$100M Was Once Big Money for a Startup. Now, It’s Common

Wait, why Trello? Isn't it still free?

It is so sad when too much money destroys products / companies.

IMHO great products are only built when the ultimate stakeholder is the user and this can get very difficult to maintain when you are effectively not financed by your users.

do you mind me asking what was that service? not even the company, but more the product itself?

Shit, this sounds like a previous startup I left. Product-market fit acquired, growing steadily, near-profitability. Then Series C, and sudden pivot to more ambitious product. A few months/years later (I left before this, seeing the danger) most of the staff gets laid off. :\

This is basically a gross misallocation of these kinds of investment deals, but you're probably right and it's all too common. It says something about oversight as well.

There is a very real rationality behind SoftBanks ideal that they want to do things 'big' and 'dominate'. So, so many markets go to a single or small number of winners, and the surpluses tend to go to one winner.

SoftBanks strategy of finding 'something that is working' and then giving a company maximum firepower to basically replicate that thing and dominate globally, makes sense for them.

Now - some things don't scale well, and some things need a lot of market adaptation ... but the logic is sound.

Softbank 'threatening' a company that doesn't take their money is not very nice, at the same time, it's not really a threat, rather it's just the communication of their rational strategy: 'we take companies that have figured it out and give them the means to win the market'. Logically, if ABC Corp doesn't want to go that route, they'll be looking at DEF Corp and GHI Corp.. This is not new, just the scale if it all seems daunting.

The difference we're seeing in scale is due to the new reality that it's no longer about 'winning America', now it's about 'winning the world'. Much in the same way Hollywood films now, the big ones, are designed for international markets and without a theme, the stars, a story that will 'win' globally, the massive budget cannot be justified.

The notion of companies pivoting on something that's working, towards some 'grand vision' is kind of sad, but in a way understandable ... every one of us Entrepreneurial minded people have an 'irrational' bone where we want to 'do this thing' that compels us forward, it's just a matter of being very pragmatic about it.

$100M is a big round B or C or whatever, it's there to scale something, not to 'find a bigger product market fit'.

It's one of the classic mistakes of taking on too much money ... but it can be mitigated by really thoughtful leadership. If you take the money on the right terms, and spend it only as you needed it surely it can be mitigated, especially with the right kind of coaching, maybe by people who have been there.

> They threatened my startup by basically saying that if you don't take the XXX millions of dollars, we'll be happy to give it your competitor who will out-fund you.

The reality though is that most of the companies who take the money end up just giving most of it to Google or whoever and then going bankrupt 18 months later. At this point I think society would probably be better off if raising VC funding was banned for early stage SaaS startups since it's really just a form of dumping, but at least much of the damage is eventually self correcting.

Probably real estate speculation. They probably will start purchasing real estate, use the rents to defray the mortgage, and then flip the real estate.

It's much like nuts in California's Central Valley. You generally make about even on the nuts or even a loss. But you make all the profit when you harvest the wood of the stock you grafted onto (generally something like Walnut).

The finance guys come in and make an expected lifetime value of a customer. So at $200 a month, that's $2400 a year. But right away they assume the average person will stay with them for 5 years, so thats $12,000 per signup.

Now that they have this figure, all math is based off it. So if you sign up 100 people you just made 1.2M of expected value. So if you want to be worth 120M you just need to be able to get 10,000 signups.

Of course, when reality hits this all falls apart. Customers churn with new competition, so the 5 years was too optimistic. You also to lower your rate to $100 a month to keep up with the market, and costs increase.

That's why you try to get acquired before that happens.

There are certainly benefits to staying private; no pesky shareholders to potentially overthrow you, less stringent reporting requirements and regulations, etc.

Of course, the reporting requirements and regulation compliance could also be considered a feature and not a bug, but those things are generally not considered a good thing for startups.

Indeed. It's a complete joke and a big reason why "the rich get richer". I, for example, believe that artificial meat will be one of the biggest industries in the world once governments outlaw the cruel and barbaric practice of producing the "real thing". I also want to support the beginning of that industry. But is there any way for me to do that? No. The deals are done in private with a few very rich individuals. If those companies ever go public it's just a way to cash out because they are already turning a profit.

I think the implication is that it's captured via salaries paying high rent.

Peter Thiel

https://finance.yahoo.com/news/peter-thiel-vast-majority-cap...

Is this really true? I used to live in Berkeley (for college) and my rent was $600. I lived with 4 other people, but it was very livable and comfortable overall, for college at least. This is only a few months ago. I'm not saying housing prices aren't batshit crazy in the Bay Area but it doesn't seem likely to be able to live in Manhattan and fly SF everyday cheaper. I currently live in Boston with a relatively more comfortable housing situation and my rent is $950. I would imagine similar rooms in Berkeley like this would be ~$1200 or something.

