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Posted on September 10, 2008 by hillel on Industry

The Problem of Scale (or: Why John at taptaptap is saying “Fuck the VCs”)

Here’s the thing: I wouldn’t have written the post that John Casasanta at taptaptap wrote about the VCs that are approaching him, but as Chris Rock would say — I understand.

A sample from John’s post:

“The vultures are out and and they taste blood. The iPhone’s one of the hottest things around right now and there’s little sign of its popularity letting up anytime soon. And the venture capitalists want in… badly. The fact that the iFund™ exists is overwhelming evidence of this.

Ever since my post discussing our sales stats we’ve gotten our share of VCs trying to court us. They desperately want a piece of the action and they’re pounding the pavement with full force.”

John goes on to recount the typical dialog with the VC where the VC guy (and it’s usually a guy) asks: what if you could do what you just did but x 100. John responds that he’s having a hard time finding even one great programmer. The VC then suggests that while great ones may be hard to find, perhaps a decent one will do. And right there is the problem.

The VC guys aren’t bad guys. They have a business model and they’re pursuing it. And in some small percentage of cases they can be a catalyst for companies that generate major wealth and sometimes wonderful products as well. The problem of course is that the VC business model depends on scale. They look for business opportunities that can scale exponentially. And John at taptaptap knows full well that with scale there’s almost always a non-trivial degradation of quality. John also knows that the tradeoff presented sometimes by certain folks in the VC community that you can either have scale and wealth or you can have quality and much less wealth is a false one in many cases. And more importantly, John cares a lot less about making something big than he does about making something great. And John knows that he can make lots of money making something small and great.

To use a comparison from the food world. Alain Passard is not a celebrity chef, but he is world famous among lovers of fine food. He cooks in Paris at a restaurant called L’Arpege. Wolfgang Puck hasn’t done regular cooking at any one of his ~10 million restaurant instances in many many years. When the money guys came to Puck and asked him if he wanted to put his name on frozen food lines, airport eateries, and anything else you can think of, Puck said yes, yes, and yes. And while Wolfgang Puck may be able to personally make a mean pizza, you can bet that the dudes working at his airport outlets are producing something that’s not nearly as good. (In fact it sucks.) And I would bet good money that when the money men approached Passard and asked him to put his name on varous products, and build an empire, he told them to fuck off. Wolfgang Puck probably has a lot more money than Alain Passard. But I bet Passard is not doing badly by any stretch. Dinner for two at his Paris restaurant can run over $1000.

Puck has his place. The guys looking to create big businesses have their place. And Passard certainly has his place.

John’s trying to make something special. And when someone comes to him under the pretense of wanting to do business with him but proposes a path that not only would destroy what John feels is special about his effort, but so clearly identifies the proposer as someone who misunderstands John and his company, John gets insulted. Just like I’m sure Passard is every time he gets approached. (In my mind I imagine a lot of swearing in French spoons getting thrown, and him riding up to his farm North of Paris on his Vespa. Apologies in advance to my French friends for my stereotyping of their anger.)

In the comments of John’s post you can see that the reactions aren’t all positive:

“This is good advice packaged but packaged in a terribly destructive way. I certainly try and design my startups to work well on bootstrapping or angel money, delaying institutional VC indefinitely. That MO tends to be much better for founder equity and employee returns, user-responsive product design, growing at a speed that is good for the company, etc.

On the other hand, WTF? Take a cold shower or something. The level of anger being displayed here has no place in this discussion or this community.”

I don’t know that the level of anger has “no place”… after all, it’s on the internet. And clearly there’s a place for all kinds of anger on the internet. That said, while I wouldn’t have written this post myself, I do understand where it comes from.

Note: I do think in rare cases it is possible to scale something large and keep a high quality bar. But you have to vastly reduce the complexity of what you’re producing. Sorry for all the food examples, but In-n-Out Burger comes to mind as a perfect example. I think in that case some of the best venture folks would be perfect partners for a guy like John to work with and make something big AND high quality.

UPDATE: I changed the references from Tapulous to taptaptap. Duh. Sorry. Thx Aaron.

Join the discussion 3 Comments

  • Reply

    Aaron Brethorst

    September 10, 2008 at 11:23 am

    He’s from TapTapTap, not Tapulous. Tapulous took $3 million in funding.

