Stackoverflow: Joel and Jeff want VC Money? Say What?

The big news today is that Stackoverflow—started by Joel Spolsky and Jeff Atwood as a programming Q&A site almost 18 months ago—is now looking for VC money. This is huge and deeply worrying. And it raises a whole raft of questions.

Vertical Growth

Stackoverflow has grown to be probably the largest programming Q&A site on the internet in its short life, supplanting the “evil hyphen site”, to be just outside the top 1000 sites having over 4.5 million visitors a month. While it continues to grow, there’s only so big it can get because there are only so many programmers.

Joel says:

In 18 months we’ve accomplish that: we’ve got 6 million unique visitors every month.

Note: this figure includes Superuser (1M) and Serverfault (730K).

The issue of course is how to turn this traffic into revenue sufficient to cover the site’s running costs, development of the site and profit for its owners. Programmers are a hard group to monetize and you can see Joel and Jeff struggle with this when it comes the usual method: advertising. See Responsible Advertising: Feed a Programmer, Our Amazon Advertising Experiment and Summary of Amazon Remnant Ad Experiment.

Horizontal Growth

It’s natural for companies that exhaust opportunities in their home markets to look at other markets that are related somehow, fuelled by (sometimes justified) paranoia that if they stop growing they’ll die or simply the need for incessant growth.

Microsoft Operating Profits by Division

Look at where Microsoft's profits come from and you’ll see their core business is Windows and Office. Forays into gaming, music, online services, mobile communication, etc have varied from being lacklustre to haemorrhaging money pits.

Google’s core business is search and advertising.

It takes a rare combination of talent, timing and luck to successfully branch into new areas as Apple did with online music, portable music players and the iPhone.

Joel gave a Google Tech Talk about Stackoverflow last May that’s instructive. A key point is that all software is social and that a given platform that works in one community that’s dropped into another may simply not work.

Programmers respond to the Q&A format of Stackoverflow because a programmer is predisposed to formulating questions, answering them and categorizing (tagging) them. What’s more, the subject matter is sufficiently objective for there to be right and wrong answers most of the time.

To put it another way: programmers talking about programming are self-organizing.

Some miss the point completely and criticize the format for making discussion hard, which misses the point entirely.

Sister Sites

Joel and Jeff’s first attempts at horizontal market growth are the sister sites: Serverfault (for sysadmins) and Superuser (for general computer questions), which Jeff calls the League of Justice. There are also loose affiliations with How-to Geek and Doctype (from the guys behind Litmus).

While a million (ish) uniques per month is nothing to sneeze at it’s clear that these sites haven’t grown like Stackoverflow has. See superuser.com and serverfault.com (this one has started to pick up recently).

Stack Exchange

Fog Creek has adapted the Stackoverflow code to create a hosted white label Q&A solution. For roughly $129/month you can have your own Q&A site to discuss everything from parenting issues to World of Warcraft (no joke).

Such sites rely on communities and building communities takes time. Stackoverflow succeeded in part because it leveraged the existing audiences of Joel and Jeff.

Careers

This is perhaps the more controversial move and something I covered in Joel Inc., Stackoverflow Careers and Jumping Sharks and Hard Numbers on Stackoverflow Careers. It’s something the pair have pushed repeatedly, going so far as heartfelt testimonials.

This one differs from the others in that the revenue model isn’t based on advertising: it’s based on the high cost of recruitment and the unique tie-in with Stackoverflow. My opinion is there simply aren’t enough active Stackoverflow users for this to be a real money spinner but time will tell.

Self-Funding and Control

Self-funding has huge advantages for any venture. If it’s possible it keeps control in the hands of the founders. Investors have their own agenda—being a return on that investment—which doesn’t necessarily coincide with the best long-term interests of the venture.

Some argue Transmeta was derailed by being forced to make a premature product launch.

When you own your own venture you can do whatever you want. Well, you can’t break the law but other than that, there’s not a lot you can’t do.

As soon as you have investors that changes. Investors have rights. Their money comes with conditions like how you can spend the company’s money, reporting requirements and so on.

It gets even worse when you’re a public company and worse again when you’re a publicly listed company.

Debt and Equity

There are two basic sources of funding for a venture: debt and equity.

Debt is borrowing money that you agree to repay the lender, typically at a fixed or floating rate over a given period of time. In the corporate world, there are many sources of debt: bank bills, overdrafts, commercial paper, bonds, swaps, traditional loans (secured and unsecured) and so forth. Many of these you have to be sufficiently large to have access to (eg corporate bonds are an option for the Toyotas of the world).

