[HN Gopher] Don't Take VC Funding - It Will Destroy Your Company
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Don't Take VC Funding - It Will Destroy Your Company
Author : olieidel
Score : 559 points
Date : 2023-07-09 14:56 UTC (8 hours ago)
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| api wrote:
| VCs are not all created equal. Some are better than others. Some
| like to stick to a company's vision unless things are clearly not
| working while others don't care and will make you flail around.
| Some understand and specialize in a given market and others just
| throw spaghetti at the wall. Some are decent people and some are
| assholes.
|
| Terms matter a lot too. If you raise a ton or raise on a super
| high multiple you will have to show cocaine growth to make that
| make sense. If you raise sanely the expectations are going to be
| more sane. (Lots of companies raised overstuffed rounds in 2021
| to 2022 at batshit multiples. Expect some carnage soon.)
|
| That being said it does put you on a certain track. If you don't
| have something that can show VC scale growth, you shouldn't take
| VC money. As with all other things know what you are getting
| into.
|
| Right now I would consider VC for B2B but not B2C. There are no
| VC scale B2C business models right now that do not involve
| exploiting people. B2B can be done in much more above board ways
| because businesses will just pay for things directly. You will
| have to build a sales org though.
| [deleted]
| DeathArrow wrote:
| >If you had any romanticized notion of building the company of
| your dreams with your employees becoming your best friends or
| family, well, now's the time to let go of those ideas
|
| I think most people start a business to make money, not to gain
| friends or enlarge their families. If your objective is to gaing
| friends or enlarge your family, there might be better means to
| accomplish that than starting a business.
| DeathArrow wrote:
| It seems the author views venture capitalists as a bunch of
| idiots who are eager to lose money.
|
| And yet, venture capitalists are making money and many founders
| along with them.
|
| Ok, if your goal is to have a very small business, with just a
| few employees and a few customers, rule that business how you
| want and have fun, you can bootstrap your business and keep it
| small.
|
| But I think the majority of founders would prefer a fast grow and
| making lots of money relatively fast, followed by starting a new
| business.
| t43562 wrote:
| I think it suggests that their interests are not your interests
| and success for them doesn't mean success for you. Their
| approach helps to give them one big success occasionally to pay
| for the things that fail but that's no use if you are one of
| the failures.
|
| So they are not carefully trying to grow each company - they
| are adding lots of fertiliser and seeing what survives. In fact
| they make success harder for you by the things they force you
| to do. This is fine for them because one company will grow big
| but not fine for you unless you are that one company.
| DeathArrow wrote:
| >You know, in ancient times, when Peter Drucker, the Master Yoda
| of business books, was still roaming the planet (alongside
| dinosaurs, probably) and writing business books, the definition
| of a successful company actually included the fact that the
| company was making more money than it was spending - it was
| profitable.
|
| I guess some companies like Yahoo were never profitable but some
| people got rich buying and selling shares.
| adhesive_wombat wrote:
| And some companies are only profitable as-run for the
| shareholders, temporarily, despite being theoretically sound
| long-term businesses. Take a profitable company, cut costs to
| bone, arbitrage off all the goodwill generated by an erstwhile
| decent product, strip assets, pay executive salaries, bonuses
| and dividends on the "stunning" short term profits and flit
| before the emptied husk crashes down on top of the employees
| that once made it work. Bonus dead-eyed vulture points if it's
| public infrastructure and the tax payer is now on the hook for
| double-digit billions to restore the damage you did.
|
| This week, water, but the same happens over and over again in
| every sector: https://theconversation.com/how-thames-water-
| came-to-be-floo...
| buzzscale wrote:
| Fascinating. Seems like similar issue risk management issue
| to silicon valley bank where they didn't account for a jump
| in interest rates and increase in inflation.
| adhesive_wombat wrote:
| Calling such shameless pocket-stuffing a "risk management
| issue" seems to rather be like calling a drink-driving
| accident that kills a pedestrian an "unforeseen kinetic
| event".
| adventured wrote:
| Yahoo isn't a good example. They were able to routinely turn a
| profit after the dotcom bust. Their business was very similar
| to Twitter's profitable years in terms of margins (pre Elon;
| 10-20% operating income margins). Yahoo had a gigantic (at the
| time), successful ad business and a lot of properties to
| display the ads on.
|
| As of right now, the single greatest example in modern business
| history is Uber. Although they continue to trim their operating
| losses and it appears they may reach sustainability ($14.1b
| revenue with $8.5b operating loss in 2019; trimmed to a $1.8b
| operating loss on $31b in revenue the past four quarters).
| Their history of loss generation is astounding. Upwards of $30
| billion in operating losses since 2009. Even in an ideal
| scenario it'll probably take them 10+ years after they finally
| reach an operating profit to turn that net positive.
| runlaszlorun wrote:
| Yikes. I knew they've hemorrhaged money but I didn't know it
| was that much. I ran the numbers once back when their total
| funding a lot less. And I came to the conclusion that with
| that money they could have literally paid every cab driver's
| salary for a year and given out free rides. But since you
| need regulators to look the other way, there was enough to
| literally give every state legislator in every single state a
| million dollars. And I'm sure it'd take far less. And there
| was still a sizable chunk left over.
|
| I feel like the startup game for a while now has been... and
| the numbers are arbitrary but I don't think the dynamic is
| wrong... raise about $100 million to get a total of $10m in
| revenue and then be worth $1b. That's not business as we
| think of it.
| dec0dedab0de wrote:
| _The first and main takeaway is this: Companies which receive VC
| funding are not profitable. They would run out of money if they
| wouldn't get the VC funding. So the news announcement that your
| company MagicalUnicorn received VC funding is actually not a
| message of success, it's rather a confession of failure._
|
| I remember when a small company I worked for was super excited to
| announce how much of a loan they got. I took that as a sign to
| clean up my resume.
| aidanlister wrote:
| Contrarians are so funny, everything is a hammer.
|
| A bunch of very smart bankers have spent an enormous amount of
| time doing due diligence on the company you work for and they
| think that the risk is low and repay-ability is high ... but
| the contrarian always knows better. To them this is a sign that
| the end is nigh, and they rejoice in the feeling of their
| beautiful superiority.
| sebastianconcpt wrote:
| TL;DR: to maximize the population with the best survivability
| rate, walk the bootstrapped path, not VC's path.
| burlesona wrote:
| This article is technically correct about a lot of things, but it
| also feels like it's over-thinking things. Yes if you take big VC
| investments, the purpose is to grow a big company and sell it
| later, and at that point the deal really is "rocket ship or
| bust." But there are also a lot of VCs who are happy to invest
| small amounts very early, don't get control of the company, and
| would be happy to see you get profitable without taking any more
| investment -- often these smallest investors are called "angels"
| but there are also firms that specialize in these kinds of
| investment.
|
| It's fine for the author to be all high and mighty about looking
| down on taking funding, but for most people bootstrapping isn't
| practical or even possible, the business they want to run
| requires full-time focus and attention, and they don't have the
| means to work for 2+ years without a paycheck. VC funding gives
| people like that a chance to try!
| allenleein wrote:
| VC money is the rocket fuel. If you're not going to build a
| rocket, then don't take resources. There are plenty of tech
| startups generating over $100 million in revenue that didn't
| require that fuel.
| klysm wrote:
| I've seen several people say that in this thread - who is the
| original source of that analogy?
| netcruiser wrote:
| Mr Wonderful?
| nvrgngvup wrote:
| [dead]
| exabrial wrote:
| Apologies and I don't mean this as a snarky question, but I have
| been asked to be a part of a lot of start ups, because you know
| "I can write an app".
|
| All of the offers have just had equity is compensation. I've
| dodged the many of bullet, but I definitely would've taken cold
| hard cash.
|
| My advice to a lot of them was "Get funding, I'll come work on
| the idea". How does HN propose they do that instead?
| Waterluvian wrote:
| There's many reasons to start a company, ranging from "money
| money money!" to "this is my passion and it brings me joy."
|
| Figure out what matters to you and act accordingly. And you can't
| decide "money and passion" because, in my opinion, they're at
| odds with each other and is usually just a self-lie.
|
| Like always, no post has a one-size-fits all answer. Well, except
| for this comment. ;)
| jll29 wrote:
| This article has a point, warning of some dangers of taking risk
| capital, but it is too biased against it: better, more balanced
| advice would be to say: there are use cases for risk capital, but
| there are also many use cases where bootstrapping or debt capital
| (taking a loan, borrowing money) is the right financing approach
| instead.
|
| It all depends on how capital intensive your business is, and how
| fast you want or must grow to become how large.
| lifeisstillgood wrote:
| At some point around 2008 starting a (tech) company became
| possible at "ramen" levels - middle class kids could launch on
| AWS etc. Tech VC struggled to adjust and a new breed of VC (ie
| ycombinator) saw a gap and exploited it - they needed smart
| founders who could get to series A with minimal funding. (more
| fairly they also (slowly?) paid founders much more and encouraged
| earlier liquidity so founders you know could see earlier payoffs)
|
| anyway, the point was that it became possible to launch and run
| with small capital investment. But at some point you had to hire
| more people to do the extra coding bits.
|
| I am wondering if LLMs are about to chnage that. The coding
| output is so good it could put off hiring a tranche of new devs
| for months or years. "create a web page to show the cities in
| yellow where users > 1 poker per month" is something you used to
| hire someone to do, and correct their work. now you are hiring
| OpenAI.
|
| How much early phase work can be delegated to OpenAI if you know
| the right questions? Can the onboarding work through a chat bot?
| the initial demos? And is the next ycombinator skill set going to
| be "I know the right questions to ask ChatGPT to allow you to
| keep lean for another year?"
| eastdakota wrote:
| You're so right! It was an absolute disaster for us. Never do
| it!!!!!
|
| Kidding aside, it is true that raising money from VCs puts you on
| a very defined path with really only three potential outcomes: 1)
| failure, 2) sell to acquirer, or 3) go public. There are a small
| handful of exceptions, mostly for companies that throw off
| massive amounts of cash, but, realistically, those are the
| outcomes.
|
| If you don't like any of those end states and what it
| realistically will take to get to them, don't raise money from
| VCs.
|
| But, having done so and been successful and taken a company
| public, I can say: it's pretty great and I have zero regrets
| about anyone we raised money from. And I'm proud that everyone
| who invested in us prior to going public made at least a 10x
| return.
|
| While there are plenty of VC horror stories, there are fairytales
| as well.
| noobermin wrote:
| This is a nice wrinkle to the story, but as a reply points out,
| your story (3) is a hell of an exception, a fairytale if you
| will. It would be nice if people realise that and have
| realistic expectations. You shouldn't set people on chasing
| fairytales without them being aware that's what they are doing.
| onion2k wrote:
| According to Statista there were 16,464 VC deals signed in
| 2022. There were 181 IPOs in that year. The most IPOs in a year
| _ever_ is 1,035. Obviously the two aren 't directly comparable,
| but the point I'm getting at is that an IPO exit for any
| company is _really_ unusual. If you found a company and take on
| VC funding your exit event is _much_ more likely to be getting
| acquired if you don 't fail. It does happen, and deservedly so,
| but if you're at a point prior to raising 'what if we IPO?'
| probably isn't a very useful question.
| jacquesm wrote:
| Of course it is unusual. But no less unusual than building a
| successful company to begin with. What's normal is failure.
| Alex3917 wrote:
| > But no less unusual than building a successful company to
| begin with.
|
| Statistically, companies that raise venture capital are
| _vastly_ less likely to succeed than those that are
| bootstrapped.
|
| Think about it this way: from the perspective of VCs, the
| most successful apps of the iOS era were Uber and AirBnB.
| But from the perspective of entrepreneurs, the most
| successful app of the iOS era was the Flashlight app.
|
| Which one do you think was easier to build?
| jacquesm wrote:
| You're right that in numbers of survivors there
| bootstrapped ones are going to outnumber the VC ones. But
| in terms of total # of employees, total $ of turnover and
| profits I would expect it to be the reverse.
|
| But for any individual founder, if you want to aim for
| 'successful enough to be relatively wealthy and worry
| free' then 'bootstrapped' is the way to go. If you aim
| for an outsize success, wealth for the next N generations
| and massive impact on the world (for good or for bad)
| it's going to be very hard to avoid the VC track.
|
| I wrote about this long ago, but it is still quite
| relevant:
|
| https://jacquesmattheij.com/three-roads-to-the-top-of-
| the-mo...
| Alex3917 wrote:
| > But in terms of total # of employees, total $ of
| turnover and profits I would expect it to be the reverse.
|
| In general, the less money that startups raise, the
| better their returns:
|
| https://techcrunch.com/2016/10/15/overdosing-on-vc-
| lessons-f...
|
| There are a number of reasons for this, a big one being
| that marginal revenue is always the least profitable:
|
| https://techcrunch.com/2017/10/26/toxic-vc-and-the-
| marginal-...
| dash2 wrote:
| This is fully compatible with the OP's point. They
| mentioned total $. Returns are percentages.
| DeathArrow wrote:
| The revenue can be 0. As long as the shares are worth a
| lot, you are still a very rich person.
| [deleted]
| DeathArrow wrote:
| Seeing that you wrote the article 12 years ago, I am
| curious how did it work for you. Did you make it to the
| top of the mountain?
| jacquesm wrote:
| Well over and beyond my wildest expectations.
| DeathArrow wrote:
| >Statistically, companies that raise venture capital are
| vastly less likely to succeed than those that are
| bootstrapped.
|
| I'd wonder if taking VC money five times, failing 4 times
| and building a large and growing company 1 time, isn't
| better than bootstrapping a small and profitable company
| just 1 time.
| noobermin wrote:
| The article is specifically about this value judgement.
| If you do not value _making a profit_ as a company you
| have to find value in something else. Which is fine,
| different things motivate different people and should,
| but at least be clear that it is fundamentally a values
| conversation.
| DeathArrow wrote:
| Businesses are about profit not values. An NGO is a
| better vehicle for pushing values than a business.
| tptacek wrote:
| I sort of don't doubt that VC-funded companies are less
| likely to succeed than bootstrapped companies, simply
| because bootstrapped companies can keep afloat with
| consulting and VC-funded companies can't. But vastly
| lower odds of product success sounds like something
| that'll need a citation.
|
| It seems likely that VC-funded app store pure plays
| without a recurring revenue SAAS component are much less
| likely to succeed than indie app store pure plays, but
| that's because VC is obviously the wrong model for one-
| and-done app store transactions. If you have a good idea
| for an app, don't raise for it (you'll have a hard time
| raising for it anyways).
| Alex3917 wrote:
| IIRC each time you raise a round, your chances of success
| go down by ~10x. Can't find a good cite offhand though.
| tptacek wrote:
| Every time you raise a round, the outcome you're shooting
| for is magnified. If you're raising an A round, you're
| not getting acquired after your seed; you're rolling the
| dice on getting a much better outcome. If you're raising
| a B round, you've got some facsimile of product-market
| fit, and you've decided to take the company to the point
| where the only "successful" outcomes are denominated in
| hundreds of millions of dollars, etc.
|
| So it's not surprising that there's a stat somewhere that
| says "committing to a 500MM sale decreases your odds of
| success over satisficing with a 50MM sale", right? Very
| few software companies of any provenance end up going
| public, but by the time you're raising a C, that's
| essentially what you're saying you're going to do.
| jacquesm wrote:
| For down rounds the stats are probably much, much worse.
