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Comment by 65827 | Hacker News Reader

The artificial need for ever increasing growth and valuations is so destructive in this town, need to start rethinking some of those attitudes. We just have to hit this weird fake number with no basis in reality, or people's lives get ruined. Why?

I get how capital and return on investment work, but maybe it's time for a different model.

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The fetishization of startups and venture capital is to blame. There's no concept of creating a sustainable business when you take someone else's money. Investors need 1000x + returns on investments because that's how it works. 1000 startups they invest in fail so 1 has to pull the weight of the others. This model is broken for sure, but I don't know what they cure is.

Not that it is a good idea, but I wonder what would happen if a version of "basic income" for VCs was created, the difference being that no exit or return is needed.

The cure is simple. Stop being greedy?

The problem is when you bootstrap your startup business, and your competitor is a VC backed startup. They don't need to think about revenue, they can build a product they give away for free - and you need to price it reasonably to pay salaries. Competition with a free product always leads to a race to the bottom. A few years later, these competitors will burn, but you cannot wait years to turn in a profit.

The best time to bootstrap is right after a crash. Many years ago I worked at a startup that flamed out. A couple of guys went off and developed a similar product to fill the niche abandoned by that company, and no VC would even touch that space (remember the buzzword "B2B"?). Right there those guys had a 2-3 year window to develop a product and build a brand almost undisturbed by competition.

How did they fare in the long run?

In that case there's plenty of competition to take Zenefit's business.

I started my career at a company that was entirely bootstrapped, and by the time I left, they were doing nine figure annual revenue. Since then I've worked at VC-backed startups (all of which have actually generated revenue). The longer I think about it, the more I think that bootstrapping at the beginning is the right move, and then to see how far you can go while bootstrapping. Raising money should be on the table, and will often be the right decision, but the longer you can go without raising it, the better position you'll have put the business in to succeed after raising.

I take your point. But as a practical matter, this is a foolhardy (and somewhat tautological) approach to building a business. It is to say, "We must raise too much money in order to compete with other companies who raised too much money, even though it will almost certainly lead to both of our companies ultimately going out of business." Moreover, it seems that the people who (perhaps intentionally) get their companies into these situations cannot publicly acknowledge the grim reality of what they're doing (if they even understand the consequences) while raising the kind of money they'd need and pretending to their employees about the company's rosy future. It's fuckery all around and the only people I feel bad for are those unfortunate enough to be suckered into working at these places.

It's somehow the prisoner dilemma applied to startups. I've raised ~30M$ as a founder in my past startup. For my next adventure, I'd love to bootstrap (with personal savings from my last exit). But here is the (prisoner) dilemma: if I start something that needs to be profitable and my competitor(s) are also bootstrapped businesses that needs to be profitable, game on. If my competitor is a VC-backed startup, I might be in serious trouble. So either I find an industry VC won't touch (porn?) or the prisoner-dilemma for startups is hanging over my head.

I don't think it's fair to assume that a war of attrition must be fought by parties with equal resources. I can't think of any reason why a patient enough small player could not wait long enough by the river.

There is also the option of aiming for a segment of the giant market a la 37 signals.

Me, I don't think I would ever go after one of these giant markets if I truly believed that the only way forward was to raise 8-9 figures and pray that my competitors die first. It's unreasonably risky.

I disagree. It just takes rigid discipline and perseverance. The value proposition, business model, and team emerging from that will be fierce. I sense that these stories are much less reported and talked about, since they have less click appeal...

Bingo.

This is why, when leads mention a VC backed competitor, I say something like: They'll be gone when the money VC dries up. You can trust us to stay for the long haul because you are our boss.

The downside of that is that if your product strategy is beholden to a few early adopter customers then it becomes much harder to make the changes you need to "cross the chasm" to the mainstream market.

Silicon Valley is the greediest place on Earth. That's why we're all so "successful". If making more money, either because we want all the nicest things, or because we just want to keep our heads above water, weren't on the top of our minds, no one would be working as hard as we do.

The funny thing is - this wasn't the case even 20 years ago. Silicon Valley was still a place you went primarily to work on cool stuff, secondarily to hopefully get lucky and build a company worth a shitload of money. You went there to change the world and work with the best, money was a decent side benefit but not required. Most took a pay cut (after cola) to move there and work on these awesome computer things everyone was talking about.

Now it's 100% about the money - just look at what is being funded. Almost no real "tech" companies - just a bunch of folks writing slightly different variations on how to sell ads. I have to try to keep a straight face when I have some obviously-way-more-talented-than-me engineer telling me about some silly worthless app they are working on. It obviously does not move humanity forward or progress the art of their profession in any way - it's just a lottery ticket people have deluded themselves into thinking they are "making the world a better place".

The change in tech startups has been extremely sad for me to watch. What used to be inspiring is essentially now one step removed from fraudulent.

This take is not completely fair - there are a lot of startups also doing interesting things - but it's closer to reality than not - and nothing like what you envisioned as a "startup" even just before the dot com era.

