The Danger of Being Default Alive | Hacker News Reader

The Danger of Being Default Alive

hajak.se

58 pointshajak36 comments

This is a VC perspective. They need 10x wins and expect mostly failure. From a VC perspective, the worst case is the zombie - cash flow positive, so you can't kill it, not making enough money to repay investors, and can't be ignored because the VC still owns it. A portfolio of zombies can eat all of a VC's time. It's easier on the VC if the losers just die already.

On a more egalitarian note, the VC also wants the loser companies to die 1. so that their founders can be freed up to found other, non-loser startups, that they can then invest in (a pivot is just as good as such a default); and 2. so that their talent can be freed up, and then fed to other startups in their portfolio, to give them better chances of wildly succeeding.

In a VC's eyes, a "zombie" isn't just a time-sink; it's a prison holding back good founders and employees from doing other things.

I know you are having a go at the VCs, but you do make a good point. If good founders are wasting their time on "zombie" companies then the VCs should put their money where their mouth is and back the founders before they kill the zombie. They should be saying if you kill the current company I will put x million into your next company.

"They should be saying if you kill the current company I will put x million into your next company."

If the VCs are not the sole owners of the company, that will get them a lawsuit from the other investors for breach of duty as a director. Often the VCs don't have the authority to kill the company.

I was not suggesting that they be so explicit about it, but the VCs could have a general policy that they will always back founders in their next venture if the founders create a profitable company. The founders knowing this will kill or hand over the zombies themselves.

I think that explains some weird behavior I witnessed at several places years ago.

We were doing fine, but not awesome, and then management started taking big risks and we flamed out. Very frustrating to spend time and effort on something you know is killing the company.

Why doesn't this get talked about more often? That there exists a fundamental VC v/s founder conflict. The VC wants at least one of his startup to go mega, while the founder wants his startup go big enough that his opportunity cost is smaller. There are many decisions that the founder will want to go one way, while the VC the other way.

Because the incentives are not aligned with presenting complex realities to readers of the media.

Practice intellectual self defense: Read books, and lots of them, read the comment sections but skip the articles, and engage in communities online and on the ground to gather your own information about the world.

Well I doubt that zombies would readily suck up that much time, but VCs would rather all their portfolio companies take bigger risks if it increased the chances of a runaway success. Much better for a VC if twice as many of their companies fail, but they get just one more unicorn. All the returns come from unicorn companies, it follows a power law distribution.

Wait how do zombies eat time, exactly? If they have cash flow and are viable businesses, what do they need from the VCs that would take up their time?

board meetings, requests for intros to people/customers, informal checkins, even just dealing with the company within the VC firm

are u kidding? favor after favor the CEO asks from the network of each VC partner. Can you do this, can you intro me to that guy, and they can't say, "Well... but you're a zombie"

Why can't they?

I mean, yes, obviously, it's rude and unpleasant to say "I don't have time for you because you're not making enough money," but it's a lot more unpleasant to say "I'm firing you and all your employees even though you're making a profit because you keep asking for favors and it's annoying."

Because until they are ready to cut their losses and actually burn this bridge with the entrepreneur, they want to be in a good position if the entrepreneur turns things around and all of a sudden the company is a hit. You don't want to finally get rid of a zombie only to find that if u waited 6 months that zombie would have been a hit.

How do you burn your bridge? You still get rich don't you?

1) If you cut ties with entrepreneur A cuz you think his company is zombie, his business then folds and he goes on to next thing and doesn't invite you to invest in his new company.

2) If you cut ties with entrepreneur A cuz you think his company is zombie, he doesn't tell you about entrepreneur B who is about to start the next big thing

3) i.e. it's like high school. You want to always be in the right crowd invited to the right parties. And if you stop associating with a certain group of people, you better be sure those are not the future kings.

A portfolio of zombies might also be called a Private Equity fund.

The difference is that PE funds buy companies at lower multiples due to lower growth expectations. They also buy bigger companies where there is more room for driving efficiencies and where an exit is easier to achieve.