| vidarh wrote:
| It gets even worse, because a proportion of those raising
| another round are doing it because they're failing to
| grow fast enough, and are grabbing more cash before it's
| too late.
|
| So you get a mix on those rolling the dice one more time
| in the hope of that next 10x, and those unable to get an
| exit, and unable to earn enough, but able to convince
| investors one more time that _this round_ will pay off,
| and who will rarely pay off well for founders or early
| investors, if at all.
|
| I've both been in companies like that and worked for a VC
| analysing round data to avoid putting money in companies
| like that...
|
| In a company like that, I once got 10k for my original
| 25% stake when the company was finally acquired... I left
| after the 4th round or so, and there were at least a few
| more after I left (I stopped.paying attention. The
| company was acquired for only 40% above the size of the A
| round.
| tptacek wrote:
| Right, but that blows up the causality of the stat
| proposed above.
| jacquesm wrote:
| Once you're in the VC cycle though not being able to
| raise another round when you need it is a 100% decrease
| in your chance of success. So I'm not sure if that
| follows for any but the first. Essentially you need to
| keep raising until you either reach profitability at
| scale, are acquired or IPO, and even the latter won't
| help you if you aren't eventually profitable.
| harles wrote:
| > Statistically, companies that raise venture capital are
| vastly less likely to succeed than those that are
| bootstrapped.
|
| Any citation for this? I'm highly skeptical of this
| claim.
| briantakita wrote:
| The definition of "success" is different between a
| bootstrapping business & a VC funded business. A
| consultant can define success as "making enough money to
| live off of". A VC funded business has a different
| definition.
|
| So how would a study be conducted? A survey asking if the
| business was "successful"?
| santoshalper wrote:
| Actually, that's not a bad idea. Surveying founders at 5,
| 10, and 15 years after founding whether they were happy
| with the outcome could be enlightening. A little bit like
| the 7-up documentary series. It would be very interesting
| to see which path tends to provide the best outcomes
| according to the founders.
| raffraffraff wrote:
| Maybe for some of them just getting the VC funding is
| success. Pay yourself enough, last long enough, make good
| contacts... And if it fails, start over with the extra
| experience and contacts, or join an existing startup at a
| high level. Failure doesn't seem to hurt the careers of
| executives that much.
| woobar wrote:
| What is the Flashlight app developer success? At best the
| app sales supported them for a year or two. By this
| metric a failed VC funded company also has supported its
| founder (plus employees) for a year or two.
| mgfist wrote:
| For this to be a true comparison, you should look at how
| many flashlight apps were built.
| marcosdumay wrote:
| Sure, most initiatives fail. But successful ones are not so
| rare that you don't expect to see one.
|
| If you go all the way until you realistically start a
| company, you are more likely to succeed than to fail.
| adventured wrote:
| Failure is definitely the commonality. The BLS reports
| typically that 1/2 of all new businesses (in the US) will
| formally fail within five years. One can safely guess that
| at least half of those remaining are something between
| zombies and hanging on by a thread. 1/4 or fewer will make
| it 15 years or more. And of course it varies by sector,
| restaurants notoriously have an exceptionally high failure
| rate. For all businesses the failure rate is around one in
| five in the first year [0]; for restaurants the failure
| rate is ~60% in the first year, and ~80% fail within five
| years.
|
| [0] And again, don't forget to assume the figures are even
| higher because the figures will never fully account for
| zombie businesses or quasi-zombies and the equivalent.
| Joeri wrote:
| I'm wondering about the failure rate for technology
| companies. It may be higher or lower than restaurants, I
| have no intuitions.
| fbdab103 wrote:
| There is somewhat fuzzy on where you even draw the line.
| Does someone moonlighting on their Wordpress side hustle
| count as a company? There are many of those which seem
| unlikely go bankrupt - the most frequent end state is the
| sole proprietor quits due to lack of work or interest.
| marcosdumay wrote:
| Those figures also do not account for selling all of the
| company's property with some profit and closing it down;
| the equivalent of an acquihire for small and medium
| companies is counted as failure. Running it successfully
| for a couple of years and changing your mind is counted
| as a failure too.
|
| I don't have a link on hand, but I've seen studies from
| people that counted how many business actually closed due
| to money problems. The actual rate of non-problem
| business after 5 years is close to 80%.
| jacquesm wrote:
| I would expect it to be close to 100%. The difference
| between the 80% and the 100% is the ones that grow in
| spite of and sometimes because of their problems. Every
| business will run into trouble, sooner or later. In fact
| I don't recall a year in the past decade without some
| kind of crisis that needed fixing. Some self inflicted,
| some just circumstance and some outside malice. Never a
| dull moment if you run a small company.
| DeathArrow wrote:
| >Every business will run into trouble, sooner or later.
|
| Even large businesses that have comfortable cushions and
| safety nets?
| jacquesm wrote:
| Yes. But they are better positioned to deal with it and
| will likely survive. But even the IBMs, HPs and Boeings
| of this world are not immune.
| bawolff wrote:
| Most businesses fail.
|
| My intuition is that rate of failure in software, where its
| much more winner take all, would be higher than brick and
| motor businesses, which constantly fail.
|
| So really, this doesn't seem surprising.
| fatfingerd wrote:
| I think it's entering a winner take all market that's
| strongly correlated with VC money. There's plenty of
| software companies that outlive restaurants and startup
| cycles, doing pretty common B2B work, but they are unlikely
| to accidentally get a valuation based on a probability of
| winning a winner take all market.
| blindriver wrote:
| 90% of all startups fail so the expectation of an IPO when
| you join a startup is insane.
| hinkley wrote:
| And yet many of those companies expect their employees to
| be excited by that prospect.
| c7b wrote:
| According to the same source, 2022 was the second-most VC
| deals since 2006, and ca the 4th worst for IPOs according to
| stockanalysis.com. There's clearly a massive upward trend in
| VC deals, while IPOs are much more stationary. Eyeballing
| those charts, the average number of VC deals, especially in
| the relevant period for today's IPOs (10+ years ago), is
| probably closer to 5-6k, and the average number of IPOs to
| 250, ie ~5%. Combining this with the folk wisdom that 90% of
| all startups fail, this seems to suggest that half of the
| successful startups go public, actually. Lots of things that
| we'd need to account for (not all IPOs are probably startups,
| # VC deals != # of startups,...), but speaking about
| tendencies, the data doesn't seem to support such a strong
| statement.
| jefftk wrote:
| Many startups raise multiple rounds, so I think you're double
| counting? Don't you need to either divide 16,464 by the
| typical number of funding rounds or only count, say, series
| As?
| qeternity wrote:
| Most startups don't raise multiple rounds in the same year.
| jefftk wrote:
| I don't think that matters?
|
| (An extreme example to prime your intuition: imagine that
| there are one IPO and 10 VC deals annually. If every
| startup raises money annually and there are 10 startups
| at any one time, then every funded startup eventually
| IPOs.)
| mwint wrote:
| They also don't IPO more than once, usually.
| 71a54xd wrote:
| There are plenty of other ways to exit that don't involve an
| IPO. Acquisition, selling shares on secondary markets or
| privately etc...
|
| Doing VC the wrong way can make your life hell, but taking
| all the risk yourself and bootstrapping is in its own right a
| special kind of hell if you're not careful.
|
| IMHO, it's all about time horizon. Working on a startup for
| 3-4 years without a clear product market fit or some kind of
| exit is a waste of time unless you're a Jensen (which most of
| us aren't anyways).
| DeathArrow wrote:
| And is worse to fail losing your own time and money than to
| fail losing VC money. In the second case, you can get up
| and try it again easier than in the first case.
| theptip wrote:
| You'd want to compare this with the base rate of failure for
| a business venture (ideally across the economy and
| specifically bootstrapped tech companies).
|
| Spoiler: most businesses fail.
|
| I'd also believe that VC funded companies are more likely to
| fail as they are making all-or-nothing swing for the fences
| plays. But you need to compare to the correct baseline to
| avoid confusion.
| laurex wrote:
| Beyond the issues surrounding the failure rate, it's worth
| thinking about the extra work to keep satisfying investors,
| the likelihood that you'll lose at least some measure of
| control, and fundamentally the ethics of extraction that VC
| models necessitate, meaning you will need growth even if it's
| not good for the company or the customers in the long term,
| and that kind of growth often also means that there's an
| impetus to ignore the negative impacts on environments,
| communities, and economies.
| dinvlad wrote:
| This very much applies to Cloudflare, otherwise it wouldn't
| tolerate hate groups hosted in the name of "freedom of
| speech" and all that PR bs. Ethics not only takes the back
| seat, it disappears without a trace.
|
| And let's not forget the ethics of continually selling a
| large chunk of their shares in the company they publicly
| believe will continue growing and is profitable.
| paulddraper wrote:
| 1. 2022 was historically low for IPOs.
|
| 2. Companies will have _multiple_ rounds of funding before
| IPO.
|
| 3. Acquisitions are more common than IPOs.
|
| 4. Yes, a significant number of startups fail. If it were
| easy everyone would do it.
| Qwertious wrote:
| Context: the above commenter founded Cloudflare, which is a
| huge company now.
| eikenberry wrote:
| I think it is mostly based on one's POV. From the founders
| perspective starting a company, raising capitol and eventually
| taking it public might be taken as a wildly successful path. To
| an employee all it means it more and more dehumanization,
| destroying the company as a work place.
| no_time wrote:
| With all due respect, your company is probably one of the
| biggest and most successful mass surveillance operations on
| earth. I wouldnt lose sleep over these things too if I knew my
| company would be scooped up by a 3 letter agency if anything
| were to happen that threatens this flow of data.
| davidcbc wrote:
| That some people win the lottery is not a good argument for
| playing the lottery
| hinkley wrote:
| Reversion to the mean is vastly overlooked in this Bayesian
| world.
|
| If I do something dangerous and win, then a roomful of people
| copying me have lower odds than I did, not better.
| tptacek wrote:
| If you feel that way, don't start a product company.
| mwcampbell wrote:
| This seems to assume that the only reason to start a
| product company is because you want to gamble on the slim
| chance that you'll get rich. But what about starting a
| product company because there's a problem you believe
| really ought to be solved, and developing a commercial
| product is the best way to solve it? In that case, wouldn't
| it be prudent to avoid unnecessary risk?
| tptacek wrote:
| You'll still most likely fail! This is a really important
| part of why the VC math works the way it does. You can
| de-risk a product company by not trying to shoot for the
| moon, but it's an incremental derisking.
| eastdakota wrote:
| The lottery is not a very good analogy. Let's look at worst
| cases. In the lottery you put in cash and usually get nothing
| back. You literally learn nothing because every draw is
| random. At a VC-backed startup someone else gives you money.
| With that money you're expected to pay yourself a salary. You
| get to learn at an incredibly fast rate on someone else's
| dime. And you get that salary and learning even if your
| investors are awful and push you to do terrible things and
| you agree to do those terrible things and they tank the
| company. In the worst case, it's a free education with room
| and board included. And, if it works, there's a helluva
| upside.
|
| So, lottery expected worst case: you lose all your money. VC-
| backed startup expected worst case: you learn a ton and end
| up no worse financially than you started.
|
| As an aside, whether venture-backed or bootstrapped, having
| gotten to know a lot of successful founders the
| characteristic that seems to set them apart is their rate of
| learning. The best are relentlessly curious, always assume
| there's something they don't know, and seek to learn from as
| many people as possible.
| hinkley wrote:
| > And you get that salary and learning even if your
| investors are awful and push you to do terrible things and
| you agree to do those terrible things and they tank the
| company. In the worst case, it's a free education with room
| and board included.
|
| If you're learning as much at terrible companies as at good
| ones, then you've had rotten luck. A lot of what I've
| learned at rotten companies is how _not_ to do things, and
| how important mental health is to physical health. There's
| much more negative space than positive space, so you have
| to learn hundreds of ways not to do something for every
| handful of ways that actually are sustainable.
| nwienert wrote:
| You get almost no money in salary, and you spend something
| way more valuable than money: time, during your most
| energetic and precious years of life typically. I think
| it's really dangerous to put rose tinted glasses on the
| whole thing.
|
| For anyone not upper class, if you spend 6 or so years
| chasing a startup and fail, and you're a good software
| developer.. once you factor in savings and interest, your
| total opportunity cost is something like 2-4 million
| dollars. That's making a good software dev salary for 6
| years and saving some of it. That's life changing for
| someone not already rich. And you'd still be learning a
| lot, plus working a much more relaxing job with time for
| side projects.
| eastdakota wrote:
| Agree that's the right analysis for many people. Wasn't
| arguing whether you should start a startup or not. Just
| that if you do bootstrapping isn't inherently better than
| raising venture capital.
|
| Your broader point is important too: startups are
| unfortunately too often a luxury of the upper class. It
| is extremely scary to take a risk when you don't have a
| safety net. I was personally broke when we started
| Cloudflare and had to borrow money from my mom to pay my
| rent. But I could borrow money from my mom. And I had a
| mom and a family that if I failed would make sure I
| didn't go hungry. My family wasn't anything close to what
| I now see really rich looks like, but we weren't scraping
| by. Had I not had that safety net I don't think I'd have
| had the confidence to start Cloudflare. And I think
| that's a real issue with entrepreneurship we don't talk
| enough about.
| yibg wrote:
| I think we also focus and celebrate too much the route of
| college drop out start up founders. For these cases yes
| some family wealth is definitely beneficial as a safety
| net.
|
| But there are also plenty of people that have worked for
| a while, provided themselves a safety net and go on the
| startup journey in their 30s and 40s. Eg. Eric Yuan, who
| was a eng VP already before zoom.
|
| But I guess those don't grab the same headline attention.
| mattbuilds wrote:
| I wish we could stay away from generalities. There is no one
| size fits all answer to questions like "should I take
| funding?". The answer depends on your goals and where you are
| competing.
|
| If what you are trying to do is capital intensive, has tons of
| competition and generally will need the scale in order to
| compete/turn a profit, you should probably take VC funding.
|
| If you want full control over your product or are operating in
| a niche and think the explosive growth necessary will hinder
| you, you have different priorities. You might not be trying to
| make the next "big thing" and in this case probably don't take
| funding. In fact, you probably don't want VC funding because
| your goals don't align with theirs.
|
| Like most difficult questions, the answer is: it depends.
| Nevermark wrote:
| Few people are pedantic enough to misinterpret "never" slash
| "always" premises detrimentally.
|
| It is a pervasive rhetorical shortcut.
|
| 1. Flatten a proposition to an all or nothing form to
| simplify communication.
|
| 2. The reader steps back into the real multidimensional world
| with clearer insight into one of its dimensions.
|
| Anyone confused by this has deeper problems than VC or not VC
| questions.
| j45 wrote:
| There is an option #4 that I've been around a few times: build
| a shark that is doing the acquiring within 5 years.
|
| Superior tech, maybe hyper efficient, hyper profitable.
| eastdakota wrote:
| You still eventually need to return money to your private
| market investors at some point. So that just pushes the
| outcomes out later. Or, again, in the super rare case that
| you're generating so much case that you can pay investors
| back at a rate of return they're happy with with dividended
| cash flows.
| j45 wrote:
| I meant the 'super rare' case.
|
| It's not so rare in some industries like oil and gas, etc
| where cashflow is the purpose of the work.
|
| Add software that does what nothing has before.. and the
| table turns.
| eastdakota wrote:
| Agree.