Renting a room in a shared apartment in a sketchy neighborhood (Mission/SOMA), depending on the company cafeteria for most meals, and riding the bus to work, i.e. the standard startup employee lifestyle, is a marginally lower standard of living than that of a typical grad student. Maybe the Macbook Pro you carry will be kept slightly more up to date.

University campuses typically have everywhere you'll need to go within a compact walkable envelope, and you can generally live within a short walk of one of the edges. The grad students are coming out ahead, in my view, since they don't have to contend with flaky and crowded transit.

If startup employees are being greedy, they're doing an exceptionally poor job of it. They would enjoy much cushier lives as, say, mechanical engineers and accountants in the Midwest.

It's not a valid explanation when you see the usual equities and salaries people get at startup nowadays.

So is everyone being greedy? The startups taking the money are greedy and to blame, but also the VCs are to blame for investing in so many startups? I don't think it's that cut and dry. You could replace your sentence with "stop supporting capitalism".

Bingo. Also would be nice to see VCs start to set existing–not projected-revenue requirements before investing. If it's not making money, it's not a business.

The problem with this philosophy is that it would have caused investors to miss very successful investments. Since the number of big wins is limited, there is a very real risk to professional investors to NOT being in wins.

This approach also basically rules out entire classes of investments (e.g. biotech).

It may be apocryphal, but Google (market cap: $567B) is rumored to have taken its first investment before it had incorporated, and well before it started making money. I'm sure there Google is not alone in this respect.

That's sort of antithetical to the purpose of venture capital, which I understand to be moonshot research projects that create something new, something that might take years of work before it sees revenue.

This misses the point.

The whole point of investing is that you are doing so based on potential. Regardless of what the current value is. In fact, the lower the current value is the better!

The fact that the pendulum has swung too far doesn't mean the approach is spurious.

Founders can invest their own money first, though. The only caveat is like some above who mention investments in research-level projects (not software startups). Depends on the company, but in the context of Zenefits they clearly blew the extra cash on nonsense.

>The artificial need for ever increasing growth and valuations is so destructive in this town, need to start rethinking some of those attitudes. We just have to hit this weird fake number with no basis in reality, or people's lives get ruined.

Silicon Valley is the only town I know where a thing like "profitability" is seen as a weird number.

Maybe I'm missing your point, but these jobs wouldn't exist if it wasn't for endless VC capital and ridiculous valuations, so I'm not sure the net effect is leaving these former employees "worse off".

>but maybe it's time for a different model.

Be self-sustaining or go under; why should it be any other way?

An angel investor recently responded to my pitch materials by scolding me for saying that our unit economics were strong enough to make most of our revenue profit (which is true). He said it "wasn't smart" and that other investors would question whether I'd thought through our business model. Months later, I am still at a loss for words.

Maybe he was implying that it should be reinvested in growth?

He claimed that costs would outstrip our margins as we grew. I have to assume he just thinks this is how startups work, because most of the costs he specifically brought up don't actually exist in our market/business model. In any event, if you have an instinctively negative and suspicious reaction to profitability, then as a business person, I want nothing to do with you.

"Nobody ever lost a funding round for using Heroku."

I don't follow. Could you explain what you meant?

It's a play on "nobody ever got fired for buying IBM," the original FUD. It relates to that person seemingly thinking that a high run rate is de rigeur. Like IBM in the 60-70s, Heroku is among the costliest providers.

Just playing devil's advocate here, I think the whole venture capital/startup ecosystem is really broken. But: imagine for a second that you have a really good business model. It will be profitable beyond a certain scale. You don't have the capital on hand to grow it to that scale yourself while eating the losses. What's a guy to do? Meanwhile, some other guy has a lot of money and is always thinking about how he could be making even more money. He can bankroll you until you hit the sustainability threshold and become profitable, in return for a share of profits, or stock, or something similar. A return on investment, essentially. If you don't have a system like this, only existing big players can sink the capital into ventures like this, where they require a large scale before returning profits. And large companies are pretty risk averse in general, so that's not a great solution either.

The issues is that the VC wants to see growth, since growth means you're edging closer to profitability. They'll continue to give you more and more cash if you need it, as long as you look promising. This creates the incentive for you, as the startup, to make it look like you're growing, in return for more VC cash. Regardless of actual growth numbers. Growth "hacking" is a result of the incentive structure. But the system exists because there are business models that cannot be self-sustaining from day 0 that, nonetheless, could possibly be a very good investment for a VC to make if it grows large enough.

Software developers are hopefully socking away a lot of their income while the days of great pay are here rather than spending it. When the housing bubble burst around 2008 many real estate agents found themselves in trouble because rather than saving while the going was good they were spending it on new cars, new larger house, nice vacations.

Edit: this isn't to say we are in a bubble that will burst, its to say that eventually developer pay will come down (as supply catches up)

Eh, developer pay and engineering in general has been a high paying field for eons. It takes a lot of specialized knowledge to do and that's only becoming more of the case as the industry further specializes and expands. It's like how there used to be one kind of doctor and now there's hundreds of specialties.

