Startups Rejecting Venture Capital
nytimes.com
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VCs were able to control the startups they invested in to a pretty big degree.
What does that mean for founders? It means that you are putting all your eggs into one basket. A founder does not found 20 startups at the same time in the hope that one succeeds. A founder puts his effort usually into only one. So founders take a larger risk than VCs. They make it big or go bust. And the vast majority goes bust when running in supercharged mode.
What does that mean for startup employees? Well, they got the worst of all worlds. High risk and little to no upside. Their eggs are also in one basket as they work for only one company AND they don't have the huge upsides that VCs and founders have.
The whole game favors only VCs and founders who like big bets. But for the vast majority of people (which includes employees), the VC game is not a great game to play.
If you take a premise that society is better off most of the time if the business is less efficient but the law is obeyed, then it makes the whole concept of modern VC-backed startup businesses generally a destructive endeavor on society.
Obviously not in every individual case, but overall and pretty consistently in the largest growth start-ups.
> What does that mean for startup employees? Well, they got the worst of all worlds. High risk and little to no upside. Their eggs are also in one basket as they work for only one company AND they don't have the huge upsides that VCs and founders have
Presumably both of them get paid for their efforts...not entirely worthless
Are they getting paid enough to account for the risk? A VC will make more money and have less risk (overall). An employee will most likely make not much more than working for an established company and have a high chance of losing his job within a few years.
Chances are low you will be there or your job will in 5 years
There’s no difference in the risk of a founder and employee 1. They’re both out of a job and perhaps underpaid at first.
Usually they are able to jump ship sooner than the founder and don't loose any personal investment in the process they get more responsibilities and more independence which in turn can get them to higher salaries faster.
Employees at startup usually get paid a bit less than "market rate" but enjoy a work environment they consider to be more exciting / enriching / challenging. There are people that dislike the startup environment, or that don't think it's worth the pay cut compared to GAFAN or other BigCo - and that's OK - but for many it's not as bad as you frame it.
The employees that can jump ship quickly are the good performers that also live somewhere with ample opportunity. Those also are rarer than the average Joe Dev.
I'm not saying it's always a really bad dicision to join a VC funded startup. But in the majority of cases, people would probably be better off not to - at least financially. Of course (and luckily) there are more factors than that.
Isn't that where the vast majority of startups are based though?
As far as I can tell, the biggest issue with most early employees is not being able to exercise your stock options— the ones that vest first you can't afford, and by the time the later ones vest, the tax bill would be too great. So if you want to leave before an exit, you're either walking from your options, bank-financing it, cutting some kind of side deal with a VC to finance it, or working out a deal with the board to buy you out over time.
I should of hopped to big co sooner instead, I would of been significantly ahead of my life's savings goals if I did, and possibly would of bought my house at a far cheaper price because I had the money to pay for the down payment.
I can definitely picture that there'd be a high vulnerability to sunk-cost thinking.
The most valuable thing I have is the remaining time I have in this life. Not the number in my bank account.
Oh boy are you in for a surprise. Whether a company is a startup or not is almost entirely orthogonal to a culture of “filling out spreadsheets.”
Why? Is that simply because you are more familiar with the language or does the project actually require the raw power of Cpp?
2. yes, familiarity.
Then why work for a startup? Most will demand a huge amount of your time compared to other jobs. Why not pick a job which demands a sane amount of your time and spend your free time on relationships and hobbies?
one kind sent rockets and recollected them, made robots run and jump. The other kind, shrank blog posts to 140 characters, or added a timeout to short messages, removed the thumb down button, and called them a new feature.
Today, we still remember the names of da Vinci, Tesla, Turing, not because they had a successful family ...
I just want to keep the dream I had as a kid.
So you're living based on how you will be remembered by strangers? That sounds incredibly unfulfilling and doesn't sound like a good way to live. In a few hundred more years almost no one will remember the names of those people either.
>da Vinci, Tesla, Turing
It's incredibly safe to say that you are not going to be as successful as these people. Almost no one achieves this much success in the sciences. At most you will probably advance your field by a few useful steps and then be personally forgotten about except in research paper footnotes.