| j45 wrote:
| The first time I saw how customizable a PE deal was, and
| how you could limit how much of a company you give away
| with how little of the PE you end up drawing by becoming
| profitable, I was surprised why it isn't more common in
| tech.
| esafak wrote:
| Can you recommend any books on this subject?
| JumpCrisscross wrote:
| > _still eventually need to return money to your private
| market investors_
|
| If that's what you pitched them. Most businesses are
| private. Most rely on outside funding. Most of them never
| exit, and are never expected to.
| yowlingcat wrote:
| This model is interesting, and I've definitely been wondering
| about this a lot more in the new macroeconomy. Do tell more
| if you're up for it.
|
| From my perspective, it's effectively the PE model except the
| funding source is the company's own revenue rather than
| investment capital.
| j45 wrote:
| I had drafted a reply but would be interested to know what
| you're looking after - is a story/experience of PE from a
| technologist on the business side what you're seeking?
| [deleted]
| youngtaff wrote:
| Are you profitable yet?
| dabeeeenster wrote:
| > While there are plenty of VC horror stories, there are
| fairytales as well.
|
| What's the ratio, though??? 10/1? 20/1? 50/1?
| JumpCrisscross wrote:
| > _What 's the ratio, though??? 10/1? 20/1? 50/1?_
|
| About the same as the ratio of successes to failures in a VC
| portfolio.
| getoffmycase wrote:
| According to a talk I heard from a VC, the bulk of
| investments return very little, several may 2x to 5x, a few
| may 5x, and one will 15-20x or greater.
|
| They're looking for a 10+% return on the entire portfolio.
| metadat wrote:
| In my experience, around 5% of VCs I've met in real life are
| truly decent human beings, even in cases where they _don 't
| have to be_. The rest have been pure capitalistic sharks
| (which is understandable, given the entire sector filters for
| this).
| bombcar wrote:
| The best VC I ever interacted with was retiring and treated
| us more like a fun project than a VC investment. Kelts is
| going longer than he should have and exited with a small
| return eventually.
| tptacek wrote:
| Why are you meeting VCs? In what context? What else are
| they supposed to be in that context? It's a sales + finance
| job. If you're meeting them in a working context, and
| you're not transactional _and_ don 't have a really clear
| idea of what you're trying to accomplish, it'll be a
| alienating experience, except in the rare cases where
| they're going out of their way to be nice to you because
| you're out of your depth.
|
| I had a lot of animosity towards VCs from several bad
| experiences (with a company of mine that got funded, and
| then with another that didn't). But I've come to realize
| the commonality of those bad experiences was that I was
| naive about what was going on. I don't go to my bank hoping
| for camaraderie and sage advice. VC is tricky because of
| the "sales" layer it adds to the bank. The best parallel
| (this is probably really offensive to investors but it's
| more about me than about them) is real estate agents ---
| who I also had very bad experiences with, until I learned
| what was actually going on.
| metadat wrote:
| Great points and perspective, thanks for sharing! Totally
| agree.
|
| Having grown up in a family that runs a real estate firm,
| I can say the ratio is about the same - about 1 in 20
| real estate agents are decent human beings who desire
| both to help others and make a living, and the rest are
| highly self-interested.
|
| What I find interesting is the VC stories along the lines
| of "X VC really worked with and helped/saved us!". I
| haven't encountered such stories about any bank.
| tptacek wrote:
| What tripped me up with real estate agents is how
| socially skillful they are. It's a survival skill, so as
| a cohort they're all anomalously good at building rapport
| and, from there, trust. If you don't know what you're
| doing, and what they're doing, and you rely on them as
| the domain experts, there's a pretty decent chance you're
| not going to be happy with the outcome. Their incentives
| aren't perfectly aligned with yours, and if you're not
| providing a structure to engagement, they are, and that
| structure will serve them.
|
| But the flip side of this is that what feels like
| mercenary behavior is also useful for the actual job of
| making real estate transactions happen, so if you
| optimize for the most trustworthy, least self-interested
| real estate agents, you're also not going to get the best
| outcome (and you're going to bounce off of lots of non-
| altruistic real estate agents in the process). It's going
| to leave you with grim feelings about the entire business
| about real estate. Which: fair enough! There's lots not
| to like about it. But you, personally, as a consumer of
| real estate services, will feel better and have a better
| experience if you learn to understand and adapt to how
| real estate actually works.
|
| And a lot of mercenary real estate agents are perfectly
| lovely people, just doing what it takes to do a job well.
|
| As with real estate, so with investing, I suspect. Great
| example: every VC you meet is going to tell you they're
| interested in investing and that they want to move the
| process forward, and they'll keep giving you hoops to
| jump through as long as you let them without ever
| intending to invest. That's incredibly aggravating, until
| you know what's going on and learn to read the room.
|
| I'm not good at any of this stuff and would get gutted
| like a fish trying to raise a round myself, but I've had
| the benefit of seeing it done well firsthand now, and
| talking to others who've done it well, and it makes a lot
| more sense to me now.
| wolf550e wrote:
| Can you please share a link about understanding "what's
| going on and learn to read the room"? For real-estate and
| venture capital.
| conradfr wrote:
| Your VC founded business can fail without being an horror
| story though.
| eastdakota wrote:
| Indeed! And an honorable failure -- where you learned a
| ton, tried your best to succeed, but it just didn't work --
| is a terrific outcome. We acquihire "failed" startups quite
| regularly. The founders of those companies have often
| turned into some of our best senior engineering and product
| leaders. And some of them go on to then leave after
| learning from us to give a startup a go again.
|
| Success or failure aren't the bad startup outcomes. The
| worst startup outcome is The Slog. The Slog sucks. I have
| several friends stuck in The Slog. Symptoms: you're growing
| just barely enough to hold things together (call it 10-20%
| YoY on <$200k in revenue per employee). You keep thinking
| the next big thing is just over the horizon. You have a
| handful of customers who say they love you but won't buy
| any more from you. Every once in a while you get some press
| or show up on HN saying you're cool.
|
| _THAT_ is the recipe for disaster. You can wake up and
| realize 10 years have passed and you have nothing
| (economically, educationally, or emotionally) to show for
| it. It's possible both with bootstrapped and VC-backed
| startups. The Slog is the worst startup outcome.
|
| Bad VCs can definitely make The Slog worse. There's so much
| money in the system there's almost always someone who will
| put more in, even if on worse and worse terms. Good VCs, on
| the other hand, can help get you out of The Slog. They can
| counsel you when it's time to give up. They can introduce
| you to potential acquirers. And while it may not be a huge
| financial win for you or them, it's a much better outcome
| than slogging on indefinitely.
| rtp4me wrote:
| If you are inclined to share your VC experience, you
| might want to reach out to the founder of Dioxus. As a
| recent YC 23 "winner" and recent (ex)employee of
| CloudFlare, I'm sure the founder would love to get your
| personal take on VC funding. I also understand they're
| working on a product that CloudFlare could possibly
| use...
| mwcampbell wrote:
| One perspective that's missing here is that of the users
| that are presumably benefitting from the company's
| product(s). The users would probably prefer that the
| company keep slogging than that it get acquihired and the
| "failed" product get killed. I recently read _The One
| Device_ by Brian Merchant, and I'm reminded of the story,
| told in that book, about how FingerWorks sold out to
| Apple. The FingerWorks users got screwed when Apple
| discontinued FingerWorks product development and put the
| team to work on developing multitouch for the iPhone
| instead. Now, the iPhone has several assistive
| technologies of its own (FingerWorks developed products
| for people with RSI), but the death of the FingerWorks
| products was still definitely a loss.
|
| So in my own company, as long as I have the power to do
| so (I have a cofounder, so it's not entirely my
| decision), I'll keep slogging rather than shut down a
| product that is benefitting users.
| eastdakota wrote:
| Yup, that's one big reason people keep up The Slog. It's
| even an honorable one. But, knowing people who are 10+
| years into that journey, it can be extremely painful.
| network2592 wrote:
| The cog can be an outcome that is almost as bad the slog.
| You are overestimating the amount and range of learning
| that is possible under the vc path outside of the slog
| (eg the cog).
|
| Indeed, you may feel like you are learning quite a bit.
| But that will generally be lessons that the vc investors
| want you to learn.
|
| Your statements imply that there are lessons to be
| learned that can only be facilitated by the kind of money
| that vc investors offer. But your own company
| (Cloudflare) makes cloud technology more affordable and
| partially weakens the rationale for getting vc
| investments.
|
| When you have a soft money bed to land on, you will be
| less incentivized to search for a broad range of
| knowledge. Arguably, you will be learning less as a
| result of this money safety net.
|
| You will be operating under the vc cog thinking that you
| are learning significantly both quantitatively and
| qualitatively. As the vc cog wheel continues to churn,
| you have the illusion of epistemic progress.
| eastdakota wrote:
| What a depressingly nihilistic world view. Certainly if
| you believe you are beholden to some entity's rules you
| must follow then all you can ever learn is what the
| entity you follow is willing to teach. We took a
| different path.
|
| We talked to our investors generally four times a year at
| Board meetings. We had a rule that no sentence we said in
| those meetings could end with a question mark. We
| recognized that we were the experts in our business. We
| used those checkins as opportunities to confirm ourselves
| that we were making progress. We focused on building
| great products for our customers and chose the KPIs to
| report based on measuring that. And we leveraged our
| success to meet thousands of people we'd never have had
| access to and try and learn from them all.
|
| One thing that I think is natural if you have
| professional investors but is important to find way to
| create even if you're bootstrapped: the regularly
| scheduled check-in. The most valuable part of a Board
| meeting isn't the meeting itself. It's the preparation
| for that meeting which forces you to assess how things
| are going.
|
| Our trick was to pick 5 KPIs that indicated the true
| health of the business and track them relentlessly. The
| first 12 pages of our Board meeting presentation was
| exactly the same every time other than the numbers being
| updated. We picked the the metrics. We didn't ask for our
| VCs input. But then we relentlessly stuck with them,
| quarter after quarter. It made preparing for Board
| meetings easy: just update the stats and prepare to talk
| about whatever is anomalous (good or bad). And the
| consistency built confidence from our investors. I
| remember one saying: "Cloudflare Board meetings are
| great: I know exactly how things are going by slide 4 of
| the presentation."
|
| No VC taught us that. We learned it by being curious,
| talking to other entrepreneurs, and experimenting
| ourselves. You can do the same if you're bootstrapped,
| you just have to be more self-directed to create some
| cadence to check in with your business and keep yourself
| honest.
|
| PS - sadly, there's no Illuminati running the world
| either. "Sadly" because it'd certainly be comforting to
| think someone was in control and it's scary to meet the
| people who supposedly are and realize they're just making
| it up as they go along too.
| network2592 wrote:
| A sincere thanks for sharing your experience and
| insights. Curiosity and a flexible mindset with a fast
| learning rate and a willingness to challenge even closely
| held assumptions can result in innovative knowledge under
| any context, including a vc investment one.
|
| But curiosity is not limitless. It is a function of time.
| And it would be disingenuous to completely refute the
| fact that a vc frame of reference will affect curiosity -
| perhaps even in an adverse manner that can reduce
| innovation.
|
| Let's get practical and technical with a Cloudflare
| example. Arguably, there would be no Cloudflare without
| the ability to change nameservers from domain registrars.
| You spotted some network slack with the ability of people
| to easily move to Cloudflare with a relatively simple
| nameserver change.
|
| That was innovative and surely a result of your
| curiosity. That allowed you to then build upon that
| traction and offer a wider range of cloud services.
|
| However, Cloudflare itself eventually became a domain
| registrar. In the terms of service, Cloudflare blocks all
| nameserver changes for domains registered with Cloudflare
| - the very option that allowed Cloudflare to emerge in
| the first place.
|
| There is no justifiable technical reason for this. It is
| essentially a political decision borne out of a vc frame
| of reference. Perhaps the political justification is :
| Let's lock in people that registered domains with us on
| Cloudflare. So, they will will be forced to use
| Cloudflare services.
|
| Arguably, this is a violation of ICANN guidelines that
| allowed you to obtain your domain registrar license. The
| block is essentially pointless. Most people interested in
| nameserver changes for Cloudflare registered domains just
| want to coordinate across multiple Cloudflare accounts.
| Multiple questions have been posted in Cloudflare
| community forums for years. Yet, nothing gets done about
| it.[1]
|
| The fundamental point is that curiosity led you to use
| nameserver changes to get some traction. As the vc frame
| of reference gained more importance over the years, it
| blocked your curiosity by nudging you to block nameserver
| changes.
|
| You are undoubtedly still curious. But that curiosity
| time is spent on board meeting formats and and how to
| optimise slide presentations - instead of realizing that
| some curiosity doors that allowed the existence of
| Cloudflare in the first place are getting closed.
| Ramifications of that attitude and mindset going forward
| are overlooked.
|
| So yes, curiosity is good. But, there is no inherent
| primacy of curiosity under vc versus outside vc. Highly
| curious people tend to be self directed in any context.
| If anything, the direction provided by vc can limit
| curiosity and be ultimately self defeating.
|
| [1] https://community.cloudflare.com/t/unable-to-change-
| cloudfla... https://community.cloudflare.com/t/still-no-
| way-to-transfer-...
| https://community.cloudflare.com/t/how-can-i-change-
| nameserv...
| dumpster_fire wrote:
| Firstly, fan of your company.
|
| Isn't what you described as The Slog essentially just
| SMEs? That's not so bad. Perpetual meteoric growth for
| everyone is not healthy on a macro level. Couple of
| friends of mine are in what you describe as the worst
| outcome, yet they can buy houses and put their kids
| through schools (outside the US).
|
| There's a middle layer of B2B that props up the economy
| in a more fragmented manner, and I don't think they
| should be dunked on.
| eastdakota wrote:
| It's fine if that's your expectation. It's fine if you're
| bootstrapping and comfortable with your level of success.
| It's hard if you thought you were building a rocket ship,
| raised money selling the vision of the rocket ship, and
| benchmark your success versus others who built rocket
| ships.
| 8n4vidtmkvmk wrote:
| I'm in The Slog and coming up in 10 years Bootstrapped.
| Not sure what to do.
| ajkjk wrote:
| Quit, do something else.
| 8n4vidtmkvmk wrote:
| We could sell, but like $50K for 9 years of work is so
| sad.
| sk5t wrote:
| Yep. I did seven years of Slog, and quitting was very
| freeing, after years of angst and disappointment.
| 8n4vidtmkvmk wrote:
| What did you do after?
|
| If I give up on this, I'm not sure I'd want to do it
| again. I don't know what I'd do differently. Building an
| app and all the non-programming junk that goes into
| running a business is just a lot. I could rise the
| corporate ladder. I'd be fine but never rich.
| rattray wrote:
| Probably closer to 100/1, or worse - that's the gamble you
| (should) know you're taking if you accept venture capital.
|
| It's not for everyone, but eastdakota is right that it's not
| for _nobody_.
| tptacek wrote:
| If it was 100/1, no VC would stay afloat, right? The math
| here isn't that hard to work out; it tracks the portfolio
| logic of the funds themselves.
| adrianN wrote:
| It is my understanding that VCs only stay afloat because
| the payoff in case of success is huge enough to offset
| many failures. And I guess many VCs also don't stay
| afloat forever.
| DeathArrow wrote:
| It is my understanding that most VCs expect only one in
| ten businesses to succeed, but that one is enough to
| offset the loss and ensure a profit.
| rattray wrote:
| The "fairytale" cases (IPO) are quite rare, but
| acquisition is a little less rare, and help support the
| portfolio.
