> Redis Labs CEO Ofer Bengal told me the company’s isn’t cash positive yet. He also noted that the company didn’t need to raise this round but that he decided to do so in order to accelerate growth. “In this competitive environment, you have to spend a lot and push hard on product development,” he said.
I'm always amazed how startups like this where R&D practically cost nothing are not profitable yet after years in the market and thousands of customers. C'mon guys 99% of the work is already done by antirez and the open source community.
Basically what happens is that even if you start to be cash positive, you want to get a bigger company, so you need to scale a lot the sales team and the customer support team, so you spend more money in order to end with more customers, not caring about the short term profitability. This is common to most startups basically.
Btw the Redis Labs development team at this point is quite large, because Redis open source is the core, but the company produces a number of things in order to provide a good managed Redis experience, all the additional features and modules, and so forth. But even so, I think it is accurate to say that most money in most companies of this kind will go to orchestrate the company at a different level, not just R&D.
The Basecamp model has the risk of some other company doing the same thing by taking venture capital and growing by getting more customers. At some point the economy of scale kicks in and the service get cheaper than Basecamp model.
Basecamp could have been slack, but slack ate their cake.
The problem is that, for a lot of companies, the endgame is continued midsize existence; it’s death when you stop getting new customers and old ones phase out.
The low marginal cost of software doesn’t guarantee winner-take-all markets by any stretch, but it does apply pressure in that direction.
If you took VC money, 'enough' is when you cannot expect to profit from more money put into the company. (something to do with 'NPV' or net-present value, if I'm not mistaken)
And it's not about greed really - you actually have an obligation to shareholders to maximise profit.
Yes there are no laws but I always wonder about this.
If people are serious about testing this premise, why not be upfront with the investors and actually tell them that "maximizing profit is not one of our (primary) goals"?
It strikes me as daft to pick on only that. Why's it special? Greed?
Why not be upfront with investors and tell them keeping the company viable, developing new products, finding better processes, treating staff acceptably, or maintaining the environment are not primary goals?
So why fixate on profit or shareholder value? Once you act as though it is a prime directive, you necessarily relegate the others. There are going to be a lot of times in the life of a company where growth, longevity, research or a dozen other things should take priority for a time.
By not doing so, and continuing to push the continually increasing dividend, you weaken the company. Weaker and ripe for takeover, or lacking the next generation of products that might give 20 more years of profit. Maybe by showing so much greed in your pricing that your customers give up and go elsewhere.
A long lived, vibrant, profitable company is more than just a growing dividend and share price, it's a constant balancing act of all of the above. Profit is indirectly maximised as a result of that balance.
One part is especially worth quoting, from John Kay (a British economist and commentator):
"...and the more shareholder value became a guide to action, the worse the outcome. On the board of the Halifax Building Society, I voted in 1995 for its conversion to a “plc”. We would allow the company to pursue the goal of maximising its value untrammelled by outmoded concepts of mutuality: in barely a decade, almost every last penny of that value was destroyed."
Longevity would have been a better priority in that moment, no?
If you take someone's money, you only have a duty to fulfill your promises. Plenty of for-profit companies exist partially for some social good, or exist to further some multifaceted goals. If you can convince someone to invest in those types of goals, nothing is stopping you.
> And it's not about greed really - you actually have an obligation to shareholders to maximise profit.
Not an obligation, but an incentive, as preached by Michael C. Jensen and William H. Meckling in their widely-cited 1976 paper: Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, and in a follow-up HBR article.
Reality is more nuanced. You don't, for example, really know how much profit you'll make from taking more or less investment. It comes down to strategic foresight and belief.. IE not the most reliable guess. IE, a lot depends on the personality and goals of the CEO.
In practical terms, the macro amount of money investors are trying to put in can play a much bigger role than comparing unknown futures. If investors are having trouble investing all the money they want to, the proposition gets more pleasant for the recipient. Less equity, and (more importantly irl, if not formally financial logic) better terms, less loss of control, more choice of investors.
The "fiduciary duty" that obligates companies to make money is also over somewhat academic. IRL, this doesn't really cover strategic decisions. It covers stealing, nepotism, bed-feathering and other blatant shareholder abuse. You could never prosecute a CEO for passing on investment irl.
TLDR: academics formalize these decisions in a clean, whiteboard model of the world. In the whiteboard rule, where the complexity of reality doesn't exist, choices don't really exist either. The CEO just evaluates the npv of taking investment, providing free lunch or launching a new product and the decision is made.
These companies are intentionally walking a careful line of spending a ton of money to create a market-leading product and to capture as much of the market as possible early on. They could easily be cash-flow positive and take on less investment, but it's also very possible that competing products or service providers will overtake them or become dominant in the market they are trying to establish for themselves.
So you don't want to miss out on the opportunity to be the big fish in your pond (you may be unable to keep making money in the long term if you aren't the market leader), but you don't want to grow your costs so fast that you can never catch up.
That's the balancing act being played. And your early-stage investors who have lots of control will push hard to play it aggressively in later stages, because they want to make huge returns. And when there are people out there willing to give you tens of millions of dollars and by extension several years more guaranteed life of your company without you having to do the hard work to hammer out actual profit anytime soon, it's going to be hard if not impossible to turn down.
> but it's also very possible that competing products or service providers will overtake them or become dominant in the market they are trying to establish for themselves.
It's not really possible, they are just playing the startup game. Honest non Patreon sounding justifications are pretty hard to come up with at this point.
Sometimes writing the code is, like, 10% or 20% of the work. Everything else--marketing, hiring, lead gen, legal, accounting, billing, contract negotiation, compliance, on and on--while not creative work, absolutely and disappointingly cannot be ignored.
> 99% of the work is done by antirez and the open source community
Redis Labs employs antirez and therefore sponsor the open source work on redis. At least a part of this VC money is going towards making a great open source redis. As a user, that makes me happy.
> C'mon guys 99% of the work is already done by antirez and the open source community.
That's the problem. Enterprising open-source stuff is really hard. Either you're selling support for already-open-source stuff, or you're selling an enterprise variant with extra goodies and throwing a support plan on top of that.
Companies suffer from Mrs. Armitage's Bike, where they're not happy with what they've got and need more. I wish more companies could just do one thing well and scale to whatever size it is that does that.
I'm always amazed how startups like this where R&D practically cost nothing are not profitable yet after years in the market and thousands of customers. C'mon guys 99% of the work is already done by antirez and the open source community.