>not because they had a successful family
You know who cares about you and remembers you more significantly than as a research footnote? Your family.
>I just want to keep the dream I had as a kid
Man, don't we all.
Pursue your own balance of values with passion, and allow others to be meaningfully different from you. Their desires don't diminish yours.
"I" am the best witness to my existence. Not the person giving my eulogy. Who are you to tell someone how to define what "fulfilling" means to them?
I can live with failing. I can't live with not trying.
I feel like a lot of it comes down to how strong your management team and market position are. Our CEO had a pretty crazy track record, and drove the company into a really interesting, strong position, and then wanted himself to have a good, sustainable family life, and would constantly reiterate that he wanted everyone else to do the same.
I have other friends who have had roughly the same experiences, again, anecdotally.
Most people aren't going to lie to your face that a normal week is 40h if they expect 80.
My advice to folks is that if you don’t have a very significant chunk of the company, ie >1% then the payoff can never be good enough to compromise work/life balance.
If you’re a founder or very early and have 5% or some such the. That’s between you and your family.
Probably still ain’t gonna pay off.
Consider the compensation package a company offers. Companies that want young go-getters are more likely to offer high cash and equity; great benefits packages are better for drawing in risk-averse family types.
Also don't be afraid to ask straight-up what the working hours are like during an interview, ideally from the lowest-ranked person they'll let you talk to.
Disclaimer: I don't have strong data supporting any of this, just my personal experience and intuition from working in the bay area.
People skewed older than I expected for a startup. Most people were in their 30s, and the C suite people were mostly in their 40s. No one other than me was below late 20s, and everyone seemed laid back but competent.
I probed at it during the interview and was told that everyone leaves between 5-6, and that the CEO wanted to go home to his family and didn't expect anyone to do differently. When I asked engineers things about how days and weeks went there they were very direct about how people didn't stay late and didn't dance around the subject.
The CEO had already sold multiple startups while raising his family, so I assumed that he would be able to make the company successful without setting a precedent of burning yourself out and without us being under constant threat of death.
Also yeah, I didn't make nearly what I make now that I'm at FANG. But I ended up in a higher role and with more leverage than would normally be possible at my age and experience level in the new company, and got some cash from the deal, so it's been pretty great. But yeah, if I was just trying to maximize short term dollars earned it wouldn't have made sense to work there, since I couldn't have realistically known that this was the outcome.
Doing that consistently is unhealthy and sort of antithetical to building a thriving business.
Worked at many startups. Currently run a startup. No one has worked 80h weeks at any of them, except myself in the first year of creating my own startup.
If you really have friends working at startups for < 10% equity and doing 80 hour weeks, something is wrong.
Maybe go to another big co?
I'd hope even the smallest of startups is thinking about how users interact with their software and organizing those interactions into some sort of prioritized backlog for development.
In my limited experience in talking with other people, FAANG tends to not have as much process as finance, IBM, insurance or other 'boring big companies'.
Conversely, if you can get hired to a unicorn in a position that's senior enough to have any hope of coming anywhere near top tech pay, then you are likely talented enough to work at top tech instead.
There a variety of companies that pay top dollar for talent, straddling early stage startups all the way through established companies. That doesn't mean it's easy to get those jobs. It does mean that you should apply your talents where it fits.
BTW, you don't need to be at a unicorn to earn top EV. 1% of a 100M exit is 1M, which is more than the vast majority of equity grants I've heard of from FANG. Many people put 0 value on startup equity. Those people decrease their lifetime EV through misconceptions of statistics.
I worked at both. Talent overlap is quite high, far higher than is commonly assumed.
> There a variety of companies that pay top dollar for talent, straddling early stage startups all the way through established companies.
I worked in startups for many years, and most of my friends still in the field are either founders or C-level execs. They are fully aware of the top compensation for top engineers in startups presently. Startups don't match top tech comp currently. Unless you factor in the options as a sure thing, and the startup ends up exiting at unicorn levels.
> Many people put 0 value on startup equity. Those people decrease their lifetime EV through misconceptions of statistics.
This is a reflection of how many people have spent precious years of their career working for startups, and generally seeing 0 return on these options.
