Why Does Your Company Deserve More Money?
blog.ycombinator.com
blog.ycombinator.com
Things like these are self evident only in retrospect.
The two owners took too much money for personal stuff and couldn't pay the employees. Several times we were told to not cash our paychecks for a few days or were asked to take an unpaid day off, etc. That same year that they let 3 employees go and they each bought a new house, new vehicles, and one of them bought a $75k trailer. So between the 2 of them, we figured that that year they could barely afford to pay us they got around $800k worth of personal stuff.
Then they pushed all the extra work onto the remaining employees. 4 more left a few months after they let go of the first employees which caused them to change their business model quite a bit to retain the remaining employees.
Now looking back, the 3 employees they let go were paid less than $80k between them and were considered contractors (until the IRS was involved).
The lean stuff here burnt several of us out, and for those that remained, the thanks they got was being told there wasn't enough money for a holiday party.
I keep in contact with several of the employees. They're a successful startup in most aspects I assume, but only because they were forced to change stuff that they didn't want to. If they didn't change the business model, they would have bled more employees within a few months and probably would have went under.
IANAL but that sounds illegal in California at least.
Come up with an answer that will satisfy your parents or spouse, not just your co-founders and seed investors.
What can make it worth ten years?
1. A product with the potential to delight paying customers and make them talk to each other about how great it is. (If your revenue depends on ads, your customers are advertisers, duh.)
2. A big enough stake in your company (after you sell those shares) to give you good choices when it's time to do the next thing.
Whenever you take on leverage, you have to deliver a return to investors (or lenders). How long will that take? Do you really want to do this for another X years? And ten years is not a bad guess for preferred equity.
Yet scaling becomes absolutely essential for a company doing anything sufficiently complex. The question is how do you maintain that small team efficiency across an enterprise. It seems that business and engineering are very similar in this regard in that the ultimate baseline problem to be solved is managing complexity. The answer seems to be in adhering to the Unix philosophy of tiny, self contained, composable parts which can be easily reasoned about and composed with.
The unix philosophy of composable teams can only happen when the communications are clear, concise and don't generate much, if any, overhead. I'd love to see a company with a CCO - Chief Communications Officer - who has a team responsible for making sure that the information passed among the various parts of the organisation was effective and free of bullshit or grandstanding.
As teams grow, not only do communication channels increase exponentially, individual contribution decreases overall and there is less ownership/responsibility so people care less i.e. a team of 100 has 99 other people to pick up slack, a team of 1 has noone else, a team of 3 has 2 people that will let the third know of slackage, where a team of 100 may never be able to apply that.
Small teams get it all done, and sometimes single people, especially language designers like Guido, Stroustrup, Ritchie, Matz, Eich, etc and especially in the beginning.
Small team strategy even in big companies is very smart and effective to get the best performance out of each contributor. Small team configuration does give some power and worth to employees though so it isn't used as much in large companies that looks at employees as resources in a machine. Employees as resources may work for established products/processes but rarely research and development or creative products.
[1] https://pm.stackexchange.com/questions/14907/number-of-commu...
> n(n-1)/2
> exponentially
I see this a lot in mainstream media (who simply can't help themselves) and increasingly so on HN (where we should know better): using "exponential" as a synonym for "explosive". I'd love for all of us to stop that. n(n-1)/2 isn't exponential growth, it's quadratic, and once you're at more than 10-ish team members the difference is enormous :-)
If investors knew the company was going to sell for over a billion dollars, would they really not have invested? Maybe this is the case, but it doesn't seem like it. Instead it seems like the investors didn't believe the company would actually sell for a billion dollars based on the growth rate to date.
I also get what you're saying though, in terms of the companies that deserve money are the ones that can convince investors that they deserve money.
Investors do not decide who "deserves" more money, they decide who GETS it.
Deserving is more a moral term and makes things confusing: a company could deserve the money but not get it because they are not good enough at fundraising, or they need the money at a time when money is very hard to get etc. And many companies get money without deserving it because some investors are stupid, or because they are way too good at looking shiny.
My hunch is they had to go through lean times to be able to focus harder on customers and eventually create a product that could take the company to an IPO. If you’re not lean, management is most likely distracted with the internal company and organizational overhead than you are with external customers.
No way to prove this (because we can’t recreate the exact scenario) however.
B2B or B2C can make a huge difference here, in B2C there are some options that are much harder to come by than in B2B (see: youtube), but B2B is easier to land softly because it is far easier to monetize.
