Comment by ericabiz | Hacker News Reader

Comment by ericabiz | Hacker News Reader

Investors love to spout this stuff. Unfortunately, it really isn't true (even though as a founder who generally prefers to bootstrap, I wish it was.)

FTA: > If the cost of customer acquisition (CAC) is greater than the lifetime value (LTV), a startup can grow itself to death.

Oh, you mean like Salesforce? No, wait, they had an IPO and they still only rarely show a profit. And they hold their LTV very close to their chest, so we still have no idea if CAC is lower or higher than LTV.

> When investors talk about growth, we’re talking about sustainable growth.

No, you're not, because you continually fund companies that do the opposite. Salesforce, Webvan, Pets.com from the first boom. Instacart, Uber, Lyft, WeWork, HubSpot from the latest.

> The period of cheap capital and billion dollar checks has ended.

Same thing we heard in 2001 and 2007.

> In this capital constrained market, buying scale is no longer going to be a credible lever for the next generation of startups. ... Companies can no longer look to money as a performance enhancing drug for scale-up.

Until it is again. It wasn't OK to "buy scale" in 2001 or 2007, but it was in 1997-1999 and 2012-2014. And now in 2016, it's fallen out of fashion again.

Either we're going to have a raging depression, or the bubble will inflate again. Hypothetically, both of those scenarios could actually happen--a depression followed by bubble inflation yet again.

This is why I suggest that founders tune out the idiocy and focus on building a sustainable business. You probably won't build an Uber as quickly as Uber did. But you'll be hugely protected against the inevitable downfall, and won't find yourself cash-strapped and forced to switch gears quickly (notice Uber now singing the "we plan to be profitable in most U.S. cities this year" tune.) And, more importantly, you'll have built a life for yourself, your employees, and their families that are depending on you.

> Oh, you mean like Salesforce? No, wait, they had an IPO and they still only rarely show a profit.

This is a very common argument. It's also wrong.

Salesforce earned $6.7B of revenue in 2015^. It spent $3.2B of that revenue on sales and marketing, in other words getting new customers. It made $100M total profit.

If Salesforce stopped caring about acquiring new customers, it could cut sales and marketing spend by 90%, down to $300M. It would then have $3B of profits.

Financials (see page 7): http://s1.q4cdn.com/454432842/files/doc_financials/2016/Q4/C...

^ Technically between Feb 1, 2015 and Jan 31, 2016, and labeled in the report as Fiscal Year 2016.

Hard to tell there are a lot ways to inflate revenue via creative "marketing". VZW & Comcast do cross promos where they are hiding deep discounts as marketing expenses.

cough Autonomy

You haven't actually provided a reason this applies to Salesforce. All you've done is insinuate something unsubstantiated.

Financial "Engineering" applies to all public companies across the board. What applies to SalesForce is the part of the statement "it's hard to tell" :) (Given the level of detail they provide on their filings about the Marketing/Sales spending it's very hard to tell :)

There are a lot of accounting games you can play with 6.7B of revenue and 0.1B in profit plus rapid growth and a history of losses.

I don't know if they are, but just because the numbers look good does not mean much.

This seems to assume that the number of customers would stay steady if marketing costs drop to zero. That strikes me as implausible.

It's sort of like saying, "If we stop investing in R&D and machine maintenance, our factory will be much more profitable." In an accounting sense, yes, sort of. But in reality, no, because you're eating your seed corn.

I grant that Salesforce is still in a "let's buy market share" mode, so we shouldn't expect to see a profit. So they could be just growing happily. But they also could be in a highly competitive market without much competitive advantage. Or it could be that they are using marketing spending to boost revenues well beyond what's sustainable. From the numbers, we can't tell. Which, I believe, was ericabiz's point.

most VC's will tell you anything but the truth - profits, sustainability, culture, blah blah blah, they'll make some nonsense blog posts about it, but none of that matters, as long as you grow the business through any means necessary and have a huge, profitable exit for them. and if you can't have a huge exit, well, they'll probably just take all the money back and leave you with nothing.

things like profitability and sustainability are for suckers, plebe small businesses that they won't look at until they smell an opportunity. otherwise, you might as well be the taco joint they eat lunch at. they'll say great things about you and even use your products, but they wouldn't give you more than an hour of their time.

they have the best jobs on the planet, that's for sure. i'm not saying they don't do work, they certainly do, it's just extremely favorable for them, because they have all the money. so what are you gonna say, chump? nothing.

watch out for their lawyers, too. it's hard to tell which of the two are more full of shit.