| antupis wrote:
| It is tool and there is cases where you need to use that
| and some case where it is just stupid to use it.
| jaboutboul wrote:
| Oh. Hi Matthew!
| bawolff wrote:
| I don't know what people expect. VC's obviously aren't giving
| out money from the goodness of their hearts. It is obviously
| going to come with strings.
|
| Maybe those strings line up with what you want anyways, which
| is great. If they don't, don't take the money.
| metadat wrote:
| Tangential: I'll never forget the story of Lee. One of the few
| times I've I've shed so many tears over someone I never met.
|
| https://www.wired.com/story/lee-holloway-devastating-decline...
| Angostura wrote:
| frontotemporal dementia - horrific.
| eastdakota wrote:
| Thank you for posting. We could never have built Cloudflare
| without Lee. His disease is incredibly tragic and in many
| ways literally unimaginable. Today he is still alive but has
| continued to cognitively decline. I am happy that
| Cloudflare's success has ensured he has the support he needs.
| I miss having him as a cofounder and friend every day.
| jacquesm wrote:
| Holy crap that's a heavy story.
| martin8412 wrote:
| I bawled my eyes out the first time I read it, and it's not
| any easier this time. I'm happy the success of Cloudflare has
| allowed him the best available care, even if all his money
| can't cure him within his own lifetime.
|
| It's a horrifying disease.
| toomuchtodo wrote:
| https://news.ycombinator.com/item?id=22878136
| blibble wrote:
| > You're so right! It was an absolute disaster for us. Never do
| it!!!!!
|
| has cloudflare ever had a profitable quarter?
|
| I could give away my investor's $10 bills all day too
| ajkjk wrote:
| The _people_ are profitable, even if the company is not.
| They're not profitable in part because of all the generous
| salaries they're paying.
| Kye wrote:
| On a skim, they seem to be losing money the same way Amazon
| did. It's marginal, with a purpose, and could be turned
| around by trying to.
| tempusalaria wrote:
| Last quarter they had negative operating margins of over
| 20%. That's not really marginal. Considering they already
| do over $500mln in revenues and are growing mid 30s it's
| very possible they never make a profit.
|
| A big chunk of software VC success over the past 20 years
| has been public markets accepting loss making companies and
| giving them a lot of credit for potential future margins.
| blibble wrote:
| if you look at their accounts they spend a vast amount more
| on sales and marketing than r&d
|
| not very amazon like at all
| MatthiasPortzel wrote:
| It's still indicative of VC culture that the CEO calls the
| company a success after IPO. Rather than, say, after the
| company is profitable. (I have a couple shares of NET, so
| I'm optimistic they'll be profitable eventually. But
| sometimes their path to getting there seems lackadaisical.)
| hinkley wrote:
| And now I have Simon Sinek in my head talking about
| finite versus infinite games.
| eastdakota wrote:
| I don't think IPO was success. It was just another
| fundraising event. Another step in the journey. And, per
| this discussion, the end of our VC journey and beginning
| of our public company journey.
|
| "Profitability" is a funny term on Hacker News. Think
| most people here aren't accountants so they think of
| profitability as: do you have more cash in the bank at
| the end of the period than you did at the beginning.
| That's "free cash flow profitable." By that measure,
| we've been profitable the last ~12 months and have said
| we expect to be so every year going forward. We've had
| non-GAAP operating profits even longer. So next up is
| GAAP profitability, which I am confident we're on a path
| to. We want to emulate Microsoft's accounting financials,
| not Salesforce's.
|
| Even that won't be "success." Just another step in the
| journey. Success to me is living up to our mission of
| helping build a better Internet. Don't get me wrong,
| financing and accounting milestones are all critical to
| us doing that. If we were burning through cash it would
| be hard for us to fulfill our mission. But I show up to
| work every day because I see the positive impact our team
| is making toward a more secure, more reliable, faster,
| more private, and more efficient Internet for everyone.
| Only steps toward that represent success to me.
| blibble wrote:
| > "Profitability" is a funny term on Hacker News. Think
| most people here aren't accountants so they think of
| profitability as: do you have more cash in the bank at
| the end of the period than you did at the beginning.
| That's "free cash flow profitable."
|
| no, I look at your financial statements and look for Net
| Income
|
| (more or less the only number that can't be manipulated
| by clever tricks)
|
| https://cloudflare.net/news/news-details/2023/Cloudflare-
| Ann...
|
| > We've had non-GAAP operating profits even longer.
|
| you may want to look up what the second A in GAAP stands
| for
| hotpotamus wrote:
| Would any business leader say anything like, "we have no
| idea if we'll ever be profitable, or what we would need to
| do to get there?". Everyone made fun of Softbank's
| presentation on Wework[0], but it just looked to me like a
| simplified outline of nearly every over-confident business
| presentation I've seen in my life.
|
| [0]https://nymag.com/intelligencer/2019/11/softbanks-
| insane-pre...
| arpowers wrote:
| I'd add a caveat here: you guys were a Harvard founding team w
| prior experience and connections though...
|
| Just like everything else, the real approach to this is
| nuanced. It's important to highlight that as many fundraisers
| are operating under misguided thinking on this topic.
| epolanski wrote:
| > You're so right! It was an absolute disaster for us. Never do
| it!!!!!
|
| You're still unprofitable after 13 years though, aren't you?
| Growth is prompted by skyrocketing sales costs.
|
| Does any VC funded company ever ends up not losing money?
| spacebanana7 wrote:
| Facebook / Meta
| jwr wrote:
| Customers of VC-funded companies take note: none of these
| outcomes are good for you.
|
| When you have a choice between being a long-term customer of a
| VC-funded company vs a self-funded business, think about long-
| term incentives and don't follow the rich and shiny.
|
| Disclaimer: I run a self-funded SaaS business and sometimes
| explain why I never wanted VC funding and why a LARGE BUSINESS
| is not necessarily better for customers.
| jrm4 wrote:
| "It is true that playing the lottery doesn't work out for
| everyone, but it worked really well for us!"
| Kye wrote:
| The key takeaway for me was to know what you're getting in to.
| You sound like you do. OP seems to be aiming at people who do
| not.
| floomk wrote:
| Man who won lottery recommends it to everyone.
| OOPMan wrote:
| Right on the money
| sf4lifer wrote:
| Only take rocket fuel (VC funding) if you've got a rocket (PMF in
| a massive TAM with net revenue retention)
|
| If you don't have a rocket, the rocket fuel will be wasted and
| disappointing in any other vehicle. Ideally you bootstrap until
| it's clear. But if you start the company with VC funding, you
| should know the expectation.
|
| If you truly have a rocket the economics of VC funding is
| favorable for everyone.
| paxys wrote:
| And the corollary is that if you do have a rocket but no fuel,
| a dozen others are going to copy your business _and_ add fuel,
| leaving you with no chance to succeed.
| anonzzzies wrote:
| How do you know if you have a Rocket? Many (most?) VC funded
| companies are just appearance, no substance and it's all very
| apparent. All the new AI 'products' for instance. So those are
| clearly not rockets, just blah and hype. Maybe we had rockets
| before, but I don't want to lie and cheat like some of our vc
| invested companies did (most are gone). Never were rockets,
| just hype, Twitter presence and faking all around.
| ninth_ant wrote:
| > How do you know if you have a Rocket?
|
| That's the trick... you don't. And neither do they.
|
| I believe it's a pretty well-understood statistic that most
| VC-funded businesses are not successful, and the VCs are only
| successful because a small number of investments are
| massively profitable.
|
| Neither VCs nor companies know for sure if they _will_
| rocket. VCs are looking for businesses and founders who
| _could_ rocket.
| TrackerFF wrote:
| monthly/annual growth?
|
| To be honest, startups play on another level than most SMBs.
| With a SMB, you can double your growth every year for 5-10
| years straight, and do very well, but not be interesting for
| VCs. To be interesting and relevant for VC money, you need a
| business that can scale to millions of users.
|
| If you can show that you're able to double growth every month
| (or similar short-window metrics) with an idea that could
| scale to a billion dollar company, you'll get the interviews
| all right. Hype is a big part of growth.
|
| The problem, so to speak, is that you'll be competing against
| other startups - and if you they have the VC money, but you
| don't, there's a good chance they'll outpace/outgrow you.
|
| I think it's very noble to grow as much as you can
| organically - but realistically speaking, it's difficult to
| compete against those that are funded.
|
| And you don't really need to use the money you get - being
| funded also comes with a signaling effect. You get lots of
| publicity, and get to signal that serious investors are
| willing to back you.
| esafak wrote:
| Actually you would be interesting for VCs if you started
| compounded from a reasonable start like $1m/year. Doubling
| for five years would get you to $32m/year, and 10 years to
| 1b/year, leading to a $10b valuation.
|
| One common benchmark for startups at the $1m/year stage is
| T2D3 (triple, triple, double, double, double).
| [deleted]
| tiborsaas wrote:
| You have a reassuring proof that you have product market fit.
| sf4lifer wrote:
| You know you have a rocket if you're leaving
| money/customers on the table because your cashflow doesn't
| support rate of fulfillment of potential growth.
| a-dub wrote:
| i think this would be much better written if it compared and
| contrasted the pros and cons of building a fun and sustainable
| small business vs. taking investor funds with the hopes of doing
| something more ambitious.
| mrg3_2013 wrote:
| I love this post! Mainly because it resonates with me 100% and
| aligned with my thinking, as I go build my startup.
| ahmedfromtunis wrote:
| The writer is not an entrepreneur (according to his bio), and
| didn't back his "analysis" with any form of data (beyond some
| anecdotal telltales) -- yet his conclusion is stated without any
| sliver of doubt: "it *will* destroy your company"!
| sfink wrote:
| I think the conclusion is justifiable, but it relies on the
| author's definition of "destroy".
|
| "If you want to run a company that looks like X, then taking VC
| money will prevent that from happening" is a pretty easy
| conclusion to make, though the only value in it is in the
| description of potentially surprising parts of what not-X looks
| like, to allow readers to judge whether they care.
| jschveibinz wrote:
| Wow, as an investor, I see a lot of misinformation in the article
| and in the comments.
|
| Investors are experienced business people, and they will help you
| to know if what you have is ready for prime time. Listen to them.
|
| Investors are business partners: they are not loan officers or
| casual kickstarters.
|
| And one more thing: the "VC" stereotype being discussed here
| doesn't really exist. All investors are unique.
| renewiltord wrote:
| VC funding is so you can accelerate your test for the thesis you
| started the company with. The ideal state is you rapidly discover
| fit. The second most ideal state is you rapidly fail. The worst
| state is you spend years on a thesis that doesn't have legs. VC
| funding moves the decision point earlier in either direction
| because you won't be capital constrained.
|
| That's it. You can never make more time for yourself. That's the
| lesson.
| version_five wrote:
| I recognize there must be good VCs around, but so much of what
| you see looks really like a kid's game to me. So many douchy
| people with the same cliche advice acting like they're
| visionaries. And a certain kind of "lifestyle" "founder" fawning
| all over them. Starting a company has been commoditized and
| turned into an internship for smart kids. I know it's not all
| like this but for anyone seriously interested in doing something
| different, the whole scene comes off as very unappealing.
| freediverx wrote:
| VC is a cancer on society. No exceptions.
| dang wrote:
| Ok, but can you please stop posting unsubstantive comments to
| Hacker News? We're hoping for something different here.
|
| https://news.ycombinator.com/newsguidelines.html
| fullstackchris wrote:
| I think it falls into a few categories: and you can _feel_ the
| difference. There is type one: the company just going through
| the motions because they're just the NPC that feels "oh I now
| its time to 'do' VC because that's what everyone does"
|
| Then another type: some of the deep tech startups full of super
| smart people, even publishing papers, and are usually backed by
| one or more major institutions (universities, companies, etc.)
| you can literally feel the passion pouring out of their
| employees
|
| Then even still there is a third but very rare type: that
| startup that bootstrapped itself to profitability without any
| VC at all! (IMO most impressive and difficult)
| disgruntledphd2 wrote:
| GitHub did this, and took VC later on.
| tptacek wrote:
| It's an availability bias. You're noticing the worst founders
| and VCs, because the worst of them work to be noticed (some
| good ones, too, but _all_ the worst ones). But as long as you
| understand the modality, it 's also fallacious to write off a
| whole financing model just because its douchiest practitioners
| rub you the wrong way. Remember Sturgeon's Law!
| yowlingcat wrote:
| Absolutely. The successful sleepers that are founders and VCs
| are sleepers very deliberately. They don't want the
| notoriety. They're already well-known enough by the people
| that matter, the outcomes they've generated. They are already
| freed by the wealth they've generated. What does notoriety do
| but subtract from that?
| jacquesm wrote:
| Exactly, if it bleeds it leads and boring VC stories (of
| which there are many) don't make for good headlines.
| peter422 wrote:
| I remember when "silicon valley" came out, and after watching
| a few episodes I thought it was so stupid and unrealistic...
| This isn't how startups operated.
|
| Then I talked with other people in the startup world who said
| it was a perfect match.
|
| That's when I realized that I just worked at competent
| places.
| mafuyu wrote:
| VCs want to feel good about investing in innovative and
| exciting startups that will give them massive returns, and the
| free market responds with founders who meet their emotional
| needs by selling personalities that are quirked up and coked
| out with just a hint of sociopathy. Truly a virtuous cycle.
| redbell wrote:
| Definitely, one of the most interesting reads so far, and without
| a doubt, the best piece on _" The other side of VC funding" _
|
| > "Company MagicalUnicorn has still not figured out how to
| perform food delivery in a profitable way. They're going to run
| out of money soon. But to buy themselves more time, they sold
| parts of the company for 10m EUR to the VC investor DudeFund."
|
| I never thought of this _alternative opinion_ like that when
| reading about a startup raising more money!
| neilv wrote:
| My interpretation of this article: _Don 't take VC funding! It's
| the definition of failure! It will have you doing the wrong
| things for building a business with strong fundamentals! (Except
| this VC-powered kind of "failure" is a more likely way for the
| founders to become very wealthy.)_
|
| I'm open to criticisms of VC models, but I don't see how this
| argument is going to dissuade many founders, who are the
| ostensible audience.
| DeathArrow wrote:
| >Maybe it's the amount of customers a company has, or the speed
| at which that customer base is growing. Business dudes like to
| call it traction, but I'm not sure whether they know what they're
| really talking about. I'm not even sure if they know what they're
| talking about. Regardless, whatever traction may be, the minor
| problem is that, well, having traction doesn't magically make
| your company profitable.
|
| People wondered how Google and Facebook will going to be
| profitable with billions of users and gaining no money from those
| users. There's always going to be a way to convert users into
| money.
|
| Many companies are trying to grow at first and then find a way to
| monetize the user base.
| constantly wrote:
| What about all the VC-funded companies that were never able to
| find a way to convert users into money? "Always" is a very big
| stretch here.
| vidarh wrote:
| There's however not always going to be a way to convert users
| into _enough_ money. During the dot-com boom, the VC 's who
| invested in the company I co-founded around that time pushed us
| to switch from planning to charge for our service (vanity
| e-mail accounts) to offering them for free to attract users,
| driven by the greed of seeing pre-revenue companies in some
| instances acquired at a valuation of up to $4,000 per user
| before the bubble burst.