Daily or weekly meetings on the ‘scores’ sound like a good idea.
Unless I am missing some nuance you where going for?
I still agree with the GP post that 'deserve' is an unfortunate choice of wording. It has the potential to again mislead founders, now in a different direction.
Nobody deserves your investment (except some non-profit organizations). Fairness is no significant criterion for investors. You probably just give it to the founders with the best risk/gain ratio. The founders you want to educate might think that they now can say "I did what you suggested. Now I deserve your money". And they will again be surprised if "that shitty company over there" gets it instead.
As an analogy, say I had the idea for a car when everyone is still using horses. I raised a seed round to build my car but the funding is only enough to build a car prototype that goes 10mph. At 10mph, there is obviously no product/market fit since horses are still faster and cheaper. However, the prototype proved out the technical challenges, so I know with more capital I'd be able to make a car that can go 80mph, making the horses obsolete. How would your post apply in this case?
On the other hand low technical risk projects tend to come with higher market need risk.
Launching a new general aviation company is massively capital intensive. They raised a bunch but failed to do anything that resembled shipping. They could have made individual parts, they could have sold kits. Any number of things.
Sometimes you have to start with the small pieces, or do services engagements. These things generate revenue, attract staff, and enable you to build the kind of organization necessary to do something capital intensive.
Trying to go to Mars as step one won’t typically work. Try to find business models for the components and assemble over time. My guess is that Elon Musk’s portfolio follows this model.
(Also, I can't imagine what it'd be like for jobs to be easy to find!)
I’m curious. What do you mean?
Between 2009-2011, I was working for a company that had three rounds of layoffs until the company finally shut down. We all knew the company was in dire straights, management was very up front with us. None of us who were left, jumped shipped because we liked our jobs, were working on resume building technology and we knew we could get a job relatively quickly.
Without fail, within a month of being laid off, every person who was laid off had another comparable or better job. This was true for developers, QA analysts, and L1 and L2 tech support. On our last day, when the company shut down and laid all of us off, we hung around, went to lunch, laughed, joked and called our recruiters for our next opportunity.
My biggest fear is never being unemployed, it’s being unemployable. If you keep your skills marketable in tech, finding a job or at least a contract is not hard. It’s been true for me for almost 25 years asa Developer - and I’m not on the west coast.
Were you adding new users but churning out so many that growth was flat?
Or were you not adding new users, but retaining the ones you already had?
We spent a lot of time debating whether or not this was just the nature of "live" content (e.g. live television derives most of its value from sports and real-time events, and they defend these verticals viciously). I have no special information on Twitch, but from the outside, it is a qualitatively different audience. There's a level of commitment that just wasn't there for JTV.
The lesson is burned into my mind, because there are a lot of ways for a startup to generate deceptive "traction", and if you're not careful you can fool even yourself. You have to be brutally honest about how committed your users are, and what their actual value is. It's an easy way to become a zombie startup -- trundling along, nursing a "big" audience of users who require a lot of care and attention, but don't really care about your product in return. These kinds of audiences are worse than worthless, because they waste your time.
I consult for VCs on a technical side and I sit in on many series A pitches. It’s funny how often when you ask a struggling startup why you, as a VC should invest millions into their business, they give the question like this back. “Why do you deserve to invest in my company?” “What are you as a VC bringing to the table?” “What kind of acceleration will you bring to my startup?”
The answer is “Millions of dollars in cash you just asked for” and in our minds we say “you stuck up asshole, you came to us.” At that point we often look for different investments. And we never go looking for companies to invest in. They always come to us.
That’s pretty arrogant. I can tell you from first hand experience that the best VCs are vigilant and don’t just expect people to get referred to them. a16z rates themeselves by the % of their competitor’s deals they had seen. You don’t optimize that number just from waiting for the phone to ring.
Unless you're one of the ~10 most well-known VCs in the world (or in your region/niche) it stands to reason that proactive search could yield additional high quality leads. Why forego this?
There's a parallel in recruiting: applicants on your web site might include many, many candidates who don't meet the minimum requirements of the role, such that even the top 10% include some that don't warrant a phone screen. So companies target passive candidates via LinkedIn, to find the gems who aren't currently even considering a new job.
(And it's not just small companies that do this. Even companies with a top-tier employer brand, which receive many thousands of applications, will actively source candidates this way.
Why doesn't the same apply to the VC firms with which you work (wrt potential investments)?
