Greenspun On ArsDigita

Eponymous, Showered writes: "Following up on the depressing tale of ArsDigita and its takeover by nursery school miscreants, Philip Greenspun gives his take on the recent turn of events recently covered on Slashdot. He even provides a nice aD history in a nutshell for those of us who were vacationing on Uranus for the last several years."

VC, PhilG, and Why I Hate You All.

I am about to rant. If you are in my way, please step the fuck down.

I have read with interest the fawning adulation and tea-and-biscuit sympathy the slashdot community has for PhilG on this issue. Oh, wait, did I say "interest"? I meant "disgust." What the fuck is wrong with you people? I'd suggest that your mothers dropped you on your heads as children, but it looks more like she thwacked you with a sledgehammer. Twice.

There are two assertions that people seem to be making:

• Look, isn't it terrible how the evil venture capitalists gave Ars Digita lots of money and then took control of the company?
• If only PhilG had been left in charge, Ars Digita would have been as large as Microsoft, except it would have given us all free ice cream. And Aeron chairs.

Both of these statements are pathetically false.

First off, I don't know PhilG personally. Maybe he's a nice guy. Maybe he spends all his spare time saving kittens and helping nuns cross the street. Maybe he is god's gift to the Internet, computer science, photography, and women. But none of that has anything to do with whether he has been wronged here. Fundamentally, Philip signed a contract. For him to now claim that it is unfair for the VCs to exercise the rights Philip gave them when he signed the contract is irritating at best and utterly disingenuous and deceptive at worst.

Phil had a very easy way to keep control of aD: don't take the fucking money. He took the money. He made his bed. Now he sleeps in it.

Furthermore, there seems to be a fundamental misunderstanding about why companies seek venture capital financing. Here's a hint: it ain't just for the money. Finding money, if you have a good idea and aren't a schmuck, isn't all that hard. Running a successful business: now that's hard -- a lot harder that building a few tools used to create web sites. Founders of companies (or at least, smart founders of companies) seek VC not just because of the money but to gain access to a pool of talented people that know how to do something they don't: grow a small company into a larger one.

That Philip doesn't seem to understand this is sad.

I suspect the people who will win out, in the long term, are the people working at Ars Digita, who now have the benefit of professional management without the interference of an amateur (why do I say amateur? If you sign a contract for millions of dollars that you don't seem to have read, you're an amateur) that, from what I've heard, wasn't able to effectively manage any group larger than about 5 people.

I wish Ars Digita success, I wish Philip well, too. I hope all of you that think that the VCs are somehow wrong for trying to do their job are injured in fiery auto accidents with large-breasted German women.

Good day.

Re:First quarter

Okay, you take a successful company with 80 employees. You bring in VC money, you bring in a change in CEO, and with that, a change in direction. The first quarter, instead of the great growth you've been having, you start to slump. Then the next quarter after that you're even lower. I think at that point he should have stepped in a said "Hey listen, you guys might be great in your own respective fields, but you don't know what you're doing in this one. Step away from the console...."

Except that it's not at all clear that the new management team doesn't know what they're doing. It's absurd to talk about the declines in AD's profitability without considering it in the context of what the industry as a whole is seeing. Plenty of companies are seeing losses and having to lay people off. Plenty are just folding up and dying completely.

Look at what's been happening to software service companies recently and tell me honestly that the management team that replaced Philip is solely responsible for the decline in AD's fortunes. You can't. Despite the the big-name clients Philip likes to cite, a hell of a lot of AD's revenues were coming from little dot coms flush with VC cash of their own. Now that the gold rush has died down, it's no surprise they are suffering -- just like nearly every other software company that depends significantly on service revenue, and many that don't.

Giving Philip all the credit for past profits and the current management all the blame for present losses requires that you willfully blind yourself to changes in market conditions.

The King is Dead, Long Live the King

I owe Philip Greenspun a lot. Philip Greenspun is personally responsible for changing how I looked at technology, programming, as well as changing how I looked at Life.

My students owe Philip Greenspun a lot as well; If it weren't for his article on software professionalism [arsdigita.com], I don't know that I would be teaching free programming classes to the public. [taoriver.net]

It's terrible and saddening to see ArsDigita becoming just another silly company.

On the upside ("Long Live the King"), I look forward to seeing where he decides to turn his life next. Maybe this is actually a turn for the better. Maybe he'll be a little more humble, not just in thought and deed, but also speech. Maybe he'll write about his trip to India. Maybe he'll become a spokesperson for Nikon. Maybe he'll just relax, read, and mull over some books.

Regardless, I feel very priveledged to have been able to read what he has written, and to have heard him lecture, and look forward to his new life.

VCs

Good venture capitalists are predictable. That's why this story may sound familiar: arrogant genius takes on partners, agrees to terms he thinks are innocuous because they only kick in when really bad things are happening, finds he is reluctant to share control, struggle ensues, he gets booted.

Here are a few things you should expect from venture capitalists:
- they are not tech experts. They may be pretty conversant, but what they do is demanding in its own right, so they don't have time to keep up. The longer they have been VCs, the further away from the nitty-gritty they will be;
- they are in it to make money. If asked, a good VC will sit you down and bluntly explain that they are in it to make money. If you want someone whose first priority is to create something extraordinary and new, get money from Intel or Cisco or somebody who is investing in R&D, not cash return;
- VCs expect somewhere around a 35% annual rate of return on all their money invested. If 2 out of 10 companies fulfill their growth plans, 3 out of 10 go sideways, and 5 out of 10 go bust, but the VC doesn't know which is which beforehand, then they have to *plan* for each of their investments to have a 84% growth in value per year, sustained for the average investment holding period of 5 years, or a 20x growth in value. These growth needs mean VC-backed companies have to swing for the fences - slow, measured growth won't get the VCs the returns they need;
- VCs are paranoid about control for good reason. I was told by a lawyer that every clause in a contract is a result of someone at some time getting screwed;
- VCs do not *want* to run the company. They are usually involved with up to 10 companies at a time and looking for more, as well as being involved in running their own firm. They do not have time to run the investee. They want to oversee. The only time they try and replace management is when they think things are drastically off-plan, or with the buy-in of management.

There are alternatives to venture funding. Strategic investors, as mentioned above, are one of them. Bank financing of receivables is another (especially if the company has top-notch clients and is profitable, as aD was.) Do not get venture funding unless you believe you can (and want to) put all your chips on the table and roll the dice. Even if the odds are heavily in your favor, you can still lose it all.

If you are a technologist or visionary type, find a person who believes in your vision and who you trust but knows the ins and outs of finance, law and business, and hire them. You may scoff at the MBAs, but if this happens to you, you'll have wished you had one on your side. (And, yes, MBAs that know and love technology exist, they are just hard to find.)