|
| We stupidly agreed (everyone understood the $4k per user was a
| crazy aberration, but it triggered thoughts of "but even if we
| get to just $400 per user _fast enough_ to get acquired...),
| and ended up selling off that service a year and and a half or
| so later for a pittance after pivoting (we did the ".name" top
| level domain, which was not a great money maker either - was
| eventually sold to Verisign and I got a little unexpected
| cheque years after I'd left, but nowhere close to f-you money),
| but the point being that there were a whole lot of companies
| spending far more on acquiring users at that point on the basis
| of crazy per-user valuations than there was _any_ realistic way
| of earning back.
|
| So, yeah, you can always convert users into money, but that
| doesn't necessarily mean you'll be able to convert them into
| profit.
| nvrgngvup wrote:
| [dead]
| rossmohax wrote:
| There was a company I can't recall its name, but they took VC
| funding for one round, retained voting control, built successfull
| business and then refused to go for another VC round. VC still
| owns company, but can't exit and founders are happy with the way
| things are.
| liorben-david wrote:
| > You confess that you as a founder were still not able to make
| the company profitable with the resources you currently had.
| You're bleeding money, and you need more.
|
| For a lot of companies this is true, but tons of business models
| require economies of scale to be profitable and there's nothing
| wrong with that. It's not a failure to say that a company can't
| be profitable at a small scale.
|
| The real issues are the plethora of companies where the unit
| economics will never make sense regardless of scale. Painting VC
| money with such a large brush is unhelpful.
|
| > VC Funding Means You Will Sell Your Company
|
| I think this is the more serious critique. Your VC investor wants
| you to make an exit, either through IPO or acquisition. This is
| the VC business model. A steadily growing profitable business
| will almost never provide the kind of return neccesary to
| compensate the risk of a VC firm.
|
| If that's something you're okay with, great.
| luispa wrote:
| I worked for a US startup that received VC founding, and I left
| after a year that happened. 6 months after I left the company
| almost disolved.
|
| Just think it twice before you accept this kind of
| responsibility.
| juancn wrote:
| Yes, mostly... sometimes a profitable company needs to grow
| faster than it can organically to capture enough of the market
| and you need outside investment. Maybe taking debt is the right
| idea, sometimes it's not.
|
| It's not common and it's a great place to be in (it's easier to
| price your company, and to bargain).
| vidarh wrote:
| Having co-founded multiple companies and been an early or the
| first employee at several more, several of which have taken VC
| funding, this feel unnuanced. Of the VC funded companies I've
| been involved with I think only one would've happened at all
| without VC funding because they'd have been too capital
| intensive. For the one that we could've done without a VC, I do
| _somewhat_ regret taking VC money, as we ended up pushed by
| investors into selling off a part of the business that could 've
| been a nice lifestyle business, but it's not at all a given it'd
| have grown enough without taking investment to be worth it.
|
| I've bootstrapped businesses too, and it's an arduous process and
| often _far slower_. If you 're successful you're then lucky
| enough to be fully in the drivers seat, and that's great. If
| you're not, chances are you've wasted far more time.
|
| Overall it boils down to what do you want? VC accelerates the the
| whole process, and multiplies outcomes - both risks and rewards.
| If you feel comfortable with taking a higher risk for a chance at
| either making it big fast or failing fast, then VC investment can
| be great. If your idea is your baby or your life's mission and
| it's what you want to keep doing whether or not it's a runaway
| success, VC might be a poor fit for you unless you happen to
| strike it lucky very quickly and can dictate terms - control can
| slip away very fast if things go in the wrong direction or too
| slow.
|
| I'm far less likely to take VC money if I were to start something
| today largely because I've got enough money that it'd take far
| better terms to make it feel worth it, but I don't regret taking
| investment in the past other than _maybe_ that single one I
| mentioned.
| tptacek wrote:
| I didn't like most of this post but did feel like the "Second
| Order Effects", for the most part, ring true.
|
| The only thing I can comment on here with any authority is the
| consult-to-product model, which I've attempted a bunch of times.
| It is drastically harder than this post makes it seem to pivot
| from a viable consulting business to a product; it's notoriously
| difficult, consultancies are constantly trying to do it (it's the
| dream!), and very few of them succeed.
|
| That's not to say you shouldn't do a consulting company! They can
| be great. If you are comfortable with the idea of settling into a
| long-term consultancy if the product doesn't work out, it's a
| good way to hedge. Most products fail too! But _consultancies_
| (as opposed to products bootstrapped by consultancies) are
| probably a lot safer to build.
| raesene9 wrote:
| The article has a lot of interesting points, but seems to miss
| out on one of the main reasons (IMO) that startups take funding,
| which is to grow faster than (or as fast as) their competition.
|
| Unless you're lucky enough to be in a market segment without
| competition, you need to keep an eye on what your competitors are
| up to. If they can expand faster, add features faster and get
| more customers than you, it damages your chance of success in
| that market segment.
|
| Taking VC money _could_ provide that velosity.
|
| That said ofc I do agree that, if your goal is to run a
| profitable business for a long time, taking VC cash is quite
| possibly a bad idea, depends on what the founders goals are.
| raincole wrote:
| https://www.joelonsoftware.com/2000/05/12/strategy-letter-i-...
|
| From 2000(!), still a must read today.
|
| My takeaway is: you either raise (and spend) more than all the
| competitors in your field, or you spend very little. In terms
| of funding, be the 1st or the 100th. Don't be the 3rd.
| anonzzzies wrote:
| OR (as you say, but many miss) you do not care about being the
| market leader. I just want to have a nice company with nice
| people, no stress and making millions for all to live. I don't
| need vc money, stress, be the market leader or 'be faster than
| the competition'. A LOT of services or products you can make a
| long term (decades) money with like this. I don't need more
| than 10m euros in my life, nor do my colleagues and our clients
| are happy. No idea why I want all this misery of competing,
| stress, exposure, running all the time etc etc.
| hn_throwaway_99 wrote:
| As someone who's worked for tons of startups, it's not that
| binary. For loads of industries, there is simply no viable
| path without significant outside funding (whether from a VC
| or very rich founder), and even if you look at some of the
| most famous outliers (like Atlassian), I don't believe the
| path they took is even viable these days anymore.
|
| For example, if you're selling any sort of business SaaS
| product these days, the regulatory regime has changed
| _greatly_ from 20+ years ago. The cost of just something like
| SOC 2 or ISO 27001 certification, which most enterprises will
| require to even talk to you, often prohibitively prohibits
| bootstrap-like funding models. Couple that with the fact that
| software engineering salaries are comparatively way higher
| than they were 20 years ago.
|
| The short of it is that a lot of people take VC funding not
| because they _want_ the "misery of competing, stress,
| exposure, running all the time etc etc", but because, in many
| industries, there is simply no other option if you're not
| already rich.
| tptacek wrote:
| (1) SOC2 is somewhere between $10,000 and $20,000 if you do
| it cheap.
|
| (2) That's a dollar amount that most bootstrappers can
| swing.
|
| (3) Critically, you don't do SOC2 until you have a critical
| mass of purchases requiring it.
|
| (4) Many (most?) of your customers, especially your early
| customers, won't require it, and/or will have alternate
| paths for companies without a SOC2 attestation.
|
| (5) When you finally do hit the big deal that absolutely
| demands an attestation, you can often cut a contingent PO:
| you sign the deal, deliver the stuff, but you don't get
| paid (or you don't get the last tranche) until you get the
| SOC2 attestation.
|
| (6) You can get a SOC2 attestation real, real quick.
|
| There may be other things keeping people from bootstrapping
| SAAS businesses, but this isn't one of them.
| Hermitian909 wrote:
| SOC2 is also waaaay less expensive on the development
| side if you do just a little upfront development in dev
| tooling: logging, backups, encryption in transit and at
| rest, tagging data with sensitivity levels, IAM policies,
| and CI. I've seen a few founders who invested a few
| weekends pre-funding into this sort of tooling get to
| SOC2 and have almost no development costs (still have to
| document those processes though).
| SkyPuncher wrote:
| SOC2's cost is primarily just the branding and audit.
|
| Most of the controls are easy ti meet if you follow any
| sort of best practices.
| tptacek wrote:
| You don't even need to bother with the encryption and
| sensitivity levels (your data classification policy can
| be just that, a policy). The ace move is to roll a set of
| SOC2 policies that just captures what modern dev teams do
| anyways; that was the idea behind
| https://latacora.micro.blog/2020/03/12/the-soc-
| starting.html.
|
| The right way to think about SOC2 is that it's a ~$15k
| outlay that will come up when a major customer proposes a
| P.O. that justifies it, and little else.
| chromatin wrote:
| As a new self-funded founder, thank you for this.
| lifeisstillgood wrote:
| My take is the VC world will split into three
|
| - Million startups - put loads of cash into thousands of
| startups globally and play a huge vegas lottery - there is a
| lot of work there for the BC companies but played well it
| will have influence at the levels seen by newspapers or major
| consultancies used to
|
| - the current much maligned approach that is going to creep
| further up the series A B C tree supplying capital to
| companies that have developed the model to just churn
|
| - your one. The one I and half of HN is looking for :-)
| Honestly this confuses me - there is a large chunk of people
| on this very site that you could have convinced to leave what
| they are doing and set up a company with the risk of doing so
| mitigated by "nice VC" cash.
|
| And since everyone in the industry claims they invest in
| people not ideas then they are turning away people because
| they won't raise their price to meet a new point on the risk
| threshold curve.
|
| So yeah something like VCs that fund profitable non IPO
| businesses seems a good idea. I mean if you stop asking
| people to make moon shots maybe more of them will just make
| 20% per year ROI
| andsoitis wrote:
| > nor do my colleagues and our clients are happy
|
| Your colleagues can get better jobs elsewhere, so you are
| constantly competing for talent.
|
| Your customers can get a better deal, or product or service
| from one of your competitors, so you're in constant
| competition with them too.
| anonzzzies wrote:
| But I am in the EU and we all do better money than what I
| hear here what most American devs make. But sure; my
| colleagues just will never leave here so it would have to
| be better paid, many vacations, no stress, wfh and more
| money.
| [deleted]
| detourdog wrote:
| The biggest obstacle I see to using VC money is that it has a
| good opportunity to distort incentives.
|
| If a company has a vision fulfilling every request outside of
| the vision could be considered a distraction. The VC has
| legitimate concerns outside of the scope of the company
| vision.
|
| Apple is one of the few modern companies that I can think of
| where the VC money was useful.
|
| If anyone can remember google before going public and after
| going public might mourn the old google.
|
| Imagine if google wasn't romanced by Wall Street but followed
| their own path like craigslist.org. I believe that google
| would have been much more collaborative. I can't see where
| going public helped google be good at internet search.
| disgruntledphd2 wrote:
| Yeah I remember discussing this with friends back in 2004
| and concluding that Don't be Evil was dead. Took a little
| longer than I expected but they got there in the end.
| dzikimarian wrote:
| Then you slowly bleed nice people as they switch to company
| that went for money and now is able to pay better.
|
| If you expect company to reject money in order to stay nice,
| you should be ready to do the same personally. Otherwise it
| will not work.
| yowlingcat wrote:
| > No idea why I want all this misery of competing, stress,
| exposure, running all the time etc etc.
|
| Have you ever run a business before? The belief that you can
| build a business without dealing with competition is a myth.
| Having a successful company requires picking your poison.
|
| Non-VC is a different poison than VC, and I do agree that it
| is a much better approach for far more many businesses. But
| make no mistake, having a company with "no stress and making
| millions for all to live" is not a realistic goal. There is
| no free lunch in the world of business. Competition is
| everywhere. You can either ignore it or embrace it.
| anonzzzies wrote:
| > Have you ever run a business before?
|
| Only 30 years. You? Not mean to be as snarky, but this US
| all or nothing stuff is getting on my nerves just a bit. I
| came from a simple background, but in a country with free
| education, so I got a degree in uni, opened a company in
| high school, all without too much risk. Didn't need to work
| myself to death, didn't have much stress, didn't need VCs
| and make more than most here who seem to be dying of
| stress, lack of proper healthcare, free education etc etc.
| My clients _like_ I have no funding and that I have enough
| money yet want to keep working as _I like it_.
| ilrwbwrkhv wrote:
| I agree with you completely. Due to the whole business
| media world spreading these lies, people think business
| is all us vs them and competition is for losers.
|
| You can make very good income ($4 million profits /
| annum) in my case while coexisting with competition and
| having lots of fun.
| jwr wrote:
| Very similar experience here. Anonzzzies is not a unicorn
| outlier :-)
| yowlingcat wrote:
| I've been building startups successfully for a decade,
| but they are US based. So you got me there.
|
| There are many self proclaimed dropshipping millionaires
| on the the internet selling courses while living the good
| life in Bali, overleveraged to the gills, living off of
| credit card debt, desperately hoping the courses they
| sell as a grift somehow can be ponzied to the next fool
| before the whole thing collapses. So that's always my
| assumption when people discuss something in business that
| seems too good to be true. But maybe you are correct.
| Perhaps my US all or nothing priors have closed my mind.
|
| What kind of business do you run that can be done without
| too much risk, how does it make money, and what country
| do you operate out of? I am genuinely curious and I would
| like to be prove my priors wrong, if possible. They're
| not particularly pleasant priors, as you might imagine.
| duxup wrote:
| I agree with what you said.
|
| > which is to grow faster than (or as fast as) their
| competition
|
| But I also work for a privately held company and there has been
| a whole series of companies pop up outgrow us ... then fold ...
| It's like a parade of VC failures. They weren't bad people or
| bad ideas, they just had so little time and sometimes were so
| focused on their one cool trick, that was it.
|
| Velocity also means velocity to failure, and arguably less time
| to learn from mistakes or just make money. I've seen a few who
| didn't even have time to learn.
|
| That might work for some ventures, much less for others. Just
| gotta know what you're signing up for.
| shaimagz wrote:
| Same here, VC was horrible
| seydor wrote:
| VC bubble was a side effect of 0% rates and free money for 15+
| years, no? High interest rates are making that impossible for the
| foreseeable future. I think nntaleb puts it right about this new
| era where "it doesn't rain money anymore" for revenue-less
| companies and real estate
|
| https://www.youtube.com/watch?v=fhuSM8JTSpU
|
| I think the biggest stain that was left from this era is that it
| mixed the millionaires made from cash flow with the millionaires
| made from empty valuations, and now the two are inseparable
| asim wrote:
| For every example there is the counter example. It's sort of hard
| for me to take this advice seriously without the author actually
| having had raised money. I couldn't tell from skimming it but it
| feels like it's a lot of common things we know are written by
| someone who was either rejected by VCs or has a real aversion to
| it. Look venture capital serves a purpose and that purpose is to
| accelerate and grow innovative technologies that would otherwise
| not be capable of doing it another way. Part of that assumption
| is there will be a way to "capitalize" on that investment and it
| will go on to be incredibly valuable for end users, businesses or
| an acquirer. The most important technologies of our lives and the
| foundations for most things we use were venture funded, that's a
| fact.
|
| I've worked at bootstrapped companies, I've worked at VC funded
| companies. I've seen exits and I've seen deaths. I've done the
| solo founder thing, raised money, blah blah. What I'll tell you
| is, raise money if you believe there is no other way for you to
| achieve the goal of turning your vision into a reality without
| it. Seek out the expertise, the past experience, the people who
| will be most helpful to you. If they happen to be in venture,
| then there you go, but if there's a different path, take it. If
| you have any sort of incentive misalignment with your investors,
| yes it's going to destroy your company, but even more so it's
| going to ruin your life, your relationships, the joy you had in
| the thing you were building. You can either see VC funding as a
| game and the hot shiny thing to chase that will solve all your
| problems or you can be truly realistic about it and understand
| that it's a tool like any other to build and manifest into
| reality a product and vision you have for something you believe
| should exist.