It's also a reflection of the perceived lack of control over this sort of deferred compensation, and various nasty dynamics that often snatch value away from rank-and-file employees, even at the last minute or past it. See the LinkedIn exit and their infamous clawback policy.
Startup options have earned this reputation for 0 value over a decade of overhype and underperformance. Far too many talented people were promised the sky and ended up with nothing after years of hard work.
The point about FAANG paying so much gets made a lot, and that employees of startups are fools for their decisions, as if everyone's handed a dozen offers and makes a choice.
Most of us are lucky to get a single offer, sometimes after months of trying, so we take what we are given. The rosy picture portrayed on HN isn't at all accurate to my experience.
Though to be fair my current salary, as far as it is from the unrealistic portrayal of salaries here, still feels far better than almost any other job I would remotely have the capacity to do, and certainly far more than I need to live and have a pretty easy life if I were honest.
I'm payed a crazy amount of money to do something I love.
> The rosy picture portrayed on HN isn't at all accurate to my experience.
> I'm payed a crazy amount of money ["far more than I need to live and have a pretty easy life"] to do something I love.
You're living the rosy picture portrayed on HN. You react to $400k the same way most people would react to what you're describing.
At one point I was close to giving up on being a developer entirely after months of failing to find work, though thankfully I had a friend from a former job who helped give me a legup to a startup he was working for.
It was that painful experience which made me grateful for what I have, even if its looked down on so much by my peers. I realized how lucky I was to be working at all.
The rosy picture I was referring too wasn't so much the salary as the ability of software engineers to get these jobs. In my experience it was a lot more like a professional sport (spend decades working and practicing in this field and you still don't have what it takes) than finding a store with a help-wanted sign and filling out an application.
I guess there's something of a paradox there... its a weird industry.
Real world example: low to mid level engineers at Uber joining in 2014/2015 at this point have stock worth over $2m over 4 years if Uber successfully IPOs at $100b+. By that time, Uber was already at "scale", offering RSUs (options strike price would be so expensive that it would be a huge risk to exercise), and that $2m is almost definitely more than what you'd otherwise have received in the same amount of time working at Google or FB.
For perspective here I, and everyone I know who have worked for startups as an employee, have never seen a single penny from stock options. Maybe one day I will, but I consider them to be nothing more than a potential pleasant surprise down the line.
At a previous company, I exercised my stock options when I left. This cost me about $4K. Two years later, I got $12K back... not a bad return, but certainly not the "potential for early retirement" I was told when I joined.
Only a handful of almost surefire unicorns can reasonably come anywhere near matching that, and that only in the eventuality that they don't pull a Zenefits and leave you hundreds of thousands of dollars to millions of dollars short and in need of a new job.
Anecdotally, last year I was contacted by such a surefire unicorn for a role that was actually very interesting. We crunched the numbers together, and the best case scenario was them effectively matching my current comp. Which was actually a great proposition for startup comp, the best I've seen. Still, nowhere near compelling enough to upend my life for a higher risk position without any financial upside.
I worked in startups for the early part of my career, including a fairly well known one that exited. Neither me, nor any of my colleagues in that startup, nor any of the many other startup employees in my network, ever made more than a few hundred thousands on our options. Many very talented engineers made nothing at all on large quantities of options granted by several promising startups.
It's no wonder that none of the recent graduates I interview nowadays is at all interested in startups. When I ask where else they are interviewing, it's always FAANG and other high-flying profitable businesses. Even more so for senior engineers, whose opportunity cost is even higher, typically in the hundreds of thousands per year.
Even with 10-20 years of experience in the bay area at small, medium, large size software companies, I've never ever made anything close to that amount.
There's a huge amount of variance, within FAANG and elsewhere.
As a simple example, SDE III at Amazon typically pays a bit more than $300k. Principal SDE, the next rank above that, will pay well over $400k.
And don't forget that during years of steep stock appreciation, like much of the past decade, actual compensation will often be higher than that.
Hitting 400k total comp if you have the right experience (5-10 years, good brand university or companies) is totally doable.
GP has replied elsewhere that all his employers were startups that paid him in "worthless options".
