BUSINESS BLOGS
BUSINESS BLOGS
category: business
18 Sep 2008

Fred Wilson looks at the destruction of the brokerage business, and links to an earlier post he penned on quant jocks leaving Wall Street for the startup world.

Interestingly, Wilson is running with an initiative by First Round Capital.

I commend all of these otherwise fine VCs for trying to take a negative and spin it into a positive, albeit a self-serving one.  However, I think they are all delusional if they think that a worker who worked on Wall Street and made $200,000 to $1,000,000 will suddenly be content to work at a company that lacks a business model - what good is a quantitative model if you lack a revenue model, no? - and generates that much revenue, if they are lucky.

Forget about all of that… and let’s assume you do want to look at the world of startups.  Where to start?

In 2000, I worked at one of the first three meta search engines on the Web, Mamma.  When I joined them, Mamma was generating nearly 5M uniques and almost $20M in annual revenues.  It had raised $10M in funding in 1999 and was looking for $10-25M more.

The problem was that the company was losing money… it had a burn rate of over $1M per month. Once the Nasdaq crashed in March 2000 and the bubble burst… despite our company’s relative financial stability and revenue traction, the Board decided to cut costs and scaled back headcount.  As a support employee for the CEO and CFO, after seeing the first round of layoffs, I volunteered to resign.

That decision was in itself partially altruistic, I had reconnected with some college classmates who had started AskMen, a media startup taking on the old men’s magazines.  I joined them in the first year. Unlike Mamma, AskMen had $0 revenues and a paltry $500,000 in seed funding.  However, with an audience of 500,000 unique users per month and a decent market share in the men’s lifestyle space, I sensed a good opportunity to move from an in-house analyst to become a dealmaker.  The bet paid off, I took over ad sales and generated a currency-adjusted $10M from 2001 to 2005, by which point IGN paid $13.5M for the company, who itself got bought out for $650M by News Corp.  By December 2005, I had overstayed my welcome and was pushed out…

But the lesson I learned from those experiences was pretty simple: the decision to join AskMen paid off, not because it had a solid revenue stream OR because it was sitting on a lot of funding, the decision proved wise because AskMen had a low burn rate.  This is arguably the main variable one should consider when joining a startup in a market such as now.

Companies that have raised tens - if not hundreds - of millions in venture capital seem like an oasis, providing a false sense of safety and security… however, once the trailing indicators reach the Board… the Board decides to abruptly scale back costs.  In this scenario, the very same job you accept becomes vulnerable.  It’s bad enough to get laid off once, even worst to be laid off twice.

Lesson: When looking for employment, always consider a company’s burn rate.  In good times, VCs like to aim for the fence and will gladly pick up the proverbial tab without blinking, but once the going gets rough, historically, VCs have a history of ditching the party before the tab is even on the table.