Navigating Mid-Success

It's like a kid playing basketball. He beats the odds and make his high school team. He beats the odds and is a starter. He beats more odds and is the star. He beats even more odds and wins an athletic scholarship to college. He not only makes the team but becomes a starter and eventually the star of the team. He further beats the odds and is drafted by an NBA team. He not only makes the team but becomes a starter.

Imagine telling that guy he's a failure because he's no LeBron James. Apparently if you're not a unicorn founder you've achieved nothing.

The subtext to this piece is the mathematics of venture capital investing.

1. Most companies fail. Not "turn into airplanes"; plow into the ground at terrific speed leaving an unrecognizable smoking crater.

2. VC investors survive this by investing in a portfolio of companies, not just one or two.

3. For the math of a portfolio to work out, the winners have to pay for the losers.

4. The majority of the portfolio is losers.

Because they invest so little in such a large portfolio of companies, YC can afford to cultivate startups that are aiming for 8-digit outcomes. But VC firms, as a general rule, can't: for your startup's success to make their math work, you need an outstanding return. They'd rather you return something than nothing --- but they wouldn't rather by much.

There's a lot not to like about this model, but it's not really a moral question. There isn't a model where just a couple of investors plow millions of dollars into your startup all at once where simple mathematics aren't determining everyone's positions.

So when we talk about the difference between shoot-the-moon companies and "airplanes" or "lifestyle businesses" or whatever dumb term we're using for them this week, we'd do well to keep in mind that the people pushing you away from these kinds of outcomes really don't have a choice.

The flip side of this is that if you're not planning on a unicorn, don't get hitched to the VCs that are hunting unicorns. There are other investors who'd be quite happy to get that 5x back and build a $100M company, or even a $20M company.

Fuck building a $100M. Can you build a $10M or just a $1M company? Just do that (first).

I read somewhere - first get comfortable, then get rich (or change the world). This insane focus on the wrong metric (valuation/size of your company) is going to hurt nearly every first-time founder, which I presume most of you will be.

Once in a while, you do hit the jackpot, but let it happen to you, let it come to you as you make progress and hit bigger and better milestones. Pretty sure even Zuck, Gates, Jobs, or you-name-it-unicorn-founder had no fucking clue that theirs would be the unicorn company.

I'm a founder of a company that had "mid-success" (a few times over).

I mostly agree with this article and when I see companies in my former market raising $100M+ rounds I always cringe.

> But as a general rule, the longer you delude your investors here, the worse shape you’ll be in.

This is true, but the real problem is not deluding your investors but deluding yourself. It's often necessary to have unreasonable optimism to overcome every hurdles along the way. Knowing when that optimism crosses the line can be difficult especially in the bubble of fundraising.

> Very often I’ve seen cases where founders know in their hearts they have an airplane but are able to convince good investors it might still be a spaceship. This really causes a lot of heartache, and often precludes your opportunity for a good acquisition later.

The point about over-raising limiting future options really resonates. It's one of the saddest things that can happen: all of the hard work has been done to build a viable business, but in the rush to get there too much money was raised, so the the cap table has gotten to the point where any reasonable exit will yield the founders and employees almost nothing. So frustrating.

> Let’s define a “really good airplane” as a company that has profitability within reach and is on track to be worth $100 million with several more years of hard work.

Here's the thing. Airplanes can get much bigger than $100M, they just take longer to get there. They have to fight their way there and rarely get the spotlight. That's just the way some markets are, no matter how great the product, no matter how smart the team. It's a shame when founders build a real company but destroy the value of its equity by trying to make it something that it's not.

Quite often you find entrepreneurs getting sucked into the mindset of building for investors and not necessarily building for customers. Entrepreneurs and their teams are too focused on valuation and not enough on business fundamentals.

Silicon Valley is a place where founders need to be reassured that building a company that's profitable but only worth $100 million is "nothing to be ashamed of."

This advice is valuable to more than just "airplanes," because the truth is that there aren't just two classes of companies -- "airplanes" and "spaceships" -- there are infinitely many.

And it's just as important to realize that your $2B company is not a $20B company as it is to realize that your $200M company is not a $2B company.

If your company can plausibly be $50M, and you realize that, you can get wealthy and your investors can have positive outcomes (not "wildest dream" outcomes of course). But if your company is plausibly $2B, but you try to make it a $20B company, you and your investors will end up less happy than $50M guy, even though his company was worth 1/40th of what yours is.

I think that the story of a lot of companies during the Great Recession is of over-funding themselves to their eventual detriment -- even companies that are objectively very valuable.

Anybody have any advice for those who are actually aiming to build a perfectly serviceable airplane, preferably with a reliable-enough autopilot? Articles containing such advice are also welcome.

> When you start a startup, you get pushed off the side of a cliff with a bag of aerospace parts.

Here's a pain point for someone to solve: why the fuck does the VC process necessitate pushing unequipped people off cliffs?

This is a very investor-centric article. It assumes that successful founders will one day want to "hit it out of the park" by the investor's definition (moreso than they have with a $100M company), as if founders live to serve the interests of the investors.

I'd suggest that founders who have a profitable $100M company get themselves free from the chain of their investors as quickly as possible and go about their lives running a successful company, never worrying about what investors think or want again. Remember which party is actually engaged in creating something valuable here. You might need their money to start, but if you do things right, you don't need it to live.

The other caveat here is that sama says many founders are surprised when potential acquirers don't consider them "legitimately valuable". That's because founders typically think of value in technical terms. AFAIK, acquisitions happen only because you have something that the company can't just rip off: either you already have a large/significant installed base in a segment the company wants, a recognizable brand, or you have some intellectual property that the acquiring company couldn't recreate by stuffing 3-4 engineers in a closet for a year (which costs ~$1M, much cheaper than any type of exit you're hoping for) (this basically means patents that they want to own for themselves, not really patents on interesting technology, because such patents can normally be circumvented).

This seems to be a much more apt analogy for most startups:

Rather than being pushed off a cliff and asked to build a rocket, they are being strapped to the rocket (of VC funding) and asked to make it to the moon.

Not to diminish the hard work that goes into building a successful startup. Not all rockets make it to the moon, as the difficulty of a moon shot isn't really in generating thrust, but thrust is a necessary but not necessarily sufficient condition.

"A company that has profitability within reach and is on track to be worth $100 million with several more years of hard work. This is nothing to be ashamed of"

I wonder if there's some vague sense of how disconnected one has to be from normal conceptions of reality to consider building a $100MM company something to be ashamed of.