Indeed, you won't ever see $400k or even $300k working for startups that "pay" you in illiquid 0.001% stakes in what will surely become a multi-billion dollar runaway success (in which unlikely case your share will be diluted to nothing anyway).
You can certainly stick your fingers in your ears and sing LALALA while the rest of us make real money,. Your life, your choice.
Also bonus closer to 15-20%.
There's your problem.
Getting paid in options is the exact mistake I've warned about repeatedly in comments throughout this thread.
Yours is a fairly common case in SV: worked in a series of startups that "paid" you in illiquid options that ended up being totally worthless.
I'm willing to bet these very same startups encouraged you to value these options very highly: high 6 and even 7 figures, right?
These places don't pay well, because why should they? Talent is apparently willing to work their ass off for these "worthless options" that are sold to them as vouchers for surefire multi-million-dollar jackpots.
400k for senior is pretty good, but still doable at a lot of the big companies.
I make over 300 and I'm not senior yet.
The key points are:
1. Startup valuations are highly volatile. There were plenty of startups that were valued above the billion dollar levels, then sold for 8 or even 7 figures.
2. While profitable established companies can also go south, such companies pay you in cash and liquid RSUs, so if they spiral down you just switch to a better performing company. Getting most of your pay in illiquid options means you risk losing multiple years of earnings in the best part of your career.
Specifically, tons of talented people took a job in Zenefits based on the assumption that their illiquid shares will be worth six-seven figures, and likely will never see anything close to that in real money. Same thing wouldn't happen for those paid in liquid assets.
The exec in charge was fired, and a lot of their key staff had already jumped ship by then.
Experience and fast career progression shouldn’t be overlooked when looking at startups.
I don't think you're wrong, but I always thought VCs were there to hopefully guide these organizations too. Control, guide, probabbly overlap a lot. But the idea being you get capital, introductions, maybe help finding some people you need?
Granted I don't think you're wrong about the rest of it but control (when you sold yourself...), also guidance are weird venn diagrams. Not sure there is a right or wrong there.
Especially in tech where there is generally a large community of supporters who are willing to fund the projects they believe in directly.
I think the Green Bay Packers is a perfect example, it’s the only “publicly owned” football team in the NFL and as a result when they need funding for large projects (like stadium renovations) they go straight to their community supporters with “public offerings of Packers stock”...which isn’t really stock at all but a certificate and small voice in corporate governance (ie election of a small number of directors). It’s so successful of a legal structure the NFL publicly takes the position they are at a competitive advantage to the other teams which are owned by billionaires.
There is no reason Startup’s shouldn’t look at the same model and cut out all VCs, incubators, etc...
Donations are not investments. They're expenses. Investments must have a return of some monetary vale, or else it's an expense.
You’re really acting like an authority on “public offerings”, do you think you know more than the SEC about public offerings and they don’t know what one is? I understand your definition, it’s just not the legal definition is all.
What’s at odds is Packers “Stock” which isn’t “stock” in the common definition and understanding, but it’s still called stock, it’s just not a security or investment.
Have you even seen the Packers Public Offering Document(s) or subscription agreements? Because I’ve never seen a donation/charity issue “public offering documents” or require subscription agreements.
Edit:
>public offering is selling parts of your company for cash, aka a stock, ownership has it's privileges, without those privileges, you aren't selling anything to the public,
You should also really take a look at SEC enforcement actions against ICOs because almost none of them are “stock” nor carry privileges yet are considered public offerings.
Community support projects work for Kickstarter or Indiegogo marketing to the general public consumer, that's not the same thing as trying to build a B2B SaaS platform fixing a specific problem marketed at Fortune 500 companies.
How is the Packers model a scam? Because people support it and don’t get profits? Does that make the 90% of VC funded startups that fail scams? Are other NFL teams that are privately owned scams, because as I said the NFL publicly acknowledges the Packers community ownership is a competitive advantage over the other teams.
Sure maybe people won’t directly support your b2b software application marketed at Fortune 500 companies, but as a counter example many of the next fourtune 500 companies could easily adopt a community ownership model in a similar fashion as the Packers (only for profit).
People like community ownership and governance...there are many examples beyond the Packers to establish that. People don’t necessarily like the VC model and having to take money from wealthy people who take a chunk of your company just to compete on a level playing field.