Equity is ownership of the company. Depending on your jurisdiction there are many forms of equity: ordinary shareholders, preferential shareholders and so on. They have different rights and a different pecking order for being repaid if the company is ever wound up (and typically the debt-holders will be ahead of all of them).

In between there are countless variations (eg convertible notes are a debt instrument that can be converted to equity in certain circumstances).

Companies generally strive for a healthy mix of debt and equity funding options.

The fallacy that many tech companies succumb to is that venture capitalists are their only source of funding. What’s more, VC funding is about the most expensive source of funding. A bank, being your typical source for a loan, will look at your plan and make a decision on your ability to repay the loan. Not your revenue but your income (being revenue minus expenses), both current and projected.

VCs typically look for blue-sky potential, often in ventures that don’t even generate revenue now or in the foreseeable future. Still any business plan will need to answer the questions of “when” and “how” the investors will get a return.

What Does Stackoverflow Want?

This move is surprising consider Joel wrote Fixing Venture Capital and Strategy Letter I: Ben and Jerry's vs. Amazon. Joel is somewhat vague on their motivations, saying only:

Now we’re biting off the bigger goal of changing the wayeveryone gets answers to their questions on the Internet, and that’s something we can’t do alone.

The infrastructure (hardware and bandwidth) is cheap (almost free) for Q&A. Stackoverflow.com seems to run on three Web servers based on Stack Overflow Architecture (a little outdated but those Web servers are low RAM and single CPU, which means dirt cheap) and Stack Overflow Network Configuration.

It’s fair to say that hardware is ludicrously cheap. Plentyoffish uses less than 10 servers for over a billion monthly page views.

Is it development? Is there some grand Q&A idea that’s going to take 50 man-years of development time to implement? Jeff has repeatedly said that apart from tweaking around the edges, Stackoverflow as a technology platform is basically “done”.

Is it to broaden the scope of Stackoverflow? What about a Wikipedia-like platform? What about the Wikipedia content? Is there any money in that?

Why Venture Capital?

This points to something ridiculously large scale otherwise:

  • Why wouldn’t a bank fund it (based on existing income)?
  • Why wouldn’t Fog Creek fund it?

The last is worth mulling over. Fog Creek has ~34 employees. Joel once said for every $10,000/month Fog Creek made he hired a programmer. Fog Creek is a private company so it’s profits aren’t published but it would seem reasonable to assume that their revenue is in the order of $4-10 million per annum.

  1. he business itself could benefit from the publicity of getting an investment from someone who is thought of as being a savvy investor.
  2. The investor will add substantial value to the business in advice, connections, and introductions.

But he also says:

  1. The founders are not in it for their own personal aggrandizement and are happy to give up some control to make the business more successful.

Interesting. Could it be as simple as wanting to cash out?

I suspect (3) and (4) are more what it’s about but without knowing what they want to do it’s largely impossible to figure out the why.

Conclusion

It’s hard not to be concerned by this. The evil hyphen site became evil when they tried to take what was free content and and monetize it using a subscription model. I don’t believe this is a likely outcome here but when you give up control, it’s a question of what your investors believe is the path to profitability that matters.

Many businesses fail because they try to apply something that worked one place to another area where it simply doesn’t work. I would hate to see this happen to Stackoverflow as I’m personally a big fan of the site.

There’s something to be said for leaving something that works well enough alone and turning your attention to building something else. Not everyone can or should be Microsoft or Google. Trying to be is typically a surefire way of converting success into failure.

Update: I misspoke regarding the Stackoverflow Web server configuration. Fixed.

14 comments:

Andrew said...

The reason stackoverflow.com has gotten so successful so fast is because Joel and Jeff and icons among programmers. If they want to make a major push into other niches they need to find similar icons to lead the charge. Connections + cash would help identify those people and get them onboard.

Plus, getting money in to pay for additional staff before the revenue is there would be wise if they really are in a land grab scenario.

technike said...

I am concerned as well and was planning to write a post myself but you saved me the trouble :-) One of the concerns is the community around Stack Overflow. I think the community exists because of the lack of 'premier' paid features. If they go for such features under pressure to monetize, that community might well evaporate and that would be shame.

chnicola said...

Try this: "The reason facebook.com has gotten so successful so fast is because Mark, Eduardo, Dustin and Chris are icons among people who like posting photos of themselves online."

