimmins

  • Robert Williams

    Glenn,

    Respectfully, I must disagree. Startups that hope to get bought out in 18 months are just as valuable as any other. Often entrepreneurs have really good ideas that in and of themselves are not complete products and will never sell in a marketplace. As I am sure you know, this is not always easy to see at the beginning of a project, or even near the end in some cases. However, there is definitely a value in being able to sell one’s technology so that it can become a component in another marketable product. A smart business person will be able to know when that is the case.

    Having an effective exit strategy is a very important aspect of business. It is a bigger problem for all entrepreneurs if this “industry” were to continue to back losing products that are better off as technology for someone else. It is a sure fire way to make sure that investors will not put money into anyone’s product if they feel there is no chance for return.

    You have my deepest respect for what you have done so far, but your view discounts a lot of other people’s successes and a completely viable and valuable business plan.

    Best, Robert Williams

  • http://blog.redfin.com/blog/author/glenn%20kelman Glenn Kelman

    @Robert: I agree on the importance of an exit strategy, and I admire folks who can create value quickly and sell their companies for a good return to employees and investors. What makes me uncomfortable is the company that has no way to become self-sustaining over time if it isn’t bought out quickly. Even if profits are a backup plan, it’s always good to have a backup.

    @Bob, thanks for the kind words. I’m excited about what you’re doing with innovateHealth. How was the conference?

    @Josh: thanks for the thoughtful comment. The example I gave of a rinky-dink idea was only one Kirill, Joe and I had considered in lieu of Plumtree, “Quicken for Food.” I was glad we latched onto something that had more open space, but you’re right that I didn’t take the time in the speech to call out other people’s startups that could be considered rinky-dink.

    Competing with your successor can be taken as political or corporatist advice — it makes me cringe to sound that way — but it’s just for me a useful way to think about correcting dumb mistakes I’ve made. When I worked at a startup without thinking of myself as accountable to anyone, I became a bit of a small-scale tyrant. I’ve seen it happen at other startups too. I think there’s a way to work with a board that isn’t just butt-kissing, where you are forced to evaluate other points of view in a healthy way. I was trying to find a positive way to say something humble and, to me, important — which is for me to stop being such an ass about something dumb I’ve done — if it came as trying to please my corporate overlords, I apologize.

    As for the straw-man, I didn’t mean to get you wrong. I genuinely thought you were saying the main difference between Adam’s essay and my speech was in Adam’s emphasis on profits at a small scale vs. my emphasis on spending venture capital at a larger scale, and I was trying to explain that I agree with Adam on that point. It sounds like you do, too.

    As for whether my speech is directly comparable to Adam’s essay, I agree that it isn’t except insofar as Adam’s essay is so much better. My effort at practical advice is here, but it has some of the flaws you’ve already highlighted:
    http://www.techcrunch.com/2008/11/30/the-first-time-ceos-recession-survival-guide/

  • http://www.planomatic.com Kori Covrigaru

    Glenn, great post. I watched that “idea” film about 3 times when I first saw it. I even emailed Grasshopper and this was their reply in case you were wondering:

    “Thanks for your comments. Please spread the word! We came up with the idea for it and then hired a very good animator, composer and writer to make it happen. We are very happy with the results. Our composer was Carly Commando, who created the latest NBA finals ads and the copy and art direction was done by a company called, The Cultivated Word.”

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