You hear from time to time small to mid sized business that are "employees owned and operated" but that doesn't mean every employee has the same equity, the generally ownership will have the largest stake anyway with employees having very little control or equity compared to ownership
Well there is no equity as there is no equity in any non profit corporation. That doesn’t make nonprofits a scam.
The shareholders elect the board and the board elects the officers and the officers control the day to day operations.
>It's still controlled by a small group of people aka the board of directors, the stock structure is setup that fans could not mount a hostile takeover
Well stockholders do get invited to the annual meeting and vote for a number of those directors.
You can claim all you want investor won’t invest when they can’t get their investment back, but again the Packers are proof you are wrong, no shareholder can recoup their investment much less make a profit, but they have no problem raising as much as $250M when they had their last 2 public offerings.
Edit: another example is the Gates foundation, supporters donate because the believe in the organization (like the Packers) yet supporters have even less rights than the Packers shareholders and obviously no chance of a “hostile takeover” and yet people “invest”/donate.
Of course you can have equity in a non profit. That doesn't mean your entitled to profits that don't exist, it means you have a stake in the organization. And the # of outstanding stocks versus the # of stocks held by the general public is a tiny fraction of what the Packers are worth, but again those silly pieces of paper are not proof of equity or ownership, it's literally memorabilia fans traded cash for a piece of paper that says they own something even though they have no power of ownership, the annual shareholder meeting is for show, so to call it an investment like a traditional stock would be isn't fair, it's really not the same thing.
What you are describing is development office, going out to ask for donations for a cause. That's not the same as running a venture that's going to make profit for shareholders.
The primary downside for startups is the cap table, but there's regulation in the works (already passed the House with near-unanimous bi-partisan support, waiting on the shutdown shitshow so the Senate can vote) to fix that.
Disclosure—I work at Wefunder, both on crowdfunding and very early cohorts (https://xx.team)
If you're not the capitalist then you're probably the capital.
I'm thinking about a Planet Money episode that discusses big-time poker folks, and they frequently trade percentages of their winnings such that if enough people do it, the few big winners are evened out over time.
What I found hilarious was Jim Clark's original vision of a "trillion dollar healthcare cost disruptor" that was Healtheon, actually IPO'd in '99, but ended up being acquired by the content mill cesspool that is WebMD.
When you take that (significant) compensation away it should make the job much less appealing. I think a lot of younger (by which I mean years of experience in the industry rather than age) talent has forgotten or is not aware that this is why a startup job became the "done thing".
For many, they'd be better served by working at an established company (even temporarily if they have ambitions of their own startup in the future) as the package will be much better, and because the traditional upside of working for a startup largely doesn't exist anymore.
Still significant for someone just starting their career.
On the other hand if you didn't go to an Ivy league you can prove yourself at a startup or advance your career faster before transitioning to a bigger company at a better position
For some people, "100% on" environments are the right choice, and entrepreneurial activities are a natural outlet, whether in isolation or with others. For others, traditional careers offering stability and insurance from any threat of rapid change, or even hermit-like isolation may be favorable. Personally I've fluctuated between the former and the latter, and VC has done well by me as an employee. YMMV. Do what excites you.
You reduce VC earnings by having more VC competition. You increase founder earnings by having more VC competition as well. Also by providing a better environment for success (that VC's provide, like it or not) You increaes employee payout by the number of competing startups for talent-> more VC and more founders better deals for employees.
There are things that tip the scales amongst the players, but its not true employees lose out as a whole: the majority of minted millionaires in this game are employees, not founders. Even more than VC's. VC's meanwhile have not great returns as an entire industry. And in the founders game, most lose out with detrmient to health, status, or family fortunes.
Pittsburgh has a great tech scene and a pretty good 'stable, 10 years in company' scene. It's got dick all for startups (duolingo yes there are always exceptions) because there's just no VC capital.
IMO we're mostly fine with that. It's certainly a hell of a lot cheaper to live here than San Fran.