  • Reply

    Marc Hedlund

    September 11, 2008 at 7:31 am

    I definitely think there’s a critique to be made, here, but I’m not sure it’s this one.

    I thought of your post when reading this LA Times article by Thomas Keller:

    http://www.latimes.com/features/food/la-fo-side10-2008sep10,0,7679327,full.story

    He starts off the article with, “When I was learning to cook, I never dreamed I’d wind up designing a line of porcelain.” Further in he mentions, “When I opened the French Laundry, my goals were simple: Pay back my investors, improve the restaurant, and offer good benefits to my staff.” Note the investors. He’s definitely scaled way up — slowly, to be sure, but on the back of investors and to a level of quality people generally admire far more than Wolfgang Puck’s.

    It’s easy to pick on Wolfgang, and I’ll happily play along with that end of the analogy. You lost me a bit with L’Arpege, where I had an extremely unpleasant meal — good food, certainly, but in my mind crassly commercial service (my then-girlfriend, now-wife was given a menu with no prices by a waiter who then proceeded to almost urgently push her to order the appetizer and main that were vastly more expensive — on my menu with prices — than any other choice) — but, I get the point, and in general I definitely see where you’re coming from. But Keller?

    Having eaten at Bouchon in Las Vegas, I can definitely see some support for your analogy. That place is not at all what I think of as Keller-quality. But: Keller running French Laundry and Per Se on opposite coasts, with comparable, very high quality, and soon to be four other restaurants besides, seems not to support your argument.

    I’m not sure how far I’m willing to push my argument (I’m picky about restaurants), but someone could definitely go further with the “quality at scale” counterarguments: Boulud? Vongerichten? I seem to remember someone saying recently that a chef with a single restaurant in the US would go broke.

    So, I don’t know. Maybe I just got distracted by bad memories of L’Arpege and you lost me there, but it seems to me that reaching for scale might not be the VC’s worst sin. IBM and Microsoft and now Google have all managed to attract very large populations of extremely talented people, with, in the latter case, their VCs (apparently) urging them towards extremely high quality, not just decent quality.

    The TapTapTap approaches by VCs (like those to 37signals and many others) is still totally wrong, the Kleiner iPhone Fund is nuts, and there is definitely something broken about applying the VC model to these situations. I’m just not convinced that the bug is in reaching for scale alone. I think it probably has more to do with VCs being too trend-focused, instead. Chasing around the latest developer interest (Java, Rails, iPhone, etc) might very well pay off from time to time, but I bet the failures cost more than all the successes put together.

  • Reply

    Hillel

    September 11, 2008 at 8:12 am

    Good feedback. And I love debating food on the JFM blog.

    Some responses:

    * I won’t defend your experience at l’Arpege as clearly it wasn’t good for you. That said, next time we’re in Paris, I think you and I should try again. :)

    * Keller mentions his investors. But what were the returns for his investors. Were they 2x? 5x? 10x? I’m speculating of course, but I doubt they were in line with what a typical (not every) venture fund would require. And I would imagine that if Keller had showed up at his VC’s office and offered them 2x, they would have sent him back with his check and told to scale scale scale.

    * I would claim that you actually support my point with Keller. When Keller scales horizontally — with Per Se — the result is as good as the original (FL). But when Keller goes for scale and tries to cash in — with Bouchon — the result is, well, chain-like.

    I’m not opposed to investment and I’m not opposed to scale. While we haven’t taken any investment here at JFM, we have shipped four of our own apps in our first 18 months of full operations.

    Horizontal scaling to me is where you slowly and carefully extend your operation while always maintaining (or improving) the standards of the original. And when the choice is between quality and scale/speed, you always choose quality, because otherwise the brand gets diluted (like Bouchon dilutes Keller in my opinion). Keller spent months at Per Se getting it up to speed. He’s got live videoconference between the FL and PS kitchens. He had his hand-picked personally trained guy running the kitchen in New York. Believe me, he doesn’t invest the same amount of time in the Bouchons of the world. And it shows.

    And while I have no problem with investors, my point is that in our industry, the VC model is often incompatible with horizontal scaling. When push comes to shove the VC wants scale even if it dilutes quality “just a bit”. And I get this, I’m just pointing out the incompatibility.

    And to make sure that people don’t read into this too much… I do believe you can make something of quality with VC investment. And I do believe that things at scale can be of high quality. I just think the money and the expected returns make it much much harder.

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