I tried doing something very similar to this. It ended up being so draining I couldn't do it long-term.

Specifically, I was in Washington DC and the startup I wanted to work for was in San Jose. My then-girlfriend (now fiancé) has the kind of job that can only be done in DC. I agreed to fly out for a week every month or so and work remotely the rest of the time. I did it for a little over a year but the travel wore me out and I struggled to find a healthy routine working from home.

I see threads like this and think that the solution to this problem has to be more remote work. I just wish I could be one of the people for whom it works as well in practice as it does in theory.

The City of New York actually put a billboard on US 101 in Silicon Valley promoting moving to New York City because it is cheaper.

I disagree. Office space is relatively cheap compared to employee salaries. For a 25 person startup in SF, office space pencils out to the cost of 1-2 employees depending on the quality of the office. We have capacity to cram in up to 35.

"Companies spend the the majority of their costs on office space"

Have my doubts about this. Would love to see your sources

Not office space.

The math: most companies are doing roughly 150 ft2/employee. You can get good office space for $60 ft2; quite nice office space for $80 ft2. On the lower end, that will come out (+ services) to $5.50-$6 ft2/mo. So maybe $800 - $1200/emp/month.

Note you can do much better than that $60 if you don't want to be close to caltrain. I looked at stuff in the $40 range that was your standard peninsula office park.

As for housing costs... the bay area is fucking stupid. Next round (I'm a founder) we're going to be opening an engineering office anywhere else. Candidates are probably Chicago (ugh that flight), Oregon, Seattle, maybe Reno. The difference is is $150k barely making it or a pretty decent salary.

It's not just housing either. A founder friend bought health insurance for employees in Oregon. She thought her broker screwed up the price was so low.

Don't even get me started on the fuckwits in our government and the commute situation.

> It's going to salaries, and it's going to marketing. And that's why it's risky.

Risky to who though? S&M salaries are expendable. If you can achieve 90% gross margins, you can basically flip the switch, turn S&M off, and you're profitable.

> Overfunding is a real thing

Overfunding has only real two business-centric downsides: undue dilution and chaotic operations.

As they say though, revenue solves everything.

Google has 88k employees today, almost 20 years of existence, and an average tenure of about two years. I would estimate that people who have worked at Google and learned valuable lessons, and able to secure director-level roles in start-ups to be in the thousands; many have gone to Facebook (25k employees, 14 years, similar retention). There are hundreds of people who similarly left Facebook for Uber, Lyft, AirBnB, Booking, Coinbase, etc. I personally know at least a dozen who made that move before their new employer raised more money, and can name three friends who went from Google to Facebook and to a third now-10B$ company, moving to pre-IPO company each time. And I don’t even live in the US.

If you include probably several dozen people from PayPal (not just the six founders but the people who reported to them); hundreds of YCombinator alumni, who learned from their own failed company but leveraged the success of the friends they made in YC, and probably ended up working with; if you include people who have done their four years at DropBox, Zynga, SurveyMonkey, Twilio, etc. overall, yes, I expect to find several people with relevant experience at key positions in hundreds of companies. Some might have gone to investing full time, but they are if anything more likely to trust and advise appropriately their former colleagues.

A lot of them are “anonymous” in the sense that TechCrunch wouldn’t name-drop them, but they would be familiar with, say, SQLite, AirFlow, or know from experience whether RedShift is the right solution at scale; they would know how to setup a Salesforce cluster; who to ask about address format in South-East Asia; they know about bugs in Samsung’s Android video codecs; they would have coordinated a launch in Arab-speaking countries before, know that React works well with Big5, or know that VAT is processed differently in Islamic finance.

I expect those people to be asking for, and justifying convincingly compensations several times higher than what people could justify in 2000.

You are certainly right about marketing: I should have mentioned far better targeting and control tools. CPA probably went up overall, but more importantly: the ability to measure it, to optimise campaign, interrupt ridiculous PR stunts before they cost too much, leverage them, etc. all that has become better. Analysts measure LTV with less ridiculous estimations now. That justifies trusting people with more money because when you hit the product-market fit, you know that this money will make more.

> Who are these founders who have grown "a couple" of unicorns?

His comment said “people” not “founders”. Plenty of c-level execs have grown multiple unicorns. Plenty of employees have worked at multiple unicorns in the early stages.

Medical bills are covered in many countries outside of the US. The inflation goes into home instead.

I thought those particular examples were caused by federal subsidies and regulations juicing the demand side of the price curve via Medicare/Medicaid, Fannie/Freddie/FHA/USDA, and guaranteed student loans.