A few misc comments:
- VC is not for every company. Most VCs will be the first to tell you that: if you're not trying to build for a specific type/size of outcome, then VC funding is going to suck for you, and it's going to suck for the VC. It's not at all in a VC's best interest to invest in a company that has no desire to fit the VC model.
- I think the VC model itself is a great development from the last century. The fact that someone can raise millions (more than most people earn in a lifetime!) with an idea enables a lot of innovation that would be hard to nurture otherwise. But because the failure rate is high, VCs have to bet on outlier outcomes. That works for the VC but isn't always ideal for the companies they fund (because the founder is all-in but the VC can absorb many losses as long as at least one of their investments is a big winner).
- Many VCs add value and are great, but many other VCs subtract value and are awful. I've met people from both groups over the last 6 years in this job. It's not different than most jobs: there are amazing and awful teachers, politicians, engineers, doctors, etc.
- I love all of the new models coming up: revenue-based funding (SaaS capital), funding for ad-based acquisition (Clearbanc), Indie.vc, etc. The more types of investment models there are, the better off everyone will be. If the only companies that look for VC funding are the ones that require VC funding because no other funding model would work, then that's a good scenario because no one is wasting each other's time or looking for suboptimal funding options.
- go to your bank for a loan for a little money you have to pay back fairly soon
- go to Sand Hill Road and get investment with the condition that you have to shoot for a huge outcome or die trying
There's a _lot_ more in the middle now, and that's really cool.
However, 1) a lot of seed stage companies predict that "this is the last round of funding we'll ever need" and that's rarely the case, and 2) because of #1 it's hard to convince investors that you'll never need to raise more money.
For most VC-backed companies -- the ones that raise multiple rounds before an exit -- $100m+/year in revenue is a good 10-year goal. That's about the level required to go public or exit for $1b+.
Investors won't be unhappy if you shoot for $100m in annual revenue but "only" hit $40m or $6m. The nature of startups is that most don't end up going public. But it's hard to see any path where you could end up with $100m+/year in revenue within a decade, then most VCs will pass.
I think this has actually backfired. Because with sufficient number fudging you can raise more that you would ever earn, we have a whole generation of companies that are built to look great on paper, and actually identifying and solving business pains in a profitable way is becoming a lost art. Once the gravy train of investment cash accumulated in the previous economic cycles stops, we might be in for a very painful correction.
Perhaps this perception is misplaced... I know VCs will say that they want a company to go bust as soon as possible (so that they aren't investing in Picplz). And this may be true.. but do you think a founder that had serially--and rapidly--gone bust 4/4 times 4 years in a row would get funding?
Isn't this what the public stock markets used to be used for, before an IPO became a way to cash out?
Intel's IPO was 2 years after the company was formed.
Raising money is a failure mode. If you are raising money it is because you failed at something and you need the money to catch yourself. This is more true for software companies than, say hardware companies, but I think is still generally true.
For example, if you are raising because you need to hire people. You have failed to find small team to cofound the company with, or you have failed at developing the necessary skills yourself.
I'm not saying that no one should ever raise money, I just want entrepreneurs to stop seeing it as some kind of badge of honor. I hear people measuring themselves on how much money they've raised way too often. You don't build great things by raising money, you build great things by building them. Measuring your company on the number of customers it has is _much_ healthier than measuring your company on how much money it has raised.
Focus on profit and quality.
Maybe not...but you might latest hardware, fancy offices, etc without risking a dime. Not a bad proposition :-)
Whether or not founders find it a badge of honor to raise money has no real bearing on the fact that businesses require capital.
If you're trying to build a lifestyle business, yes. That's correct. Incrementally building your recurring revenue is rewarding and doesn't require outside investment and comes with no strings, which keeps the cognitive and administrative overhead of the enterprise low.
If you're making a play to win in an emerging market against seriously capitalized contenders, you might not fare so well.
In software, most of the product development is fairly bespoke, but in many other industries you require access to capital assets to do anything. Having a portfolio of well placed leases is critical for a retail play. Having capital or leverageable equity is essential for an industry consolidation play. One wouldn't pretend that the founder of a junior mining company 'lacks skills' for issuing a raise on public markets to develop a mining site.