|
| Today due to the saturation of accelerators, venture and the
| abundance of capital it's basically just a lifestyle thing that
| you raise a round and hack on side projects like it's a job but
| there's also the self selecting group within there who take it
| really seriously. So you know when I bootstrapped for 4 years
| solo, raised funding and tried to build a product/team/company
| through COVID it was a brutal experience but one I took seriously
| and tried really hard not just to manifest my vision into reality
| but also take care of the people on that journey, be forthright
| with my investors, etc. It's hard man, only do it if you really
| get that.
| breadwinner wrote:
| Similar advice from Mark Cuban: "If you think that raising
| capital is the best way to get your business off the ground,
| you're wrong, according to Mark Cuban.
|
| You should actually do the complete opposite, the billionaire
| entrepreneur said during a panel at SXSW last month, and opt to
| start a business "with as little money as possible."
|
| https://www.cnbc.com/2023/04/09/mark-cuban-best-way-to-start...
| aaa_aaa wrote:
| > On a quick side note, let's talk about lottery winners for a
| moment. Their situation might seem quite similar. After receiving
| their winnings, they often end up unhappy, broke, or worse yet,
| dead.
|
| According to current research, this is false.
| throw_edda21db wrote:
| If you sell, say, 10-20% of your company to VCs, how can they
| force you to behave differently? Why can't you move on as if you
| were bootstrapped, while using the cash for whatever your company
| needs at the time (hiring, marketing, etc.).
| zdbrandon wrote:
| You sell 10-20% 4, 5, or sometimes more times in an effort to
| increase the size of the pie while your share of the pie
| decreases.
| seraphsf wrote:
| A fun puzzle: if today you take $10m of VC funding at a $20m
| post-money valuation (ie you sold 50% your company), how much
| will you get if you sell the company for $20m tomorrow?
|
| Answer: typically, you'll walk away with $5m (25%) or less. VC
| funds usually have a 1x preference, which means the get their
| $10m back (plus interest), and THEN they split the remaining
| proceeds with you 50-50%.
|
| So if you take VC money, you might have to double your valuation
| just to keep your take-home value the same.
|
| VC makes sense if you can grow fast and very large. But assuming
| you have scenarios to grow slower or to a smaller size, those
| scenarios often turn into bad ones if you've taken VC funding.
| sfink wrote:
| Good point.
|
| > VC makes sense if you can grow fast and very large.
|
| I could also argue that such companies are often a blight on
| the ecosystem. They're an invasive weed that outcompetes a rich
| variety of smaller companies, sucking the resources required to
| sustain such companies without doing nearly as much to enrich
| the environment. And then they tend to die off (perhaps through
| acquisition and having their product cancelled/absorbed into
| the larger company's), leaving customers high and dry. If they
| hadn't been there, some of the smaller companies would have
| still been around.
| renegade-otter wrote:
| Depends on your goals. Some people want to take the risk on an
| off-chance the startup goes supernova, and some are just tired of
| working for the man.
|
| Every time you take someone's money - you get a new boss.
| JumpCrisscross wrote:
| The term "VC" has been colloquially generalised to the point of
| uselessness. I've seen straight-faced professionals use it to
| describe angels, growth investors in public companies and
| lenders.
|
| Broad rule of thumb in finance is to understand how the people
| giving you money make money. Traditional VC is high-risk / high-
| reward. If that's not your strategy, don't take VC. OP seems to
| be describing small businesses. These frequently _do_ need to
| raise capital to get going, and they do it through banks and the
| SBA. (That market entirely dwarfs traditional VC.)
| ripvanwinkle wrote:
| That statement needs qualifiers. Most companies that need infra
| to serve customers need money to build that before they can start
| investing with money they make. Hard to see how Google or Amazon
| could have come about without VC funding
| esafak wrote:
| Hardware is cheap. The engineers are more expensive.
| yowlingcat wrote:
| I think this is a really poorly written blog post. Not because it
| was written in a thoughtless manner -- on the contrary, it was
| written in a very thoughtful manner! But it's not written by an
| expert. It was written by someone who has never raised VC
| themselves and doesn't have personal experience with it. And it
| shows.
|
| The reality about raising VC versus not raising VC is never "yes
| or no" it's "on what terms." During the heady days of 2021, those
| terms were incredible for founders -- favorable multiples, lax
| governance, clean sheets, no loss of control. You'd have to be an
| idiot, or an incapable fundraiser, to not to take that deal
| because it was free money. And the reason why that money was free
| was because we were in a ZIRP environment where debt was
| extremely cheap as well; just not as cheap and unencumbered by
| equity for many companies.
|
| Today, the situation is more varied. If the terms of the deal are
| not particularly founder favorable, you won't take it unless you
| really need it. That doesn't say anything about whether you
| should or should not take VC -- just that the cost of capital has
| changed.
|
| To the author, all I will say is this -- be wary that a VC funded
| competitor doesn't look at your business model, say "that's a
| nice business you got there, shame if anything happened to it"
| and raised a ton of VC to build a competitor, out-execute you at
| lower margins and take a ton of territory from you, and
| effectively eat your lunch. There are long-term strategic costs
| to bootstrapping. There are costs to everything in business.
| cheeseblubber wrote:
| The person ultimately responsible for the success of your company
| is yourself and most likely you'll fail regardless of VCs.
|
| I take issues with some of the second order effects:
|
| 1. "Because your goal is to sell the company later, it has to
| grow."
|
| You don't have to hire just because you take VC money. You should
| hire at the right rate.
|
| 2. "You'll be spending much of your time on finding the next
| investors".
|
| If you manage your burn properly you wouldn't have to and you
| should aim to be default alive.
| http://www.paulgraham.com/aord.html
|
| 3. "You have to focus on large markets with many (or large)
| customers"
|
| Yes you shouldn't take VC money if you don't want to go big
| eventually.
|
| 4. "Making existing customers happy is less important than
| acquiring many more new customers"
|
| You have to do both and the goal should be to make existing
| customers so happy that tell others which will drive growth. If
| you don't make a product people love you won't win in the long
| run anyways.
|
| Finally I think a common mistakes for Founders is making their
| VC's their boss. Although I agree with some of the sentiment of
| there is some perverse incentives with VCs as a founder you
| should take ownership of the decisions that impact your company.
| detourdog wrote:
| That list sounds right I think their is nuance for this one
|
| >3. "You have to focus on large markets with many (or large)
| customers" >Yes you shouldn't take VC money if you don't want
| to go big eventually.
|
| One can want to grow to a point of organically understanding
| the problem domain before going big.
|
| The VC and the company may differ on the short term but agree
| on the long term.
|
| Which is a distraction. If the company is doing everything else
| suggested and the VC pounds on this issue.
|
| I would think the ideal time frame for the use of VC funds is
| probably about 2 years. If the company can't make productive
| use of the funds and return it in 2 years the timing of the
| funding is bad. If funding is needed for some large capital
| expenditure that will depreciate over decades should have
| existing revenue support.
|
| I think Wall Street has created a different industry that is a
| business model of its own fantasy.
| EGreg wrote:
| This is like if David Heinemeier Hansson took drugs and gave a
| speech.
|
| I like DHH, and his and his cofounder's opinionated approach to,
| well, everything. Ruby on Rails was opinionated. Their company
| stood for building products you charge for and never taking VC.
| (I think Atlassian and JetBrains toom that even further.)
|
| Until today, we never took VC. The way I live my personal life I
| have never attracted gold-diggers and I guess the same thing
| applied here... both my largest companies are a open source
| platforms, each builds an alternative to Big Tech, and I even
| extol the virtues of Utility Tokens and Web3 smart contracts in
| the face of massive opposition here on HN which has mostly ever
| seen Shareholder Capitalism. They haven't really understood how
| taking VC or going public creates a parasitic class -- equity
| investors -- who every earnings call expect profits and rents to
| be extracted from all sides of the market. I think a word got
| pioneered recently by Cory Doctorow -- enshittification -- to
| describe what happens in Shareholder Capitalism, whether a
| company ends up being run by a benevolent dictator (Zuck, who
| isolated himself from ever being removed, or Elon, who straight
| up bought Twitter together with a group of friendly sovereign
| wealth funds) or bought out (FogBugz, Reddit) or acqui-hired and
| turned into a money-making machine (WhatsApp, Instagram, Oculus)
| while its founders leave in disgust after their golden handcuffs
| are off.
|
| I recommend everyone TRY to start a project funded by sales of a
| utility tokens, similar to FileCoin or Ether. Even better if your
| project already works (IPFS, Ethereum, BitTorrent) by the time
| you introduce the utility coin.
|
| The reason I prefer this is the same reason funding DisneyWorld
| through Disney Dollars are better than Disney Inc. shares. It's
| "stakeholder capitalism." The people using the network own the
| network. The incentives are aligned and there is no parasitic
| class.
|
| Well -- here is an important caveat. Do this only if you are
| building a PLATFORM, like The Web, because it can benefit the
| world more by being permissionless and open (and not fake-open
| like OpenAI).
|
| Tim Berners-Lee on why the Web stayed open and permissionless:
| https://m.youtube.com/watch?v=QXmEcku6Udk
| stcroixx wrote:
| We took one round 20 years ago a none since, still private. Then
| again, we've been profitable every year.
| chasing wrote:
| Venture capital is a tool. Understand it and then decide whether
| it's appropriate for your company.
|
| "Don't hire employees. They will destroy your company." They
| will! If you hire a bunch of people just because it sounds cool
| and you think it'll magically make you rich.
| mugivarra69 wrote:
| u need to have vc money and their involvement. i rather take 50m
| with same valuation outcome if the guy gives me hands than 150m
| from some rando dumper of funds with demands/takeover ideas
| DeathArrow wrote:
| Looking at the author's bussineses website, here's a sales pitch
| for potential new employee:
|
| >OpenRegulatory is different. It's 100% boostrapped. Ironically,
| having no investors (and less money) opens up interesting
| opportunities: We can serve customers who don't have a lot of
| money, like, Healthcare startups. And we can build software which
| only solves a tiny problem, and solves it well.
|
| While eating your own dog food has a certain face value, future
| employees most likely won't be pure idealists who will take a
| lower pay out of the satisfaction that their work helped others
| who "don't have a lot of money".
| sfink wrote:
| > future employees most likely won't be pure idealists who will
| take a lower pay out of the satisfaction that their work helped
| others
|
| If you rewrite that to "a much smaller percentage of
| prospective future employees won't be pure idealists..." then I
| would agree. But it's about the pool being smaller, and in fact
| small enough that you risk not being able to find anybody, but
| the fact that 95% of people are not going to be adequately
| motivated by helping underserved people does not mean that the
| remaining 5% won't be.
|
| Existence proof: I am working for substantially less salary
| than I could get elsewhere. I can prove it, I've been offered
| the higher salary at a FAANG and turned it down twice. It's
| financially irrational. I don't think it's wrong for people to
| work for directly ad-funded Big Tech. Or even for me. I'm not
| ecstatically happy in my current position. If I were younger I
| might make a different choice.
|
| But I care enough about working for a mission-driven
| organization that I basically have no intention of leaving as
| long as the organization doesn't lose my trust about being
| mission driven. (There's often a gap between stated positions
| and reality, and I try to watch closely to monitor how big that
| gap is.) And I think I'm far from being the only one in this
| position.
|
| I'm also aware that it's a privilege to even have the option. I
| grew up poor. Now I have a spouse and kids and live in an
| insanely high CoL area that we mostly don't get much from, but
| our past work was enough to make us financially comfortable.
| (Actually, I suspect it probably has more to do with the
| extremely unfair macroeconomic situation that has inflated our
| real estate and other investments, but whatever.) When I go to
| feed the worms, I won't be leaving my kids with as much
| financial security as I could have, but I hope to leave them
| with better respect for my values than I would have otherwise.
|
| That said, "mission-driven" doesn't actually mean that much.
| Any mission is going to have unintended consequences, and it's
| pretty dispiriting what people are actually using my mission-
| driven labor for. There's no easy way to sort companies into
| "good" vs "bad". It's often not even a meaningful distinction
| at a whole-company level. But there are still large differences
| if you pay attention.
| berniedurfee wrote:
| I was going to say exactly this. There are many talented
| engineers for whom compensation is not their primary
| motivation.
|
| Working on interesting problems, working in specific domains
| or working for a mission-based company trying to make the
| world a little better are all strong motivators.
|
| I suppose the overall pool of available candidates is
| smaller, but I don't think the pool of candidates with strong
| skills is necessarily smaller.
|
| Once you find purpose in your work life, that becomes a
| compensation all on its own.
| dangus wrote:
| I've taken a class on new venture funding and what this article
| misses out on is a discussion of the term sheet.
|
| VC can be a great deal for the company and the founder, or it can
| be a really bad one. That often depends on what ends up being
| negotiated into the term sheet that is signed by the VC and
| founders: what's the pre-money valuation, what's the liquidation
| preference, etc etc.
|
| Basically, this article says "don't buy a cheeseburger, it's a
| bad deal" without having a discussion about how much the
| cheeseburger cost.
| AlbertCory wrote:
| > you'll also have the non-obvious effect that you hire people
| who are not perfect fits for your team.
|
| That's only if "you" are not a smart manager. You hire some 'B'
| players, and they in turn hire 'C' players. An 'A' player will
| hire other 'A' players.
|
| The article assumes that your business is already there and
| running. Many VC-funded startups only really get started when
| they have enough backing to do it. Hiring really good engineers
| and marketers takes some money (although less than it did back in
| the day).
|
| He's right, though, that bootstrapping is cool and worth trying.
| It forces you to think about profitability right from the start,
| instead of all those BS metrics he decries.
| kozikow wrote:
| If your competitors are VC funded you are going to have very hard
| time competing unless you are already very established. You can
| have smarter founders or whatever, but VC company can hire very
| smart people as well.
|
| With how ubiqutous VC funding became in recent years, only small
| market niches are "viable" for non-VC funded startups. VCs will
| often still fund small market niches if they believe they can
| expand easily.
| ouraf wrote:
| there's a modicum of irony in posting this on an Ycombinator-
| enabled site. But at least they give enough leeway to keep this
| post here, so that's a good thing
| DeathArrow wrote:
| >You have to focus on large markets with many (or large)
| customers.
|
| I see nothing wrong with that.
| dijit wrote:
| I'll take another position; since it might be keen to understand
| a little more from a different perspective.
|
| I am a person who is a non-founder startup CTO; my company does
| not have any venture capital funding and we have enough capital
| to go to market.
|
| However, certain institutions (especially US ones) give great
| discounts, insider incentives (such as early access to features
| or access to people) and so on to venture backed startups.
|
| I have even been explicitly told this by AWS and Google; I am
| basically invisible to them _except_ for the fact I have
| previously worked with a small handful of people coming from a
| large organisation. I have to use personal contacts which wouldn
| 't be necessary if I was venture backed.
|
| VC's also seem to open doors into other companies that they are
| invested in, which can be hugely beneficial.
|
| Even companies that invest _egregiously_ in everything, like
| Tencent, can 't command such door-openings.
|
| So, if you absolutely need some doors to open, VCs can be a good
| way to go, but it's very much a "selling your soul to the devil"
| type deal.
