Original Sin of Venture Capital

I’ve been planning to write about this topic for a long time, since I’m witnessing too many sites burning money endlessly, what’s worse is people feel so good about burning money as if the ultimate goal of a startup is “Get Venture & Burn it”. Hey, where is the revenue, dude?

When I start to sell great online storage service, there will surely be 10 sites offering the same service for free within 30 days. Finally no one of us can make money. The same thing happens to email system, ringtones download, online office suite…We build great products which people really need and want to pay for it, then VCs come and screw up everything. The simplest way is to copy your product and offer it for FREE. If free is not enough, fine, they send you a real check once  you sign up. What the hell is happening here? They spend huge cost on the product but they give it away to everyone for free!

Can you imagine a medicine shop giving away all medicines, or a restaurant offering free foods? Yes, you are right, VCs are supporting DUMPING which is forbidden in traditional business, and trying to kill the whole industry until they live alone. This is the 1st original sin of Ventures.

Yet it’s not easy to kill others in most cases, since there are too many VCs in the world, and every VC wants to build a monopolistic company in some industry, and the result is, at least 2 or 3 monsters are still fighting endlessly, and as long as they are fighting, they have to continue their free model, and in the same time they are claiming how huge traffic they are acquiring and how many millions of dollars they are worth.

But sorry, can I ask a question: are you making money? oh, you are making money by advertisement? huh, great business model ! but can you just show me how much was the ad revenue last month and how much was your bandwidth cost in the same time?

When a company is spending much more cost than revenue, they invented new phrases for company valuation, such as Traffic, User Base, Active Rate, Retention Rate…… Before getting bankrupt, these numbers keep on telling beautiful lies to make people believe this company can make money in the future. The only thing they hide is, the future is endlessly far away. Finally, the real value of the company is buried by numerous VC phrases. VC phrases can change by 1000 times while the real value don’t, for example, when IDG invests 10 millions to my small laundry shop, and sells the stock to Softbank at doubled price after one year.

Wait, suddenly a new laundry funded by Sequoia is opened next door, and starts to offer free laundry service. It nearly kills me while all my customers turn their back on my laundry and go to free service, until Morgan Stanley knocks my door saying:”We can make you a marvelous 1000-page prospectus and turn your laundry into a NASDAQ IPO…” This is the 2nd original sin of Ventures.

The most frequent questions I meet is “How is your next round funding going on? How is the new VC?” I’m so sad no one ask me “How much is your revenue increased this month? Can you live on your own without VC in next 6 months?”  Well, right now it seems ridiculous to talk about revenue in online business. Young enterpreneurs spend most of their time making fancy business plans to kiss the ass of VCs, not for their own belief, what’s worse they consider Burning Money as a necessary step of a company, totally ignoring the best attributes of a great business: Cost Less & Earn More. This is the 3rd original sin of Ventures.

Chinese version of this post: 风投的原罪