Seriously though, while websites may succeed and fail partially based on how well they are marketed, the founders being "rockstars" really has very little to do with long term success.

Andrew said...

chnicola: starting a site like stackoverflow has a huge chicken and egg problem. Theres no point asking questions if theres no one to answer them. Theres no questions to answer if no one is asking them. You need to achieve critical mass of people asking and answering questions in a timely fashion before the thing becomes useful to anyone.

Jeff and Joel being who they are had that initial round of users available, ready to go. I wouldnt be at all surprised if there were other better Q&A sites that withered on the vine because they never got critical mass.

This isnt really about long term success. This is about launching into new niches. Doing that, getting the first round of question askers and answers, is vastly easier if you have an existing community leader who cant bring an audience.

Joel said...

We'd be nuts to mess with the programmer-friendly formula that made StackOverflow successful in the first place. Don't worry, it won't happen. We wouldn't do it, we wouldn't hire a CEO that would do it, and we wouldn't take money if we thought there was any chance of it happening. That is about as fundamental to our DNA as a company as anything can be.

That's one of the reasons we creative-commons'ed the communities contributions from the beginning and we provide frequent normalized dumps of the data: so that if we (or our successors) go bad for some reason, you can take the content and set up elsewhere.

onionfutures said...

I think he's making the right move. Why not test the waters, see what ideas come up, and see what an injection of money could do for the business?

You seem hard on these guys doing anything with a good chance of failure, but the model of most of the internet is trying risky things with the chance that one of them could pay off. Maybe he has some ideas hidden and needs money.

William Shields said...

@onionfutures: the problem is that it's backwards. You don't go to a bank and say "I'd like a loan of an unspecified amount for an unspecified purpose. Do you have any good ideas on how I might use it?"

You develop a business plan and then market it. It may change in that process as different people will have different ideas but if you don't drive the process, it will drive you.

It just seems like those guys are operating under a misconception (eg that there's a land-grab on Q&A sites going on or will happen) or are just looking for ideas on how to leverage this thing into something that makes money.

The latter is fine and I don't begrudge anyone their payday but asking VCs for ideas is a bit like asking Dracula what you should do with all your blood.

Lorenzo said...

Sorry but who are you to give biz advice so loudly? Did you start and operate something nearly as successful as Joel's FogCreek or Stackoverflow?

Charlotte said...

Stackexchange is still unproven in other niches. The business model is potentially flawed as it's simply too expensive and complex to gain widespread use.

People want something that is easy to understand. It is a great tool for programmers, but difficult for anyone else (such as a mum or a pet owner) to get into.

There is now competition from easier to use, cheaper systems such as Qhub.com, making a similar idea easier to access for anyone. Formspring has shown the potential of social Q&A platforms but it still remains to be seen whether people would use Q&A as an alternative to blog or a forum.

sanity said...

> The business itself could benefit from the publicity of getting an investment from someone who is thought of as being a savvy investor.

This seems like a rather lame reason - how many users do they really expect to get from a post on Techcrunch?

> The investor will add substantial value to the business in advice, connections, and introductions.

Joel is an icon in the programming world and I'm sure he could get an introduction to almost anyone he wanted to. I just don't see what some guy with a MBA in finance is going to add to what they already have.

I just don't see what problem will be solved by them raising VC (speaking as someone that has founded several companies that have together raised about $15M).

Rob Allen said...

The VC funding may not be for the Triology/League of Justice.

In response to a feature request I made on meta.stackexchange.com, David Fullerton of Fog Creek responded with "We'll pull it in when we do the merge with StackOverflow shortly after launch." Add that to this quote from Joel's blog post regarding VC funding for SO: "Now we’re biting off the bigger goal of changing the way everyone gets answers to their questions on the Internet, and that’s something we can’t do alone."

Taken together those quotes suggest that the StackExchange project will be merging back with StackOverflow (company and codebase) and then make a combined effort to build both the sell-able platform and trilogy sites with one set of resources. VC funding would be necessary for that since Jeff's company doesn't have the resources by itself and Fog Creek would be giving up control and unlikely to want to be exposed to losses.

Anonymous said...

"The reason stackoverflow.com has gotten so successful so fast is because Joel and Jeff are icons among programmers."

LOL! Jeff Atwood is an icon among programmers the same way Gilligan is an icon among sailors.

Bob Foster said...

Some repeat themselves which is completely redundant.

Greg said...

Jeff Atwood is an icon among sys admins, he's the king of backup :p

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