The only ones hurt will be generalists. It's not like you can pull a guy off the street and have him do 90% of dev jobs. The number of people capable of doing the job well will mean it always pays fairly well.

Real estate on the other hand can be done by anyone with some charisma and decent reading/writing ability which is probably about 50% of the population. These are the niches where high paying jobs don't last. Look what happened with Uber recently, once the job seekers catch on to an easy source of high income it's a few years or less before that income dwindles from excess supply

This may seem off topic but bare with me for a sec. I've been shopping for a house and have started to learn about how real estate transactions work. One of the things I was surprised to discover was the amount of selling costs produced by middlemen (9-12%). Given the pricing of homes, this is far from an insignificant cost. From my calc considering current interest rates, the breakeven time for reselling a home at the price you bought it, is ~ 7 years. Sell before that and you have to jack up the sale price to try not to lose a sizable chunk of change.

As I buyer I'm constantly reminded that they are free to me, but as they say "there's no such thing as a free lunch." These costs are just passed on to the buy via a higher price; hence the [now] fallacious "home prices always rise."

If the cost of housing rises with each transaction, then it seems logical that the economy must grow to support higher wages to support higher costs of living, right? This got me wondering how much of the necessity for growth is a by-product of unnecessary middlemen taking cuts of various commodities?

All the time on everything. That's how a sustaining economy works. Every one gets a piece by inserting themselves in the pie.

But the same time the idea is that everyone in the chain is delivering value or else they wouldn't be there because someone else will provide something better by ruthlessly removing said intermediary out when it is no longer efficient.

If you have a better way of selling houses between people without the need for that 9-12% you would be doing it now or you would have done it by now.

Literally the definition of a founder. You find opportunities to exploit.

From the sellers side, the agent makes sense. Although I would argue a flat or time based fee is more appropriate than a percentage of sale price. The buying agent delivers relatively little value once the purchase agreement has been signed so I would argue they are essentially rent seekers.

That's not how markets work. Clearing prices are set by supply and demand, not by the seller's costs.

It's certainly not the only factor is cost increase, but that cost will almost certainly be passed onto the buyer if the market will bare it.

You're missing the point. Sellers will charge as much as the market will bear even if they got the property for free and have zero selling costs.

I don't believe I'm missing the point you're trying to make; on the contrary, you're missing mine. Selling costs create and artificial floor. It's a pretty simple point that is in no way mutually exclusive to yours.

Not entirely. The seller is still going to factor in their costs when deciding what to sell something for.

Sellers do all sorts of irrational things when setting asking prices which have no impact on actual selling prices.

I can't agree with saying that trying to sell something for more than it cost you is "irrational"

If you have a sustainable business you can get a loan instead of giving away equity. The problem is that you have to consider what your competition is doing. If you can take out a loan for $200k and grow by 15% a year your lunch will get eaten by the startup that gets $10m in funding. But generally a startup will only get funding if there is potential for the investor to get a great return on their large investment, so many ideas are not competing with startups.

They don't think it be like it is, but it do.

> is so destructive in this town

Destructive to whom?

One answer: destructive to other businesses that can't compete with VC-backed price dumping. A good recent example was wash.io: they undercut and drove out a bunch of laundromats in San Francisco, and then, just to put the cherry on the stupidity cake, they went out of business themselves, so now there are a whole bunch of people in SF that can't do laundry. There was an extensive Twitter debate about this that I would link to, but it appears to have all been deleted.

That sounds like a good subject for a long blog post or article in the SF Chronicle.

Where did all the washing machines go? Did they destroy them? If all those places sold their washing machines when they went out of business then the capacity for doing laundry was conserved.

Come on. You can't just conjour up a laundrette like you spin up an AWS instance. You need to find real estate, employees, equipment. All of those will have been redistributed when the business shut down and any new proprietor will have to start all over from scratch.

I think the GPs point was that presumably the equipment and real estate still existed at some point after wash.io shut down. They could have been sold off as businesses rather than simply being dumped through an auction house, but it sounds like that's not what happened.

> Where did all the washing machines go?

Presumably, to places where a VC backed startup hadn't destroyed the laundromat industry. San Francisco is not a closed economy.

> Where did all the washing machines go?

Probably to community theaters (Or hotels, or the equivalents thereof) in Pittsburgh, who picked them up for a discount at a liquidation auction.

Great news for out-of-state community theater, bad news if you need your laundry done in California.

Either that, or they went straight to the junkyard. Move fast and break things.

Knowing how high-cycle industrial equipment goes, probably scrapped.

To the companies at issue and their employees, obviously.

The people who get hired then laid off.

Fund sizes raised basically dictate the exit outcomes needed to satisfy LPs.

Raising from small funds ameleriorates this somewhat, but that isn't the sexy thing to do so people seem to rarely do it.

Bryce Roberts from OATV is trying to offer an alternative path via his http://indie.vc program.

> We just have to hit this weird fake number with no basis in reality, or people's lives get ruined. Why?

Because money is god round these parts.

People also declared profits were sooo yesterday...

in 1999.

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