Getting VC funding isn’t a cure-all for every startup. There can be downsides to getting investors – and not surprisingly, Rand Fishkin has some pretty strong opinions about this topic.
Rand is the co-founder of SEO software company Moz and founder of SparkToro, an audience intelligence tool for marketers. I interviewed him during Powderkeg’s Unvalley 2020 conference. Here are a few Rand’s valuable perspectives on the potential traps of Silicon Valley Culture:
VC Alternatives and The Case Against Venture Capital
We’re in an era of unprecedented income inequality in the United States that has been growing at a rapid pace for the last 50 years. This economic divide has been exacerbated by venture capital.
The model of VC was originally built around creating a few billionaires and a ton of unemployed people. It encourages a miniscule number of winners, and a huge number of losers. That is not an economic model that Rand thinks is helpful or productive for our society, and he is working to change it.
In 2012, after Moz had received funding, the company tried to expand beyond SEO. They lost focus and left an opening for their competitors – and Rand says that experience is not unique among VC-backed startups.
In our conversation, Rand exploded more myths about getting VC funding. Check out the recording from our Unvalley archives.
Transcript for VC Alternatives and The Case Against Venture Capital
Well, you obviously built a big company with Moz, and saw quite a bit of success that included raising a bunch of money, and building a big team. Tell me a little bit about what you experienced as a benefit, but also the downside of taking on venture capital with Moz.
Yeah, I mean, so I think that the biggest benefit, Matt, for me to be totally honest, it’s kind of embarrassing. I think the biggest benefit is pride. The biggest benefit to raising money at Moz is that I get invited to speak on stages and participate in conversations and be covered by press and be interviewed and be viewed as
somehow someone who’s important and authoritative, because I raised a lot of money. And I think very frankly, oh, sorry.
Do you think that’s right?
No, I mean, I think that’s a, I think it’s a terrible incentive. But I also I also know myself, right? I know that, if I hadn’t, for example, raised venture capital, I would always feel like that outsider who wasn’t good enough, who wasn’t worthy. And I think that’s what, that’s how the venture ecosystem works, right? venture money funds, almost all of the press and media directly or indirectly, right, and events, and, and, you know, which we call accelerators, and, you know, all these sorts of things. And as a result, they get to control the narrative that is mad. I’m sure you’ve heard this. In fact, I’m sure a ton of people on this on this, have heard this before. They use the word lifestyle business as a deep insult, right? They point you and go, Oh, are you making millions of dollars a year but only working 30 or 40 hours a week? And you’re happy? F*** you. You’re a lifestyle business. I’m sorry. I don’t I don’t mean to swear, but it’s just, you know,
The FU is implied? Probably.
They see it they say it really sweetly. Oh, adorable. How cute. Your little lifestyle business? Okay, well, you know, get back to me if you ever want to build something real? Yeah, not that is highly, highly disturbing. And then and then you think about that in the context of sort of the broader macroeconomic picture of the United States and sort of the Western world in general, which is, we’re in an era of unprecedented income inequality that’s been, you know, growing at a rapid pace for the last 50 years, and deeply exacerbated by venture capital. Right. venture capital is is an is an asset class whose entire model is around creating a few billionaires and a ton of unemployed people. That is the old model and don’t let them try and convince you otherwise. Don’t. Don’t let And try and change the narrative and be you know, your your you are not who you say you are, you are not trying to create jobs, you are not trying to encourage entrepreneurship. You’re trying to encourage a small number of winners and a huge number of losers. And that is not an economic model that I think is helpful or productive for our society. I don’t think it’s good for the world. I don’t think it’s good for our politics, or our economy’s ability to survive. upheaval, right? If you look at what economists think is healthy, it’s a lot of small and medium businesses with a ton of competition that creates healthy, healthy capitalist markets. What creates very unhealthy capitalist markets is what we have now, which is essentially largely unregulated capitalism, a few monopoly players. And venture capitalists are, you know, their goal? And look, this is not I think they are also in the ecosystem. You know, many of them feel trapped in the ecosystem, even if their politics or their thinking is broader than this. That they need to fund monopoly builders. Right. And potential monopoly builders. That’s how you get your billion dollar outcomes. Your unicorn, right?
The unicorn chase? What Yeah,
yeah, it’s funny that they managed to make them unicorns. I mean, they really should have been Cthulhu chasers. Because that’s, that’s what, that’s what we’re really dealing with.
Tell me how you really feel Rand.
Yeah, what I’m, what happened to the culture at Moz, when you brought on venture capital, because you were a profitable business with SEO Moz and ran it as a Services Agency ahead of time, which service versus product, I’d love to circle back to that. But what happened at the culture at Moz? Since we are doing the culture awards here at on Valley, and powderkeg culture is the number one reason that we’ve found that people join a tech company is also the number one reason they quit at a tech company. How do you see venture capital changed the culture at Moz?
Yeah, I think I do not know, I think Moz is a is an outlier, in that I’m not sure our first round of venture capital did much of a big change at all. And I think that’s because, you know, the founders still maintain the overwhelming majority, I think we were at ignition own maybe 17% of the company when they first invested. So it was a $1.1 million round is pretty small, you know, his board of directors. So we got a little more formalized, but I don’t think it had a huge impact on on us culturally, the biggest impact was probably on our mindset around what we wanted to and needed to build, which was essentially, we consistently invested all of the profits and earnings from the company into trying to find faster and faster growth. And I think that eventually biased us into a place where we felt like we had to raise more money so that we could do more of those potential investments. And it made us I would say, uncomfortable, made us very, very high risk taking activity in terms of the business, we threw a lot of dollars at foolish channels.
And in particular, we I think the dumbest move we ever made was after our 2012 fundraise from foundry, we raised $18 million then and attempted to go much broader than SEO. Right. So you mentioned the old name of the company was SEO Moz. When we first raised venture, we dropped the services business became exclusively software, and then and then, in 2012, tried to go bigger than SEO because we worried as a board of directors, that SEO wasn’t a big enough market. Right. And that was incredibly foolish. I think if you look back over the last, you know, eight years, in particular, what you can see is Seo grew bigger than ever. And when Moz took its eye off that ball for those four or five years that it tried to go broader, other competitors stepped in to take its place. Very, very frustrating. So and our experience is not particularly unique. You know, I talked to a lot of venture backed entrepreneurs, of all kinds in all sorts of markets, who basically you know, they look at their, they look at their businesses and when they’re venture backed growth rate is the dominant metric. And so they optimize for that over everything else. And as a result, in many, many cases, don’t focus and don’t build what I would call high Discipline businesses that have, you know, long term survivability and great profit margins and competitive advantages and their specific fields. Right there. They’re just focused on. Okay, how do we become Airbnb or Uber? Or we work or two of those three? I’d? I’d probably are you’re not very healthy businesses.
Are you open to new job opportunities in tech?