Jason is wrong: Winter is coming, and revenues aren't the answer for everyone

By Sarah Lacy , written on December 25, 2012

From The News Desk

All month I've been insisting that startup people don't "turn it off" just because it's Christmas. While annoying for my team, who didn't get time off, Twitter has proven my point this morning, with a juicy multi-way debate about the Series A crunch.

Jason Calacanis started it with a blog post saying that it was a "non-issue" for a few reasons. We ran his post here earlier today, because debate is good, and Jason's perspective is always thought-provoking and honest.

But there are a few big flaws in his logic that deserve a rejoinder.

My biggest gripe is that he seems to live in a fantasy world where VCs will regenerate like Gremlins and suddenly there will be capacity to do thousands -- not hundreds -- of deals next year.

He cites Marc Andreessen and Ben Horowitz's ability to raise billions in a short period of time (still it was years, not a single year) as evidence that new VCs can just come out of nowhere if opportunity warrants it. That's like entrepreneurs saying they can run two companies simply because Steve Jobs did it. Exception, not the rule. If you've created and sold two companies for more than $1 billion each, yeah, you can probably raise a new fund. Problem is you can count on two hands the people who have done that -- in Silicon Valley history.

This blithely ignores a multi-decade shift in the venture industry towards much-needed consolidation. Given the lackluster IPO performances of late, and general concerns about terms and returns going into 2013, I'm not sure how Jason believes that an industry that has always taken a minimum of five to 10 years to respond to "opportunity" and even longer to respond to a crash will suddenly mint enough new Series A investors to fill this substantial gap.

Meanwhile, no one I talk to seems to believe it should. Frankly, there's been a lot of dumb momentum seed investing going on. A lot of people have flooded into the space and not everyone is good at it. For many reasons -- part dumb money, part general industry frothiness, part lower capital to get started -- the bar to starting a company has been dramatically lowered. There is no reason many of these companies should raise more money. Many of the ones we've mentioned here as quietly fading away simply didn't have user adoption to warrant a Series A. Better that those talents and resources get reabsorbed and redeployed into other companies.

Most people see what's coming as unfortunate on an individual level, but healthy at an ecosystem level. From Y Combinator's Paul Graham to Floodgate's Mike Maples, the people who do the bulk of the good, early-stage heavy lifting have said this is simply the new Darwinian reality.

Jason cleverly tries to say it's only journalists saying there is a Series A Crunch. That's absolute bullshit. Jason isn't arguing with me or the Wall Street Journal or anyone else who has written about this. He is arguing with industry experts, attorneys, incubator heads, the most successful angels and VCs, and many more who've been widely quoted on this. No reporter invented this thesis out of whole cloth.

What's more, many entrepreneurs I talk to seem to accept it. They're girding up for a competitive path to more money, focusing on finding traction, and talking to investors a year before they run out of cash. It's the seed investors who seem to be alternating between panic and denial.

Oddly enough, Jason then continues a post about the Series A crunch not being a thing by describing how companies should aggressively shift strategies to survive it. He advocates cutting burn dramatically and bringing in revenues.

It's an interesting point, and really good advice for a lot of companies no doubt. Revenues are definitely back in vogue. Jason argues any company with $1 million in revenues can raise a Series A. Others chimed in on Twitter that that amount was too low, while others still argued that margins and how you get those revenues matters just as much. In the wake of Groupon and some ecommerce companies putting up gaudy early numbers that disappoint later on, I've heard a several VCs complain about a revenues as merely the new vanity metric. It matters how you got them and how sustainable that is. If you're just swapping venture capital for buying up revenues, that won't cut it.

I don't totally knock this advice. Long before talk of this Series A crunch emerged, I've been focused on getting my company to break even as quickly as possible, so that we can control our own destiny, although not at the expense of decreasing the investment in our product and quality. Going into 2013, we've taken a hard look at anything we can cut that doesn't speak directly to the quality of the editorial or our ability to generate revenues.

But for many, a knee-jerk pivot to an "enterprise" business isn't the answer. Stick to your conviction. If you're building a great consumer business that just doesn't translate for revenues right now and requires a high burn rate, run that playbook. If you're onto something, you can show traction by another metric. The Series A VCs that I've talked to have tellingly refused to give me one single metric that they're looking for. Rather, they say it's specific to the company and the opportunity.

The last time I saw everyone saying you had to have revenues, a lot of people missed out on the early Web 2.0 wave. And that's when many of the biggest hits were created.

As with everything in entrepreneurship, follow your gut, don't try to apply what's worked for someone else to you and be prepared for winter. Even Jason says in his there's-no-Series-A-winter-coming post that "winter always comes."

The biggest point where Jason and I agree is that great companies will make it (again, what we've said all along). There are other ways to survive and the best entrepreneurs are creative. And more to the point, great entrepreneurs won't be distracted. He's right to say not to pay too close attention to even this debate. Keep your head down and build. As Graham said in our original post on the Series A crunch, most entrepreneurs don't worry about a macro climate. In his words: “Founders don’t think their problems are due to trends. And in fact, overall trends are a second-order effect for founders.”

For better or for worse, entrepreneurs see themselves as the exception. But that doesn't mean being aware of increased competition and raising money early isn't wise.

Nearly everyone I've spoken to in the Valley, accepts the basic math that's been copiously backed up by data, sources, and simple observation of the seed climate over the past few years. The good companies are digging deep to survive. No one I know is freaking out. Everyone is just getting to work.