| sdenton4 wrote:
| Would it be possible to take ~$100k of VC funding to get the
| 'VC-funded' benefits without actually giving up any real
| control of the company?
| dijit wrote:
| Yes, in fact I think this is probably the best way.
|
| I think it might be an issue that people shoot themselves in
| the foot by going for insane valuations to get more money for
| less equity- I think if you're honest about your valuation
| then theoretically this system can work.
| esafak wrote:
| You'd go to an angel.
| tomrod wrote:
| It won't destroy the company. Rather, it defines it, for better
| or for worse. And it may remove the connection to the founders'
| vision for the company.
| dylan604 wrote:
| >remove the connection to the founder's vision
|
| How is that not destroying the company from the founder's
| perspective? Is there any way to take the "don't accept VC
| money" relevant to anyone that's not a founder?
| tomrod wrote:
| Primarily a semantics game.
|
| Your business entity will still exist if you take VC money.
| However, the VC now has a say in the business and its
| profits, while their target may not be aligned to the
| founders' vision, hence a wedge that splits the company from
| the vision. That wedge may immediately divorce (what most
| would call a destruction) or it may take time.
| DriverDaily wrote:
| Are "destroy the purity of my idea" and "destroy the company"
| the same?
| tomrod wrote:
| I personally view them as separate.
| tux wrote:
| Great article written with humor I love it. Thank you for writing
| it.
| stanleydrew wrote:
| Selling part of your company to venture capitalists is a status
| symbol, and lots of people will chase the status symbol even when
| it's not required and they don't have a plan for how to spend the
| money should they get it.
| linusg789 wrote:
| I don't think the existence VCs are bad, but I do know many
| people that are taking VC money either shouldn't be or don't know
| what they are putting themselves into.
| avereveard wrote:
| > Companies which receive VC funding are not profitable.
|
| This is absolutely false. Company may be at a stage where they
| are profitable, but lack the capital to establish themselves as
| undisputed market leader before competition catch up.
|
| Banks only allow you to leverage so far, thus VC makes the most
| sense for truly scaling globally.
|
| I'll skip all the other things in the article, but there are
| plenty truism like this to watch out.
|
| Also it tries so hard to not be just an opinion piece, drawing
| for own experience, but sample size and none of the other details
| are never mentioned again.
| dang wrote:
| A title like this is probably the only thing that could get an HN
| thread to fill up with substantive, thoughtful comments defending
| venture capital. The contrarian dynamic strikes again!
| vonnik wrote:
| Like much advice that is supposed to apply universally, this is
| false.
|
| There are some kinds of startups so capital intensive that they
| came only built with massive external funding, notably hardware
| and biotech (and probably most deep tech).
|
| In addition, products that face very slow sales cycles selling
| into enterprise or government can benefit from the time that
| external funding buys you.
|
| What's true is this: if you yourself are a builder and can run a
| very capital efficient software business in an industry you know
| well where you will not get lost in the idea maze, then you may
| not need VC funding.
|
| In most cases, you will still need external capital from your
| savings, day job or friends/family.
| cj wrote:
| My favorite model is "seed-strapped" (a play on bootstrapped).
|
| 1) Raise $1-2 million (ideally from multiple small investors
| rather than 1 big investor, many smaller investors increases your
| control since every investor alone is too small to make serious
| demands about how you should run your business)
|
| 2) use the $1-2 mill to find product market fit and (more
| importantly) achieve profitability (or be cash flow neutral)
| within 12-18 months. If you can't reach profitability, close your
| doors and start another company with a new idea rather than
| raising a 2nd VC round (fail fast)
|
| 3) reinvest new sales into growth, and don't raise another round
| of capital even if people are offering you lots of money
|
| Some advantages:
|
| - Fail fast. It's better to be resource constrained in the early
| days so that you don't spend many years chasing an idea "just
| because you can afford to" when it's destined to fail
|
| - It lowers the valuation where selling your company will be a
| profitable transaction for founders & employees. If you raise $2m
| you can sell for $8m and make a good return for
| founders/employees, whereas if you raise $20 million you'll never
| be able to sell your company for less than $20m, and you now need
| to sell for $25m+ in order to see any meaningful as a founder
|
| - Without huge investors, you have a lot of latitude to operate
| your business however you want. When you raise $20m+, you
| basically become an employee of your investors
|
| - You typically retain full board control if only raising $1-2
| million, this amount is low enough that the VCs probably won't
| even need or want a board seat
|
| Disadvantages:
|
| - You'll get less support from your investors because they
| invested less. The less money VCs invest, the less attention they
| give you. This can be a downside if you actively want VC help
| (which personally I find overrated, very few VCs actually add
| value beyond the money invested, most VCs have never actually run
| a company and have only watched from the sidelines)
|
| --
|
| TLDR: raising low single digit millions in seed money to get
| going in the beginning is rarely a bad idea. Raising too much
| money too soon (especially before reaching PMF/profitability)
| severely limits options for a future exit and potentially creates
| difficult dynamics with VCs to deal with, if you accept a lot of
| money from a VC most will want you to do whatever necessary for
| them to get their money back.
|
| VC isn't bad, there's a time and place for VC. But it's 100% a
| game.
|
| _You must know the rules of the game before playing._
| smallerfish wrote:
| Aren't VCs less likely to want to invest if they get wind that
| you're going to go this path?
| cj wrote:
| Not necessarily.
|
| Not all VCs operate on the "we just need 1 unicorn" model.
| Some VCs are a bit more conservative and would be happy with
| a 4-5x return on their money.
|
| What's nice about the seed-strapped model is primarily
| optionality (which is good for you and also good for seed
| investors). Meaning you can start out with a seed-strapped
| mentality and flip to a "Big VC" mentality later on IF it
| makes sense. IMO during seed stage, most founders won't know
| upfront whether they would benefit from a huge capital
| injection or not, so IMO it's best to start with raising a
| small amount and then raising larger amounts later if/when
| you want to.
|
| Again, VC is 100% a game. You need to know how the game is
| played in order to know whether you want to play it in the
| first place. So many founders don't understand VC/Founder
| dynamics, especially first time founders. Starting with a
| seed-strapped model gets your feet wet in the VC game without
| diving head first.
| XCabbage wrote:
| > VC Funding Means You Will Sell Your Company
|
| > Remember when I wrote earlier that the VC dudes definition of
| "making everyone happy" after investing in your company doesn't
| mean making it profitable? So now you might ask: Okay, so what do
| my VC investors want? ... They want to make _a lot_ more money.
|
| > ...
|
| > Now, all of this might be none of your business, you might
| think. But it is! Because now the inevitable consequence, once
| you've taken VC funding, is that the objective of your company
| has changed: You're no longer building your company the way you
| like it. You're building your and the VCs company so that they
| can sell it, for a price higher than the one they paid. There are
| no alternatives. The course is set. You're building to sell.
|
| Why? Why do you have to respect the VCs' desires? Why can't you
| take VC funding, then use it to build a company that yields
| modest returns and live a comfortable life running it (and paying
| modest dividends to the VCs that over a few years return their
| investment)? Doing so would (I presume) not constitute any kind
| of breach of fiduciary duty, so what right can the VCs possibly
| have to enforce their preference for a more aggressive strategy?
|
| People commenting on startups often imply - like in the quote
| above - that VC investors ultimately control any business they
| invest in, and not the founding CEO, even when that founding CEO
| holds the majority of the voting stock. This strikes me as
| bullshit. At least, nobody ever spells out the mechanism of
| control, and their inability to do so makes me think they don't
| know what they're talking about.
|
| If I'm right that the narrative of VC control is bullshit, then
| what's the alternative explanation for why CEOs so often choose
| to pursue aggressive growth and sell their "babies"? Simple: the
| CEOs themselves want big money. It's not that the evil VCs are
| forcing the CEOs to do something they'd rather not do. It's that
| the VCs and CEOs are aligned in their objectives in the first
| place.
| jaysinn_420 wrote:
| Because as part of the VC investment, they are also taking
| positions on the board of your company. Maybe enough of a
| position that they can oust you if you don't do as they
| "suggest". Also, one round of funding is rarely the end of it,
| and if you are demonstrating that you are not playing their
| game and trying to become a Unicorn, then you will not get a
| second round of funding.
|
| Why do you think VC control is bullshit?
| adamzerner wrote:
| That makes sense to me that in these two particular
| situations they have leverage. But what if they don't have
| enough board seats and you also aren't looking to raise a
| subsequent round? It sounds like then they don't really have
| leverage, right? If so, it seems easy enough to guard against
| the risk that VCs end up with too much leverage over you.
| stocknoob wrote:
| https://www.holloway.com/g/venture-capital/sections/how-vcs-...
| [deleted]
| verdagon wrote:
| I know nothing on this topic so perhaps a naive question but:
| what about the employees? I imagine part of their TC was in
| stock, so if I was a CEO I'd feel pretty motivated to reward my
| employees, who quite literally bet their family's income on me
| (and indirectly, their retirement and kids' college funds and
| inheritance etc.)
| bombolo wrote:
| If you work at a startup and you expect the stocks to be
| worth anything in 10 years you're an idiot.
| knightofmars wrote:
| Lots of people say they would do the right thing when a
| situation arises that requires it. But the greedy part of the
| human brain is very good at rationalizing why the altruistic
| path isn't the best path. Imagine an inner dialogue, "Why
| should I settle for 10 million dollars instead of 50 million?
| I own the company, I made the most sacrifices, everyone else
| just road my coattails to success. They'll still get
| something but I deserve the most."
|
| This is why we should never trust anything that isn't in
| writing. No matter how many times someone promises to "do
| good by you" there will be a moment where that promise won't
| mean a thing or will be interpreted to have meant something
| different.
| Centigonal wrote:
| Many VCs take board seats, allowing them to replace the CEO
| dustingetz wrote:
| also google "Series A Exit Clause"
| zrail wrote:
| The control is the desire to hold open the option for future
| funding rounds. If you gain a reputation for not caring what
| the VCs think then they won't want to invest in future rounds.
| 23B1 wrote:
| Learn to manage up young bucks. It's the only way you can prevent
| these VCs from taking your lunch money. Get an informal advisory
| board if this is your first rodeo.
| franciscop wrote:
| > "The first and main takeaway is this: Companies which receive
| VC funding are not profitable."
|
| This is patently untrue and deceiving by the author, doubtlessly
| set to tell a narrative. Sure, some companies that receive VC
| funding are not profitable, maybe even most, but a sizable
| portion of the companies that receive VC funding ARE profitable.
| Denying this is deceiving the readers. In fact, the easiest way
| to receive VC funding is being profitable!
| tempusalaria wrote:
| The majority of public VC backed companies are not profitable
| and those are the best of the group. Must be 90+% of VC backed
| companies are unprofitable, and that's ignoring all the ones
| that just shut cause they can't make money
| franciscop wrote:
| Yes, but the author is making a strong claim that is untrue,
| that "Companies which receive VC funding are not profitable",
| specially since from VC economics THOSE VC-backed companies
| that are profitable are the quintessential part of the
| equation!
|
| BTW that's not even entering on the fact that "profitable" is
| not even clearly a financial goal for large companies: on one
| end Amazon has been "unprofitable" for a decade or so but
| that's BS ofc. On the other end WeWork was unprofitable as
| well but was highly valued, and _that_ was BS ofc (being
| highly valued).
| DeathArrow wrote:
| >Making existing customers happy is less important than acquiring
| many more new customers.
|
| As long as your shares are becoming more valuable, what's wrong
| with that?
| sfink wrote:
| It's not whether it's "wrong" or not, it's just a question of
| whether it aligns with your goals.
|
| If your goal is to maximize the amount of money you make from a
| venture, there's nothing wrong with it. There's everything
| right with it, that's why it's done that way.
|
| If your goal is to produce value in the world over a long term,
| then there's a lot wrong with it. Optimizing for actual value
| delivered is disincentivized.
| synergy20 wrote:
| It depends, without VC many people will never have any company to
| start with.
|
| Not all company can be a lean one, some just need external
| investment to gain speed to survive, some indeed has no needed
| for VC.
|
| Take it when it's good for you, avoid it if you don't really need
| it.
| KerrAvon wrote:
| reading the article might help here
| echelon wrote:
| This is an unhelpful comment and tone that doesn't add much.
|
| Many of us come to HN for the discussion and don't even care
| for the articles. Threads will often digress into interesting
| and orthogonal tangents.
|
| A better way to respond might be, "your comment is true in
| some circumstances, but the article states condition X, which
| makes the advice applicable."
| Capricorn2481 wrote:
| Which is why this place is just Reddit with more flowery
| language and an illusion of expertise
| echelon wrote:
| I really don't agree. This place is filled with some of
| the most intelligent subject matter experts in the world.
| Capricorn2481 wrote:
| Filled? I would say some really intelligent 1%
| programmers use this site to reach out to average
| programmers like me. Discussions around programming are
| often filled with people that tried a technology for 15
| minutes and gave up.
|
| Every other subject? It's a lot of cherry picked data and
| political dog whistling with an occasional expert
| mikrl wrote:
| ...and the same trolls pulling tidbits to laugh at off
| site
| surgical_fire wrote:
| If I had more upvotes to give you, I would.
|
| I come here because quite often the links posted are
| useful and interesting.
|
| While the comment section sometimes have meaningful on-
| topic insights, those are few and far between. Most often
| are just bad takes and/or things that are unrelated to
| the content at hand, interwoven with a unique brand of
| mutual fart sniffing.
|
| Your description does it justice.
| [deleted]
| [deleted]
| arnaudsm wrote:
| With the end of free money (higher interest rates), I wonder if
| bootstrapped startups could have their revenge over VC-funded
| ones.
|
| Nothing beats the feedback loop of profitability.
| carschno wrote:
| This lecture about post-growth entrepreneurship at the University
| of Amsterdam lays out some of the issues:
| https://youtube.com/watch?v=ApINAX7XEqc&list=PL14vcCXv7XVONA...
| DeathArrow wrote:
| >You're no longer building your company the way you like it.
| You're building your and the VCs company so that they can sell
| it, for a price higher than the one they paid. There are no
| alternatives. The course is set. You're building to sell.
|
| What's wrong in building to sell?
| dostick wrote:
| People running startups shouldn't be so proud of raising capital;
| it's silly child's play. Instead, you should focus on your craft
| and your product.
|
| The entire concept of corporations and shareholder capitalism is
| what is wrong with human civilization. It destroys the
| environment and reduces harmony in society.
|
| And mindlessly taking in capital, whether VC-funded or not,
| creates overhead and bloat, along with so-called "bullshit jobs."
| You still have the same number of productive developers, for
| example, as you had in the early garage startup phase. Only now,
| a bureaucratic machine is created around them, making things even
| slower and less effective than before.
|
| Every product that transitions from a startup to a bloated
| corporation produces a less useful product now. Look at Slack,
| Figma, Notion-- they are all stagnating.
| esafak wrote:
| > Look at Slack, Figma, Notion--they are all stagnating.
|
| We should commend companies that resist artificially expanding
| the scope of their products. Sometimes a product is done. I
| recall Antoine de Saint-Exupery's aphorism that "perfection is
| finally attained not when there is no longer anything to add,
| but when there is no longer anything to take away".
|
| All your examples are of single-product companies. They should
| expand their product portfolio instead.
| mrangle wrote:
| From what I can tell, the appropriate time to take VC funding is
| precisely at the exponential growth curve when there is not
| enough revenue to serve the high rate of new business.