Thank you.

I love it when I read an article, generally agree with it, feel like i'm wiser now, and then read the comments and someone like you shows me I automatically agreed with the author without thinking about it too much.

Gotta work on my critical thinking. Any recommendations on what to read?

I don't know if there's something you want to read so much as just have a higher awareness of the active processes in your head. When you agree with something, have a hook that asks why you agree. When you want something, have a hook that asks why you want it.

This sort of awareness takes time to build, much like building muscle at the gym.

But how to I train to be more aware? When I work out I have a plan of execution - various exercises. I need awareness exercises.

You could try meditation for 15 minutes a few times a week. Its hard to stick to but i always feel more aware of my thought process afterwards.

Have a plan of execution for every article you read.

Just one? I think you need a plan A and a plan B, and, for some of the longer articles, a plan C wouldn't hurt.

:)

I've grown to be suspicious of getting too comfortable. And to appreciate becoming uncomfortable. So maybe this:

For the first article you read every day, take 1 minute and pay attention to how it made you feel. Are your biases and beliefs affirmed or challenged? Can you argue the other side of it fairly? Are there ways the author could be fooling himself or fooling you?

If you try that for a while, my guess is that you'll notice particular biases and develop reactions to them. E.g., lately I've been working on in-group bias. I'm more likely to agree with authors I perceive as "us", and more likely to disagree with authors I perceive as "them".

Pick a topic (like economics). Pick out 3 contrasting books which give alternative view points on said topic. Read them and takes notes. At the end compare and contrast your notes from all 3 and write your own condensed version of notes from your new perspective. Try make sure the books are really contrasting, i.e. pick work from Ayn Rand, Thomas Piketty & Lee Kuan Yew. It's literally impossible to agree with all three on all topics so you will be forced to analyse why you do or don't agree with the contents of the book.

Sure, if you want a book that's really unconventional, I like "How to Get Rich" by Felix Dennis. He was worth something like $500 million when he wrote it, a college dropout--probably someone you've never heard of, but you've likely heard of Maxim magazine, which he founded.

Not only does it have a lot of excellent business advice, but he's also a pretty hilarious writer.

More recently, I enjoyed Dan Lyons' skewering of Silicon Valley culture with "Disrupted" (which just came out and has been getting a lot of press.) I didn't agree with everything he said, but it was a great read nonetheless.

Thinking, Fast and Slow by Daniel Kahneman.

Sometimes is just a matter of expertise. The more you know about a subject the more critical you can be when reading about it. Many of the posts about SV startups here are very inside-baseball.

You talk sense but I'll relate one of my favorite econ quotes to you: the market can stay irrational longer than you can remain solvent. If a founder was focusing on the tech and business side and tuned out the funding fads, he/she would be at a significant disadvantage to the crowd that is abusing "steroids".

An interesting analogy is steroid usage among men in fitness. I guess that is why the author used it.

Would an Uber/Lyft like company have been even mildly successful if it wasn't for the capital? Is there any other scenario under which we could've seen a private company take on the taxi monopoly? I'm not sure.

Maybe using insane amounts of capital isn't a black/white issue and more dependent on your market/business type. Obviously, you are right about everything else just being cyclical.

Also, that is very illuminating about Salesforce.

> Would an Uber/Lyft like company have been even mildly successful if it wasn't for the capital?

Probably not them but other companies with less capital have achieved better long term results.

I think we should have a serious discussion about "startup dumping" and business inequality. I don't know how to solve the unfair competition pushed by companies who can spend a lot of money acquiring customers without a profit but it is important to increase the success rate of startups with less capital.

What about Flywheel and other Taxi-side technology addons?

The reason this "LTV" notion doesn't work is because "Lifetime" doesn't mean anything if your own "lifetime" depends on customer lifetime. These companies calculate "LTV"s based on the assumption that the companies themselves will be immortal and end up learning that that isn't the case.

Great comment for a terrible post. When I saw the title I knew it was click bait.

Don't think this article disagrees with most of your statements. The leverage of money is cyclical--so it's not incongruous that at different time periods the profile of growth vs profitability focus of startups funded varies.

Thank you. If more people thought along the same lines as you then our industry would be a much better place.

But, but, salesforce is building another downtown San Francisco skyscraper! That means they're successful, right? Guys?

I think it means they're politically well connected.

The building was getting built regardless, they just paid to put their name on it.

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