By extension, where the value add in an enterprise is not generated from the value of a software product, but by the integration of tech with some other vertical, obtaining serious cash infusions may be the only way for the business plan to succeed.
If a company is "raising money" that means, in almost all cases, that they are actively soliciting or courting investors. They are doing the "Sand Hill Run" or some other such intense, grueling process which attempts to "pitch" the startup to investors in a gamified way.
I agree with the OP that this is a failure mode because in almost every case I've seen the company can't survive without it in the short-mid term.
If VC are literally hunting you down like Sequoia did with Whatsapp, I wouldn't consider that "Raising Money." They could have done without VC and been perfectly fine - probably better off long term.
You have to look at the high-growth startup market as an exercise in game theory rather than as a single-company market. It matters a large amount what other companies could and would do if you don't take funding and grow as quickly as possible.
Then it's a slightly more contrived case of race to the bottom, usually nobody wins. Except that in the case of race to overfunding, there is a parallel game of last-to-hold-the-bag going on, which some VC can win even on a failing company if they time their entry and exit right.
If "Incrementally building your recurring revenue" is a lifestyle business, then lifestyle business must be a good thing. Acting as the vehicle of valuation inflation games played by VC however, I'm not even sure if that should qualify as business at all (slightly exaggerating, but "theatre troupe" is borderline applicable if earning money, now or in the future, is secondary to presenting a convincing "story" to future investors for the benefit of, and as demanded by, current investors).
Of course companies can raise too much, and consider 'a raise' as some kind of material win, and derive too much identity from it ... but that doesn't mean it's bad.
A decent round from a good fund is the a really great positive signal, perhaps the most positive.
Just because software doesn't have working capital or capex requirements, doesn't mean those costs are magic. People's time is money.
In fact I'm surprised any VC takes any solicitations because IMO even broaching the topic with a VC without them approaching you first is a negative indicator of growth.
Companies should always be raising capital to match their expected growth trajectory. If you expect to grow by 10% a year - a lifestyle outcome - then get a bank loan because you are probably profitable. If you can grow by 100% a year then go get VC because that kind of growth would be adequate to reward the VC for the risk that naturally comes along with that rate of growth. Somewhere in the middle? Maybe revenue financing is appropriate.
But you should always be financing your growth.
Back then I was running a very comfortable business. My main competitor, if there was any, opened shop with over $10M in the bank. It took a few years for things to play out but I never stood a chance.
A half dozen years later I was working on a product that I figured was original at the time. A year in or so, I learned I had two competitors that had raised over $100M to throw around. I stopped on the spot.
Measuring your company on the number of customers it has is meaningless if your possible competitor is raising 100x more than you'll earn in the next year or two.
Focus on profit and quality; yes. But then, unless you're onto something so supremely complex that essentially no one can reproduce it, rush to get money so you can focus on growing your market before someone goes after it while figuring out the former along the way.
Nowadays, software companies are capital intensive. They don't start in a garage like in the 70s, 80s, or 90s. Are there exceptions? Sure, but they are outliers.
Marketing is one of the components that make your service or product capital intensive. Another is the level of details your product need to be in the market. In the past you were competing in the functionality now you are competing in the UX, multiplatform support, integratuon with other systems, etc.
Even back when SJ and Woz were in "the garage" stage building Apple 1s, they were seeded by their previous Blue Box profits and then after clear demand was proven they had Mike Markkula fund them to get Apple 2s built.
Companies will always have been and always will be capital intensive, nothing has changed there. Insurance, employees, real-estate, legal, just basic company things have always required significant capital.
Who will win Lyft with ~$ 5b in investment, or Uber with ~24b? Those numbers are independent of the app being built.
Airbnb was built and rebuilt several times with a few engineers in Brian Chesky’s apartment. They didn’t even have an official office for years at the beginning.
Your example is gaming, but all game startups use Kickstarter now as a way to fund the project upfront. It’s not really the same type of business and games are usually one-off finishes products.
Not all new companies with a scalable business model have the skills or risk taking ability to be a startup that actually scales.
Calling every new company that sells products in the internet a startup waters down the meaning of startup. Gradually growing and maybe becoming mid-sized business may be the best option for most. Gambling to become a very rich or starting from scratch again is low probability game. You can do it only few times and only small percentage can succeed.
