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Comment by amirmc | Hacker News Reader

> "A company with $200K per year revenue with a single person and no plans to “exit” would be a failure in YC"

It might not be what YC is after but I don't think it they'd consider it a failure either. Am I wrong?

There is a difference between no plans to exit, no exit occurring. No exit ever occurring is currently going to be a failure for any technology investor, because currently, at least, there is no custom of technology companies (unlike perhaps restaurants) paying dividends. Maybe such a custom will develop, but there isn't one yet, and it's not what YC is designed for.

The best illustration of the distinction between no plans to exit and no exit occurring is 37signals. Jeff Bezos's investment in them is a sign that he believes there will eventually be an exit. As far as I know he didn't insist on them paying him dividends; that would have been very unusual; so without an exit there would be no way for him to get his capital back.

We too would have bet on 37signals, because it's hard for technology companies to stay medium-sized. They either peter out, in which case exits are a moot point, or they grow so large that they either go public or eventually receive an acquisition offer the founders are willing to take.

FYI: 37 signals is an LLC and pays out their profits at the end of each year. So Bezos is getting a check once a year (though obviously that's not why he invested).

Wow, I didn't realize that. It will be interesting to see how this turns out.

Can you imagine a future where investors somewhat like yourselves (if not necessarily YC) invest considering their expectation to likely be a combination of dividends and some possibility of exit?

Or perhaps better phrased, do you see dividends playing a role in angel/YC-like investment decisions anytime in the nearish-term?

It seems very, very unlikely. Dividends have been done before. They were how "startups" used to pay investors back in the railroad days. But the rates had to be set in advance. Without preset rates, investors would have to trust company managements not to skim profits (which there are 101 semi-legit ways to do) and claim there were none to return. And while a railroad could predict profits with reasonable certainty, how could a tech startup?

Makes sense, thanks. Seems a shame that there is no reasonable way to invest in the companies which have good potential for growth and profit, but have no clear exit.

Could this be accomplished by paying company management a low but reasonable wage and having them also get paid dividends? That way they'd be motivated to have more profits and get more money through dividends themselves. I suppose in the 101 semi-legit ways there's probably still a way around this.

If you do not trust management, they can act to detriment of investors even without dividends. All they have to do is pay themselves market wages, for the right value of "market", rather than investing in growth. Or they can run company like it was Japanese, where it exists to buy perks for employees off their own taxable income. (The four star chef is for recruiting! Honest!)

This is a two way street, since investors have an incentive to push for swinging for the fences even when a bunt would be life changing for the founders. Consider a two man team who hits a million in sales, but seems to stall out (say, ran out of channel, but has good ongoing relationships with customers). Pivot and risk company to hit ten million, which would justify exit, or continue executing and make two families rich with little risk? Not hard to see dynamic.

Larger funding rounds include provisions to protect against such abuses. The ultimate of course is the right to replace the CEO if necessary. In practice they seem to work.

Why would you do business with, let alone invest in, people whom you did not trust?

The problem is the difficulty of the second half of "trust but verify."

What I read about VC's definitely leads me to believe that you should have an exit plan and be on the same page with them about it. If I wanted to tell them, come back in 5-10 years and I'll think about it, that would be a problem. Perhaps it is not true or perhaps a seed fund like YC is different.

yeah, it wouldn't be a YC failure, it would just probably be a company YC wouldn't invest in. why would a single-person 200k/year profit company need YC?

edit: this seems to me like she's confused. YC's preferences on companies that they would like to invest their time and money in doesn't necessarily equal "the best way" for all entrepreneurs under all situations and circumstances.

Your last sentence: that's exactly what I took to be the point of her post.

indeed. i suppose i should clarify a bit -- advice given to YC companies and similar companies should be treated as such -- advice for companies on the YC company-like path, not as universal gospel, and i believe he's made that distinction in the past.

Yeah but this is such a specific goal for an early stage startup. It's true YC might not be into this, but on the same token they invest more in people than ideas. So if a company evolves into this, will YC insist on an exit strategy, or would they accept a dividend or some other arrangement? Somehow I don't see PG et al bringing down the VC-style hammer down over a $20k investment.

YC doesn't insist on anything, beyond the initial terms you agree to when you accept YC funding. Which is why there have been a huge variety of company endings (from quietly slinking off back to college, to selling to Google, to returning remaining investor money and shutting down, to turning into a profitable growth company with no short-term exit plans, etc.).

Anyway, the terms they offer don't give them any way to demand anything. They are a common shareholder in the company with 2%-10% of the shares and no seats on the board. They can't steer the boat, they're merely passengers. So, it makes sense for them to choose companies that the most obvious outcome is one that will be profitable for them.

YC's preferences on companies that they would like to invest their time and money in doesn't necessarily equal "the best way" for all entrepreneurs under all situations and circumstances.

That is certainly true. We would never claim otherwise. YC invests in startups, and only a tiny fraction of the millions of small companies in the US are startups. Nearly all are service businesses whose prospects for growth are minimal.

Startup founders are a very small subset of entrepreneurs.

This is interesting to me. I consider what I have a startup, but what is the distinction? I'm not sure what about the $200K statement makes me an entrepreneur and not a startup. I'm assuming we are talking about scalable tech business, not consulting.

EDIT: Updated for clarity.

I don't know what you're doing, but consulting is not the only way to have limited growth prospects. A company could also be making a product for a niche market (and not be doing it merely as a way to get started engaging with users). I believe some people call these niche software companies MicroISVs.

I think you need to start qualifying 'startup'a little more, particularly when the topic tends towards hair splitting.

It looks like the definition a lot of people use is one that includes your startup as a subset.

I find it so frustrating reading through threads like this that get all bogged down in semantic nitpicking. It also opens a door to a particularly annoying type of quasi-trolling or baiting. Maybe 'startups that exit' or something

I've found the best strategy (as with most words) is just to use the word the way it's used in standard, educated usage.

In standard usage, a startup does not mean any newly created company. It means a newly created company designed to scale dramatically. Most of the 20 million businesses in the US are not startups, because they aren't designed to scale. They're either service businesses or niche product businesses.

Yes, but the PG message - and the message of other VCs - is not "Well, here's one valid way to make a lot of money (with investment and an exit), but you can also make lots of money with a SaaS."

It's "This is the way to do business."

That's the issue.

That's false. I have never used the word entrepreneur in an essay, except once in a phrase in scare quotes. My essays are addressed strictly to the small subset of entrepreneurs who are starting startups.

If people interpret what I say more broadly than I mean, there's not much I can do about that, but if you go back and look at the actual words I use, I could not be more explicit.

I didn't use the word entrepreneur, either. That's a bad stab at replying to me, and you know it. You often imply, although in not so many words, that the essence of what it means to be a "hacker" is to do a "startup".

I certainly don't believe that starting a startup is the essence of being a hacker. What a completely crazy idea. How could I believe that Ken Thompson was missing the essence of being a hacker?

I wish you'd be either less contentious or less mistaken. It would be fine if you were one or the other, but having to deal with both simultaneously gets kind of wearing after a while.

I asked Paul Graham about this a couple years ago at the Startup School and he didn't seem particularly concerned with whether the companies ended up exiting. I don't know to what extent that has changed since they took on outside capital.

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