What I am sure of is that they don’t go looking for investments in the part of the fund I consult for. Those potential investments come to us in huge sets that many analysts have to narrow down into viable investment options.
Could it be better? Maybe. I mean they aren’t the largest VC in the world. Nor are they the smallest. But for a small number of partners they do quite well. I guess they like their methods. They would probably say if you have a different idea and the funds for your VC, by all means go for it.
In any event, the fact that beggars can't be choosers does not obviate the importance or utility of posing some form of the question to the prospective investor.
Some of the better questions I’ve heard are prefaced with comments like “we’re aware we’re having troubles in this operational area, would you be able to offer guidance and advice to get us out of this sticky situation?” Self awareness seems to be a sign of a great and investable company.
And then
> We even took all of our employees to Hawaii to celebrate
This is an interesting juxtaposition within the same paragraph. I hope I'm not out of line for reading this as, "Let's celebrate our thriftiness that led to people becoming suddenly unemployed by splurging on an extravagant vacation!"
First was hard time where they had to let go people.
Second was for people who stayed and worked hard to make it profitable.
The article stated a 2 month difference toward profitability, and provided no other frame of reference for the (immediate? eventual?) Hawaii getaway. They do mention at "the end of the year" but there is no information stated about when this 6 month "get out of the tailspin" process began in the [calendar/fiscal] year, so that's non-helpful.
Without additional context, that's a single digit number of pay cycles between, "Surprise! You're laid off to save the company" to "We can afford a lifestyle of excess".
I mean, I would hope that it didn't go down this way, and the paragraph was just written awkwardly. If the author wants to make that clearer, I'd be happy to listen.
But as that blurb stands now, it reads as a casual dismissal of the "good people" let go at best, and a slap in their face at worst, which isn't a good look.
> 1. staff up
> 2. let your employees go
> 3. profit
> 4. give tips on the internet that you shouldn't staff up
> 5. stop to look into a mirror because you don't have any integrity whatsoever
I hope he just forgot to mention that there was a <minimum time to let it seem reasonable and humane> duration between the firing and the holiday.
I'm not sure I see where this "year later" is derived from in the article.
This is what the relevant section of the article says as I read it now:
After 4 months of failed pitches (in a process we organized poorly) the only option we had left was to cut expenses and break
even (here is how to organize a good process). We let a lot of good people go and doubled down on generating the advertising
dollars we needed to stay alive. Within 2 months we went from burning $250k a month to making $100k a month and we ended the
year at $8m in revenue and $1m in profit (Suhail, co-founder of Mixpanel, describes that tactic in a great tweet). We even
took all of our employees to Hawaii to celebrate
If t0 was in late June, the delta between the 6-month ordeal and the celebration would have been zero. If t0 was in early January, it would've been six months. (Plus/minus a month depending on calendar/fiscal year.)
I still wish the article was more clear about the timeline.
- Founders?
- Venture Capitalists?
- Startup Employees?
- Internet commenters from all over the world?
- All of the Above?That doesn't mean it isn't bad to lay people off in a startup; it's horrible. And it means the founders did something wrong (hired too many people, didn't have a good business model, etc).
But it should be understood that the entire company can disappear in 6 months if its a new startup.
I agree.
> I joined a Big-whatever company because of the stability. If I was going to join a small startup, I'd be aware of the instability.
I concur with your reasoning.
> That doesn't mean it isn't bad to lay people off in a startup; it's horrible. And it means the founders did something wrong (hired too many people, didn't have a good business model, etc).
100%
> But it should be understood that the entire company can disappear in 6 months if its a new startup.
That's fair.
But just because something should be understood, doesn't mean it necessarily is understood by all parties. Assuming "ought implies is" is how a lot of dangerous mistakes happen.
I'm sure it's possible that there are people who have never heard any of the statistics about how many startups fail, who have never worked at a startup, don't know anyone who has, never talked about a coworker who left to work at a startup, and who go through the recruiting process without anyone mentioning it.
It's understood by everyone else, though, so I think that qualifies as "well understood" generally.
For a B2C company, you can usually find out about the number of customers, growth rate, etc. if I am coming in on a senior level, I ask those questions.
Well not really, in the current technological climate, I really don’t worry about job stability. Jobs are a dime a dozen for developers and I get benefits through my wife.
I'm still waiting for the tech VC world to unilaterally agree on what "product market fit" is.
“The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can.”
