Excerpt from Episode #13: Addressing criticism of 37signals (Part 1 of 2) of the 37signals Podcast (transcript):
David: That’s the main push-back that we have is not that venture capital is bad; It’s that venture capital is bad when applied to businesses that do not have excessive capital needs. Because then it creates all these sort of distortions, where the money has to be spent and it’ll have to be spent on, well, hiring more people, because that’s really the one major expense that web startups have.
And then you get into all these sort of problems where you have a vastly over-staffed startup, because that’s what you have to spend your money on, so that’s what you will spend your money on. And you get, oftentimes, big, crufty, overbuilt products, instead of just focusing the same idea on a much smaller team that doesn’t require millions of venture capital and can get out the door with something simpler and build a real business around it.
Jason: Maybe once you have a success, once you have customers, once you have a track record, once you have a clear path, and then you feel like, for whatever reason, you need more money to do something else, then, OK, maybe it makes sense for some companies. So expanding operations, once you actually have operations, may make sense.
But you don’t expand operations upfront when you have nothing. You first build operations. You first build for a few years. You first build some profits and some customers before you want to do that.
David: Would you go out and start, let’s say, 500 McDonald’s before you even know what the menu is, before you’ve even designed your hit burger yet? No, you wouldn’t. You would run one franchise until you’ve really honed how that thing is going to work, how a single store can be profitable, can make a space for itself.