North Stars

February 29, 2024

I just happened to read/hear two very different — but oddly related — things on the way back from walking my kid to school this morning.

  1. The Funded Dead“, an explanation/summary of VC-backed companies that aren’t totally failing but can’t raise more money
  2. This episode of the Bill Simmons podcast where he and Ryen Russillo talk about the success/dubious value of ESPN’s “First Take” debate show

The Funded Dead

“The Funded Dead” is from Failory, a newsletter/site about startups failing that I enjoy, mostly because it’s a good reminder of just how many software startups there are. Failory also does a good job of highlighting small and medium sized startups that don’t fail in a well-publicized blaze of glory, but slink away in the face of less entertaining, but more common challenges. It’s good, you should check it out.

I found today’s explanation of “zombie startups”, however, surprising and kind of odd. In my mind, the definition of a zombie VC-backed startup is pretty simple, and I know a few of them. They raised a big pile of capital before interest rates went up, but they were always expecting to raise more — they haven’t figured out their unit economics or whatever else is necessary to run profitably, and the remaining $50m or whatever isn’t going to get them there. So they’re fine, but they’re not, and they’re going to die eventually. They’re zombies.

That is, however, not exactly how Failory defines the term. Instead, it’s this (emphasis added by me):

“You are the founder of a small but promising startup, and after weeks of negotiation, you have successfully secured a big round of funding from a well-known VC. You are happy, your team is happy, and, most importantly, the VCs are happy because they see in your startup the potential of becoming that rare and elusive creature every VC dreams of: a unicorn. Months pass, years even, and you find yourself in a weird spot. Your once unicorn-promising startup has lost its potential. It is not a dead company by any means. It has enough to cover its expenses, it generates a small revenue, and it might even be growing slowly. But it has lost relevance. It is clear now that the company will not be able to achieve the exponential growth VCs are looking for. You realize now that the big round of investment you were so happy about a while ago was a bit of a trap. You have become overcapitalized in your boom cycle and are now unable to generate enough revenue to justify your valuation. Maybe if you secure a new round of funding, you could use the money to get back on track. But VCs are no longer interested in you — they moved on to the next shiny startup and left you behind. You have fallen into the limbo. Unable to generate the necessary returns for your investors. Unable to get more funding. But also not completely broke. Your startup has been zombified.”

My eyebrows went up when I read this for a couple reasons, mostly because I had questions about how several concepts were being defined here. “It has enough to cover its expenses” — presumably, this doesn’t mean the startup is break-even, right? Personally, that’s what I’d consider “having enough to cover expenses”, because many (most?) expenses are recurring, and we’re operating a business over here. On top of that, this business is… growing? That’s great! Unless it’s one of those businesses where it loses money on every dollar of revenue, in which case I’m not sure I’d argue that you’re actually growing.

The business having “lost relevance” is a strange way — to me — of saying “people are not willing to subsidize a money losing enterprise”. While it’s definitely real phase real venture based businesses go through, it’s also one that I thought had recently fallen out of favor (except for AI, for reasons that remain unclear to me). Raising money is fine, but I think “raising money to raise money” certainly isn’t as blindly accepted (required, even!) as an operating strategy the way it was just a few years ago.

First Take

On another note entirely (and then I’ll connect the dots, I promise), Bill Simmons and Ryen Russillo spent a few minutes talking about First Take, which is a debate show on ESPN where people argue about sports in loud, sometimes tongue-in-cheek, sometimes not-so-much ways. Simmons, Russillo, and pretty much everyone else I like listening/talking to sports about all agree that First Take is… pretty stupid, and not that interesting. The arguments are basically dueling monologues that occasionally descend into shouting, none of the topics seem especially important, and most of them are about various people’s perception of things that won’t even matter by the end of the week, let alone the end of a given season.

I’m never going to agree 100% with anyone’s creative efforts (mine are certainly all over the place, quality-wise), but one of the reasons I’ve generally enjoyed the many projects of Bill Simmons over the years is that he seems to really value making things that are good, and not just things that people like. Now, Simmons is also good at making things (not everything, but things) that people like, so it can be easy to equate the two, but there’s a difference. Simmons created a TV show about basketball that an insufficient number of people liked (it got canceled), but from listening to him talk about it in hindsight, he seems more focused on how he could have made it better, versus how he could have made it more popular. If something can’t become more popular by being a better version of itself, Simmons does not really seem interested in it, and I have always respected that.

Anyways, Simmons expressed his generally negative opinion of First Take, and Russillo didn’t really disagree. However, he did observe that by all indications, the human-interest, gossipy, he-said-this-about-him element is measurably more popular with people than content about actually playing sports. And more importantly, he said this:

Simmons: That’s what they’re doing these days.
Russillo: OK, but are they doing it wrong? I don’t think they’re doing it wrong. I think they’re doing it right.

Now, this quote could easily be taken out of context, which is not Russillo saying “First Take is a good thing that I like”. He immediately makes fun of it in the next sentence! But here is where I’ll tie things together.

Dollars Are Not Points

The through line I felt with both of these things was the idea of being failed by “North Star” metrics — i.e., a quantifiable measurement that says what we’re doing is or isn’t having the impact we want. Maybe I’m abstracting it too much by not saying “solving a customer need”, but I think that’s because we hide behind the idea of customer needs to avoid thinking about why we’re doing what we’re doing. In the case of First Take, they’re maximizing viewership because that’s how we monetize television, and the goal is (for whatever reason) to make as much money as humanly possible, as quickly as possible. In the case of VC-backed startups, the goal has been to create a company with the largest valuation possible, because VCs make money by selling businesses with large valuations to either other companies or the public markets, and they invest in a large enough number of companies that the risks that come with any one of those companies going for a huge valuation are worth it… to them.

ESPN is owned by Disney, which is a corporation, which in large part is an organization designed to make as much money as possible. But I said large part. If Disney stood for literally nothing other than making as much money as possible, they wouldn’t be Disney. They wouldn’t make Disney products (that make money), or invent Disney things (that make money), because they would just be a bank, or maybe a hedge fund. VCs really do exist just to make money — the soul of a hedge fund in the body of, I dunno, some kind of Silicon Valley Tooth Fairy — but in many ways, they’ve taken over the entire culture of entrepreneurship and remade it in an image that serves their business model, or sometimes just serves what they think their business model is.

I’ve often pointed out that this is a choice, not a requirement. You can try to make money — even a lot of money — without trying to make as much money as possible. We do it all the time, primarily because profit maximization makes everything suck. Selling your extra basketball tickets to your friend for as much money as you can possibly get from him sucks and if you do that, I’m sorry, but you’re a bad friend. People get pissed off at Wendy’s for kicking around the idea of surge pricing because it would suck to decide to go to Wendy’s and then realize you’ve picked an expensive time to go to Wendy’s.

Money is fine. But it’s a necessary evil. If you forget that, and declare it your north star, your purpose for being, officially or unofficially — you will eventually ruin whatever you’re working on. Count on it. It will always be really easy to defend profit maximization because it looks best in the short-term, and the short-term usually wins. But you eventually pay. And we will eventually pay for sucking the life out of everything because today’s cohort of shareholders (a totally different group of people from yesterday and a totally different group from tomorrow) told us to.