|
| Not coincidentally, this may be when VC money is most interested
| in the business. Peter Thiel quipped that he knew that Facebook
| was a good investment because what they needed the cash for was
| more computers. To use an exceptional case to make a point that
| is broadly applicable.
|
| For the rare small businesses that ever get to this juncture,
| what I also notice is that an acquisition tends to come soon
| after.
| hdivider wrote:
| Good article and topic.
|
| What's missing though is so critical for our time: R&D.
|
| Yes -- it's usually wise to act like investors don't exist. But
| are you going to look at the world and go "oh, what we REALLY
| need is another SaaS company!"
|
| The most pressing problems today require hardware, software
| (incl. data science), and a research component.
|
| How to fund it, if not with investors? (They don't fund R&D
| anyway.) Take a _dual-use_ approach. Bootstrap with government R
| &D contracts -- and in parallel, commercialize it, so that you
| don't get stuck in gov too much of course. And/or license
| technology from federal labs or agencies. E.g. go to Lawrence
| Livermore National Lab, or Lawrence Berkeley, or Los Alamos, or
| the many agencies, NASA, NSF, DoE, DoD (which is colossal) and
| connect with tech transfer folks. They have advanced technology
| sitting on shelves, waiting for capable entrepreneurs to come and
| pick it up. Same for many academic institutions.
|
| This is how we get true technology companies like Qualcomm, and
| many, many smaller but by no means less significant companies.
|
| Make not just "what people want" but also what is technologically
| needed in this partly fallen world today.
| DeathArrow wrote:
| >So, what about those 10 million Euros? If MagicalUnicorn were
| your company, would you as a founder personally receive that
| sweet cash when your company gets VC funding? Nope.
|
| If the company receives 10 millions for 50% of the shares and it
| becomes valued at 100 millions, you can sell the other 50 % of
| the shares for 50 millions and let the venture capitalists deal
| with the business while you enjoy cocktails at the beach.
| caned wrote:
| There's a question of values here. VC may be the path for
| maximum monetary gain and maximum growth, but maybe it's not if
| you want to _make_ something that represents your values. Once
| your 50% slips to 49% and below, it's game over.
| limandoc wrote:
| This is a great example of "pick the right apple". Many VCs and
| investors can be control freaks, however if your company is
| profitable enough then you can demand whatever you want from
| investors.
|
| Just as I would not suggest to start a relationship before
| healing, same principle applies here: don't ask for money while a
| company is on low (financial) morale. But once the company is
| (financially) confident - all VCs and investors will come along.
| And that's when you can set a tone. For example by not giving up
| baord seats and restricting what investor can do. Simply offer
| them 10x return + dividents and nothing more. This capital will
| be enough to further boost your company.
| dustingetz wrote:
| Companies are valued by their future cashflows, not their present
| youngtaff wrote:
| Yeh, well that worked well for Uber...
| lloydatkinson wrote:
| I can't imagine the post lasting long here of all places.
| adventured wrote:
| The topic of not taking VC is routinely discussed on HN. It's a
| very popular subject. I've been coming here for ~11-12 years
| and there has always been a vibrant back and forth, pro / con,
| discussion on the subject of why or when VC makes sense (or
| not).
| DethNinja wrote:
| On the other hand, my first self-funded startup got destroyed by
| a VC funded venture. They had a worse product but far better
| marketing and they used every dirty trick in book to tarnish my
| company's reputation.
|
| There is no way I'll start another startup unless I receive
| backing from a huge VC company.
|
| Current economic paradigm is more similar to
| centralised/controlled economies of USSR. Thus if you want to
| succeed, you will need friends with connections to central banks.
| chris_j wrote:
| What does SSBC mean in this context?
| DethNinja wrote:
| Sorry, it was meant to be USSR (Union of Soviet Socialist
| Republics).
| chris_j wrote:
| Many thanks, makes sense now.
| Sosh101 wrote:
| I second this. Have had a similar experience.
| getmeinrn wrote:
| I'm interested, can you share?
| jorvi wrote:
| > central banks
|
| I think you mean big banks. Aside from maybe a line of
| communication due to their financial size, VCs have very little
| to do with the Fed or ECB.
| uLogMicheal wrote:
| You missed a step, it goes from the central banks to the LPs
| to the VCs. The big hedge funds that get all of that low/zero
| interest money are certainly active in private equity AND
| forcing their behaviors/policies on companies far and wide.
| littlestymaar wrote:
| Except you absolutely don't need any connection to the
| central bank to benefit from their monetary policy.
| uLogMicheal wrote:
| Want to explain? I doubt bank loans were that much easier
| for startups in times of low interest and if anything the
| inflation hurts bootstrappers worse.
|
| https://www.politico.com/news/2020/06/07/wall-street-fed-
| bai...
|
| The Fed selected BlackRock to run a groundbreaking
| program to buy hundreds of billions of dollars in debt
| from large companies slammed by the coronavirus crisis.
|
| Certainly these connections help?
| consilient wrote:
| > Want to explain? I doubt bank loans were that much
| easier for startups in times of low interest
|
| A higher risk free rate means risky investments like VC
| funds are less attractive.
| uLogMicheal wrote:
| but VC investment was at a high while interest rates were
| low, and we now see a contraction in venture investment
| now that interest rates are rising?
| disgruntledphd2 wrote:
| Yeah and what gets funded will change. Ultimately higher
| interest rates mean that time to profitability should
| decrease in order to make it an attractive investment.
|
| Honestly though, VC is such a tiny, tiny percentage of
| the investment world that maybe this won't happen (but
| the vast majority of funds are gonna fail to return their
| capital as they were funded in a ZIRP world and need to
| invest in a world with higher interest rates).
| littlestymaar wrote:
| > I doubt bank loans were that much easier for startups
| in times of low interest
|
| Low interest rates doesn't mean loans are "easier" (this
| is going to depend on the risk policy of the specific
| bank, and is mostly unrelated to the interest rate), but
| it lowered the interest rate you'd pay for _every_ loan
| no matter who you are (I personally bought a house with a
| .7% interest fixed mortgage in 2019, I didn 't have to
| personally know Christine Lagarde for that).
|
| > if anything the inflation hurts bootstrappers worse.
|
| Low interest don't drive inflation up (we've had anemic
| inflation for a decade of low interest), if anything,
| inflation leads to interest rates _hikes_.
| uLogMicheal wrote:
| You're arguing with economics here...
|
| https://news.stanford.edu/2022/09/06/what-causes-
| inflation/
|
| Inflation rises when the Federal Reserve sets too low of
| an interest rate or when the growth of money supply
| increases too rapidly - as we are seeing now, says
| Stanford economist John Taylor.
|
| I never said you needed central bank connections to get a
| home loan. To get infinite runway on unsecured risk is a
| very different area of privilege than secured home loans.
| imtringued wrote:
| >You're arguing with economics here...
|
| Japan did absurd amounts of QE and low interest and all
| they got was less inflation than the rest of the world.
|
| Your referenced article is also ignoring the obvious
| elephant in the room which is the opposite of monetary
| policy. The US government and governments in Europe did a
| lot of fiscal policy. The stimulus checks and loans were
| a far more effective way of increasing inflation than
| monetary policy can ever be, because monetary policy can
| be reversed by the private sector and therefore make it
| ineffective at achieving any outcome. QE for example, is
| a meaningless operation. It has no reason to exist.
| littlestymaar wrote:
| > You're arguing with economics here...
|
| No, I'm arguing against die-hard monetarists who still
| buy Friedman's bullshit 25 years after the Asian
| financial crisis and 15 years after the subprimes crisis.
| Japan has had more than two decade of low interests with
| no inflation, and the rest of the world had one decade
| with the same result, but as these people are cultists,
| they don't care about facts and they never did.
|
| Inflation isn't a money problem, it's a _supply_ problem
| coupled with a _market power_ one. (Nor is inflation a
| "diminution of the value of money" either).
|
| > To get infinite runway on unsecured risk is a very
| different area of privilege than secured home loans
|
| This is goalpost moving.
| uLogMicheal wrote:
| I appreciate the context and will research the
| differences you shared; this topic interests me.
|
| > This is goalpost moving.
|
| My comments have been under the context of the post, VC
| funding. With VCs, you often find companies spring from
| nowhere with a marketing blitz or infinite runway in an
| exclusive access phase. This is not accessible to the
| common person, and in my opinion stems from a modernly
| masked form of nepotism. This is also not accessible in a
| world that requires near-term profitability, so maybe
| more of this will be broken in the years to come by
| economic realities.
| imtringued wrote:
| I am personally of the opinion that the central bank is
| irrelevant. The only factor relating to central banks
| that has any relevance is that they issue cash with a
| price control aka the zero lower bound on interest. This
| results in the usual problems with minimum price
| controls. There will be an oversupply of the "product" in
| question. Because the ZLB applies to the short term
| interest ratethere will be an oversupply of liquid and
| immediately accessible deposits or account balances.
| People will be hesitant to commit their money long term
| and they instead just wait for the next opportunity. This
| then leads to a slow down of money circulation, which in
| turn forces the entire economy to adapt to this
| artificially created situation. This behaviour creates an
| opportunity to plug the gap with newly created money by
| commercial banks by keeping less than 100% of the
| deposits in reserve. The problem is that the newly
| created money will end up stuck in the same accounts as
| before which means that the bandaid solution has to be
| repeated endlessly. The obvious solution is to eliminate
| the zero lower bound and let the market determine both
| positive and negative interest on liquid account
| balances. Then the central bank won't have to do anything
| at all except prevent commercial banks from creating too
| much money by having reserve requirements at 50% or
| higher. You will get most of the neoclassical predictions
| like full employment even if the economy is no longer
| growing or the last world war has been eighty years ago.
|
| But the reverse is also true. If you keep the ZLB enjoy
| living in an imperfect world that needs constant
| government intervention to deal with the constant
| dysfunction that such a price control generates.
| littlestymaar wrote:
| > I am personally of the opinion that the central bank is
| irrelevant
|
| The economic history of the US (which was one of the last
| industrial power to addopt a central bank) is against you
| on this one, especially the period between ACW and the
| creation of the Fed in 1913.
|
| The purpose of central bank isn't to set up price control
| on money (which it doesn't, btw) it's to make sure that
| commercial bank don't have _liquidity_ issues.
| uLogMicheal wrote:
| I understood how one-sided discovery is problematic in
| paper-asset markets. I think this is a big reason we are
| seeing efforts to shut down decentralized exchange.
| Decentralized exchange prohibits censored price
| discovery. Orders must execute in public by nature of the
| systems. Now from what I understand, if the order is big
| enough to cause major market impact it goes to dark
| pools, or other frontrunning/delay measures are executed
| in private via contractual negotiations. Interesting that
| this is also similar in borrowing markets, thanks for
| that context.
| littlestymaar wrote:
| I'm not defending VCs in any way (and I kind of agree
| with your sentiment here), it's just that you don't need
| to have any relationship with the central bank to do
| that: the central bank sets the interest rate, it affects
| the entire money market all at once so anyone with access
| to this market will benefit from cheap credit.
| imtringued wrote:
| You're saying this as if the central bank is forcing money
| into the economy when it really is a pull based system. The
| commercial banks ultimately decide how much money they want
| to issue and if they think you have a viable business they
| won't hesitate to give you a loan.
| boppo1 wrote:
| Well, directly, no. But QE and ZIRP were pretty fundamental
| in their current ubiquity.
| echelon wrote:
| I self-funded my startup to the tune of half a million dollars.
|
| I've had what I can only assume to be a VC-funded competitor
| study my endpoints for high latency / expensive queries, then
| saturate them with millions of requests a second across
| thousands of simultaneous IP addresses.
|
| Business is survival of the fittest. Pressures and growth
| gradients come in all shapes and sizes.
| t0mas88 wrote:
| Why would that be a VC funded competitor specifically?
| dazc wrote:
| Money to burn?
| tester457 wrote:
| How did you mitigate the attack?
| echelon wrote:
| - Moved DNS to Cloudflare, which handled the brunt of it.
|
| - IP and CIDR blocks
|
| - A few trivial heuristics to catch certain behaviors they
| were using
|
| - In-app query caching for read-only endpoints that serve
| the same data to all users
|
| - Redis TTL caching for read-only endpoints that take view
| arguments. A means to manually expire on writes.
|
| - Runtime control plane additions to dynamically block
| IPs/CIDRs, user accounts, and endpoints (if they find
| another hole to exploit, we can just block a few endpoints
| rather than the whole service)
|
| - A tool to inject bad responses (we found another,
| probably different actor consuming and reselling our
| service)
| dinp wrote:
| > On the other hand, my first self-funded startup got destroyed
| by a VC funded venture. They had a worse product but far better
| marketing and they used every dirty trick in book to tarnish my
| company's reputation.
|
| Would you be willing to give a few more details about what
| happened? I'm not interested in the identities of the companies
| or people, just interested in a high level overview of what
| happened. We don't hear these stories often.
| DethNinja wrote:
| - Hired a journalist on some mid-size news company to tarnish
| the company's reputation. I never imagined they would bother
| to do this, but I was wrong.
|
| - Used an APT for hire but I don't believe they did succeed ,
| still it is quite insane. I was lucky enough to catch a
| targeted rootkit but issue was quickly remediated. I'll
| eventually find a consultant to analyse the Win 11 rootkit.
| They were definitely not script kiddies.
|
| - Some black hat SEO and shills for hire, but that is
| expected.
|
| I'm really surprised by hired journalist / APT aspect.
| Something I never imagined would happen, but apparently it
| does happen.
| uLogMicheal wrote:
| Between the bot farms, members of media in pockets, and
| inflation; the boat of traction does seem a bit rigged eh?
|
| Probably someone asked long ago "What if traction itself could
| be a moat?" and the rest is history.
| molave wrote:
| Not surprised. If they can't have you, then no one can. It's
| sad that startups either die quickly a hero or live long and be
| a villain.
| jacquesm wrote:
| I had this happen, we survived though, and they failed
| (spectacularly so). Camarades/ww.com: 1, Spotlife: 0.
|
| And Logitech, who backed Spotlife was more than gentlemanly
| about it, they sent us all of their traffic for years and
| years.
| mannyv wrote:
| There are lifestyle businesses, and there are scale businesses.
| The author is conflating the two.
|
| The fact is, getting customers is the hardest part of any
| business. Unless you're capital-intensive, that VC money is going
| into customer acquisition.
| Eumenes wrote:
| One annoyance I have with VC funded startups is how they all try
| and use the same playbook. Founders are generally inexperienced.
| Likely good ICs, very good talkers, but not capable of
| holistically building a company from the ground up. They hire the
| same roles, in the same order. So many small startups will have
| over embellished leaders, who are 'head of' or 'director of'
| something, with 1-2 or sometime zero direct reports. You'll hear
| how "We NEED a" head of UX, data, support, etc. These types don't
| want to do the IC work, but want to be 'early stage'. Those
| people come in, buy the same crap SaaS tools and institute the
| same culture as the previous place. Maybe this is changing with
| money tightening up, but it can be off-putting. When considering
| a new job, I look at who works there, and if its a small company,
| with inflated titles and people with short tenure everywhere, its
| a pass.
| dinvlad wrote:
| Or it may also happen the opposite way, when CEOs try to
| achieve too much with too little all in the name of staying
| "lean" so they could stay afloat, and working their early
| employees into the ground until they're dead and fresh meat
| replaces them.
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