There's not an agreement on a single definition though - that's my point https://www.quora.com/How-do-you-define-Product-Market-Fit
(side note: that is the trouble with using the word 'deserve')
As someone who has bootstrapped a company that found a product market fit and is profitable, I can't even explain how foreign it is to think that people raise and exhaust millions of dollars without finding product market fit.
I constantly have anxiety about all of the facets of running the business. I cringe even thinking about the pressure an entrepreneur must while being in this predicament. I couldn't handle it.
Quite a few raise money without even having a product, forget about product market fit.
That said, if anyone with $1M burning a hole in their pocket has no idea what to do with it, just reach out: I accept PayPal and Bitcoin. I offer you the same 0% return!
This equates to about 18 months of operating time in SF. When you talk about it in terms of time instead of dollars, 18 months doesn't seem like long at all. Certainly not enough time to find product market fit in many cases if you start out with only a vague idea.
I don't understand how "only a vague idea" is able to raise millions of dollars in the first place. Can you elaborate or give an example?
It's been one of the most basic tenants at ycombinator from the early days:
> In fact, we're so sure the founders are more important than the initial idea that we're going to try something new this funding cycle. We're going to let people apply with no idea at all. If you want, you can answer the question on the application form that asks what you're going to do with "We have no idea." If you seem really good we'll accept you anyway.
http://www.paulgraham.com/notnot.html
I worked with a recent (at the time) Stanford grad who had applied and been selected for one of the early ycombinator cohorts. Paul didn't like his group's idea, and told them to walk around the block and come up with something better and then pitch it to him. The pervading philosophy for many investors is that the idea is less important than the team, at least in the initial investment.
If someone is willing to pay you to explore idea space on reasonable terms, you’re a fool not to do it.
I agree. It feels strange. Whatever people say, it was pretty uncommon for most of the time in human history that some people with a vague idea were given some million dollars to build something. Most people had to argue a lot to get this kind of money.
I think it's because money is cheap. Book money can be easily printed by banks and our currency is worth nothing and investors know that. If the price correction happens, the system could blow off and leave many people in poverty because all their wealth was based on debt. Investors are smart enough that they know that all those dollar bills are worth nothing and that the only currency for startups is attention and massive usage (talking about B2C here).
I feel like that might not be true. Seems like anecdotally there's been a long history of people being funded for speculative adventures, going back centuries. The one that "discovered" the Americas being an archetypal example, but surely there were many more examples of patronage and underwriting of ideas, it's a core part of society.
That guy who found America? He lobbied for nearly a decade to get the money. See [1] and [2].
People weren't that rich back then because wealth wasn't that exorbitant in the past. We only got this wealth due to the industrial revolution and the digital revolution. Today even a slightly above-average guy in Europe is richer than most kings in the past.
[1]: https://www.history.com/news/10-things-you-may-not-know-abou... [2]: https://www.csmonitor.com/USA/2011/1010/Christopher-Columbus...
It very likely has a lot to do with interest rates being very low, and the stock market being very high. Returns on capital in typical investments are very low, and that pushes capital to other investments, including VC. Couple that with a very hot technology sector that's producing incredible amounts of value, and it's very clear why capital is chasing tech startups of all sizes.
“If you build it, they will come” is not exactly the most auspicious start.
This was turned into the Underpants Gnomes by South Park, which seemingly slowed down but did not eliminate the practice. I wonder if Mike Judge is having more luck, but it’s probably too soon still to say.
Obviously you're free to do as you wish. I just wanted to note that it's incredibly frustrating in a way that most comments here aren't, and it seems needlessly so.
EDIT: I'm sorry, I realize this might be considered a personal attack. It's quite possible I'm just really tired. I just find it frustrating that I feel like I can't make sense from stuff that I feel does somehow make sense. It reminds me of the time I tried understanding Deleuze.
In a word: magic thinking has been with us for a long time. It was old when I got into the industry. Various personalities have lampooned this bad behavior, or still are (eg, Mike Judge with “Silicon Valley”) which seems to slow our roll, but not really fix anything.
We're in early stages of our plan/journey. Our aim is to become profitable while bootstrapped. Mentorship is what we really crave.
Cheers
It's a business, it makes no sense to talk about it "deserving" anything. Either you think your investment will pay off or you don't.
(And try to avoid taking VC cash or you'll wind up doing all the work while they walk off with the profits.)
If you do not create enough value you dont get paid.
This is so stupid--do VCs ever ask this question in the first place? No. By the time your board is asking this question, they've already decided you don't deserve more money. Any random justifications they make up about "deserving" is a complete distraction from the fact that these choices never have a logical basis.