As I understand it, QE (and monetary policy more broadly) juices the supply side of the price curve, leading to a general rise in prices due to the increased supply of the metric we use to measure prices (i.e. dollars).

So it's likely QE has led to a general devaluing of the dollar that would lead upward pressure on all prices. The reason the three industries you mentioned have outpaced every other seems to be federal policies like subsidies and regulation juicing the demand side of the curve.

It also seems like those three industries are fairly insulated from globalization and, to an extent, automation, which accounts for a lot of the downwards pressure on prices, offsetting some of the devaluing effects of QE.

==I don't recall hearing it framed as an attempt to push investors into taking on more risk?==

Because that was never the goal. Investors are taking more risks because they have to in order to find return in a world where the interest rate was basically zero for 8 years.

No that’s not the point of QE. The point of QE is to allow the government to continue deficit spending without running out of money. The treasury lowers the interest rate and then creates new money to buy cheap debt from the government when there would otherwise be no takers.

The interest rate affects everybody, which allowed troubled banks to lend cheaply to each other in the wake of the financial crisis (good) but also means that low-risk investments generate very little return (bad). It’s the later that has pushed investors into riskier assets - whether or not that’s beneficial depends upon how much systemic risk there now is... which is not obvious, after all mortgage-backed securities were supposed to be safe but we all know how that worked out.

The treasury would like to raise interest rates but this means that consumer debt will cost more each month and is painful for homeowners especially. So it’s a slow process. We may already have trapped ourselves in unstainably cheap consumer debt - much like those 2005-vintage mortgage “teaser rates”.

He’s talking about asset inflation, not consumer inflation.

Yup, i don't remember if i heard this quote by DHH in one of his interviews or was in his book, but it struck to me and honestly if i ever have my own company, i'm going to try to follow Basecamp's model.

I'm paraphrasing the quote but it was something like "Not everyone needs to be next Google, Fb, Amazon. There is ton's of space for medium size $50 million/year businesses."

I think that pitch significantly misaligns with the goals of most VCs. If you promised them "how about we partner up to earn billions of dollars?" you would probably find many more people willing to invest.

>the ones with business models that can both be executed on and monetized profitably to > $100MM revenue/yr can probably be counted on two hands (e.g. GitHub, Plenty Of Fish, Braintree, GoPro).

If you or even a small handful of people own 100% of a company, you don't need $100MM ARR to get rich beyond need.

You won't become Bezos but bootstrapped companies don't need to become unicorns to make everyone there be filthy rich. There are tons of people who bootstrapped companies and are very well-off from it.

More money alone is never the solution, there's endless examples of huge companies with endless resources throwing money at some new project and it failing miserably. A good recent example is Verizon's attempt to compete with Netflix: https://www.thewrap.com/go90-failure-just-cost-verizon-658-m...

I always see people get fixated on dilution. As a shareholder, the most important factor should be share price. More investment at greater valuations implies a higher share price. A greater number of shareholders also leads to opportunities for liquidity for earlier shareholders.

I've been at the start-up game non-stop since the mid 1990s. You know what's really amazing today? What would have cost me $30,000 per year in infrastructure in 1999 or 2003, plus the obnoxious management of it all, is now $2k or $3k at DigitalOcean (and others) and rather easy to script and manage. After you adjust for the better hardware vs increased total Internet users scale and often increased resource demands, I also think that value proposition heavily tilts toward a greater than 10x gain versus eg 15 years ago.

Most everyone here will fully understand that effect. I'm skeptical the NYTimes et al. understands what it has done to the start-up vs capital equation however.

When Excite got started, you know what they needed? A $10,000, 10gb drive. Vinod Khosla had to provide it just so they could properly test out their search engine. Adjusting to today's scale, the equivalent might be three dozen virtual servers for tens of hours per month at a cost of $100.

I don't need venture capital to scale to a large size. It's beautiful, the VC aspect has almost entirely become optional outside of a few niche scenarios. That has provided the large capital raising start-ups with a lot of sustained bargaining power that they have never had before. If nothing else, you can simply wait longer to deal with VCs, boosting your position. That's not going away with the next crash (it will deflate some of course), that cost edge is here to stay. The leverage point is: can you actually build the thing, can you execute, do you have the ability / persistence / etc to get it done.

It really wasn't that long ago that infrastructure was the biggest cost in being able to prove out an Internet business and scale. Just to put on a good test of a product meant for scale you had to sink large sums of money in upfront. Today the people - their time - have become the biggest cost (unless you're in SF etc., then it's that and real-estate). If I want to start something today, my time is the (personal) red ink risk, rather than very large amounts of capital plowed into infrastructure.

Praying these crazy tech salaries continue for years to come!

Non-funded startups can start by accepting that 1% of squat isn't a lot.