Are there any known cases of a zombie becoming a unicorn after a while?

Apple, although not a startup, was barely alive in 1997 (ready to default) and became the most valuable company in the world 12+ years later -- worth more in actual profits (never mind stock) than 100 "unicorns" combined...

One might say that Apple didn't so much go from failure to success, as that Apple did fail—rotted from the head—and that, upon its failure, NeXT acquired the "Apple" marque (along with all the employees, factories, and purchase agreements) and rebranded itself using that marque.

Dunno about unicorn, but Brad Feld was an very early Angel investor in Harmonix music systems and they were working for many years before the had breakout success.

well said, that's exactly the issue.

As a kid, you are young, full of energy. As you mature, you learn to get more done with less. The basic challenge of adulthood is to learn how to do this while you are still having fun. Staying young and dumb is not an option any more than ossifying is.

Maturity is getting everything you used to get done as a teenager done at five so you can go home to your other job of your family. Once you are cash flow positive, then it's time to grow up. Lock everything down and secure your revenue flows. It's not just your livelihood that rides on it, the people paying you to stay in business deserve a reliable service. Chase hares with whatever resources you have left.

If you want to keep playing startup, the answer is to cash out and go start another startup.

"As an investor, I love founders that can balance this — being less dependent on external financing but still staying ambitious is ideal."

I worked for a company with a founder like this, but I think he was driven by a love for chaos as much as ambition. Every time it seemed like things were going great and stress was down he would find a way to toss a grenade in the mix (new partner, new crazy-ass idea, etc). Often the grenades ended up being huge wins, but as the company got bigger he was forced to go through budgeting, product managers, development processes, QA, etc.

It was never really clear if he was forced out or left on his own, but before he left he did mention to me how boring it had gotten.

> before he left he did mention to me how boring it had gotten.

God save us from executives who think that the purpose of business is to entertain them.

But this is why we start the companies in the first place my friend. ;)

Whaaaat? I was told that startups were all about using technology to make the world a better place for everyone!

Graham's essay does not describe "default alive" as being "cash flow positive." Rather, in his essay, "default alive" means that you are on a path towards being cash flow positive.

"Assuming their expenses remain constant and their revenue growth is what it's been over the last several months, do they make it to profitability on the money they have left?"

this piece just highlights something that is well understood by a lot of people: non-rich/first-time founders and investors don't have aligned interests until the founders cash out.

of course the VC prefers you die over you stopping to take risks. duh? they don't make money on cashflow positive companies. however, a lot of cashflow positive companies are really good outcomes for the founders and employees. as a founder, you ought to consider this before raising money.

I believe the author is confusing "Default Alive" with "Self Funded". In fact, raising money for a Default Alive company is a lot easier than Default Dead.

Every Self Funded company has to be Default Alive, but the converse is not true.

Nothing really substantial, basically an investor saying you should not be satisfied with your profitable business and that should take more risks (the obvious agenda being taking external investment)

Curious if this is actually true, statistically speaking. Is there some statistically significant relationship between delaying profitability, investment and exit size?

It would be interesting to see aggregated data on this.

Ie, look at companies by cohort, determine if / when they became profitable, how many exited, at what amount, and how many failed, how many flatlined.

The founder team of a default-alive company is in an immensely better bargaining position, and VC naturally prefer the kinds of deals people only sign in distress. It's hard to put the squeeze on people, when they can just decide to take the investment next year instead.

Dreams are prettier than reality. It's fun to not have customers. It's fun to just spend investors' money. Lots of things are fun, for a while.

As a bootstrapper with no interest in VC, I can say this rings true. I was never more productive than when I was scrambling to ensure financial sustainability.

Once things became comfortable, I slowed down. Partly, this was good: recovering social life, dating, etc. You can't keep up a breakneck pace forever.

But, I needing more money was a clear, objective metric that kept me focussed. Once you're default alive you need new metrics.

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