What I don't understand is this dislike for investing ahead of growth or success. Why is the expectation that everything can be done bootstrapped or constantly profitable?
Companies take investment. If you're building a product that will be valuable for a long time, there will always be a period at the beginning where the entity requires somebody to put their investment into it. If the idea is small enough that one or two rich dudes with Google money can do forgo their salaries, that's great. But even a team of five for 18 months is a significant investment, and somebody needs to pony up. Should startups only consist of rich people who can afford to roll the dice?
Instead of fully rejecting the model, I believe that companies should take VC money with a finite plan towards profitability. If you take $2mil in seed money and hire a team of 8, get to $2m / year in revenue. If you want to take another bite at the apple, there will be VCs who fund you at that point. If not, you're not dead.
Real progress takes real investment. Ignoring that fact ignores a wild world of interesting, viable companies.
The (unfortunate) reality is that for most people you either need a lot of savings or an investor to get a company off the ground [1]. I am skeptical that free education or a $10k/year UBI would change that.
[1] One notable exception is companies that can be started on the side, but UBI would not affect those very much, either.
Further removing people from the most important parts of life and entrusting those to a benevolent central authority is a risk I’d personally _not_ take. The lessons I learned from the most recent US presidential election is how grateful I am for separation of powers and limits on the scopes that any one person (or branch of government) can actually impose on my day-to-day life.
I’d prefer to not see UBI furloughed because two parties I’m not connected to would prefer to grandstand over a budgetary rounding error than solve problems.
It is the desire, hunger, and unmet needs that creates many startups.
I don't see a disdain for investing, I see a general disdain for the misaligned incentives between founders and investors which has been around SV for decades. It's been a heated topic of debate at least since Steve Jobs was kicked out of Apple and yet the VC industry keeps growing and growing.
However, there are some points that I don't agree with especially this: "Would Facebook’s leadership have ignored warning signs of Russian election meddling or allowed its platform to incite racial violence if it hadn’t, in its early days, prized moving fast and breaking things? Would Uber have engaged in dubious regulatory and legal strategies if it hadn’t prioritized expansion over all else? "
Of course, this is subject to survivorship bias but I think it's generally agreed that part of the reason Facebook was able to grow so quickly and Uber was able to capture markets and be the market leader were exactly those things: Moving Fast, Breaking Things, and focused on growth above all else. In hindsight, if they hadn't done that, it's possible that we wouldn't care at all what they did because they wouldn't be the giants they are. There are tradeoffs with every strategy and these two unicorns chose the ones that led to their dominance even if it came with some headaches later on.
Cheap capital is probably not such a bad thing for Entrepreneurs. More bad companies get funded, but that's not so bad. More good companies that wouldn't have seen the light of day will also get funded.
There's only a 'bubble' if there can be a significant correction. If the US economy goes into heavy recession, then maybe there will be a steep pullback in VC. But otherwise, VC as an asset class may just not get the returns of yesteryear, which is fine.
Image processing, text processing, and the next wave of robotics/manufacturing. A.k.a., "AI".
As a consumer, I find that the shareholders never have my interests at heart, not even indirectly (everyone wants to make money, but a private company seems more likely to decide they make money by actually providing me value). This feels like a massive failure on either (1) my understanding or (2) the market as a whole.
Am I wrong about VCs being the same basic issue, only with fewer players?
The default mode of a company is to increase shareholder wealth, but a company that clearly communicates to potential investors and the market as a whole that they have a different metric of shareholder value (e.g. social conscience, environmental concerns, customer experience) can still be successful in taking a company public or raising funds from VCs, they'll just be selling equity to a different, if overlapping, group of investors.
Companies that want to do good and don't think through how going public or taking investment will change the incentives on which the company operates are destined to end up in the default mode.
As always, try to put both your consumer and investment dollars in companies that understand that.
You're talking about things like Ben & Jerry's social contract. I think those are great. But here I'm talking about values like "We want to make money by making great widgets people are happy to buy". Most companies say such things, but after they go public the value seem switch to "find every way to increase the margins and take the lowest thresholds of quality and customer satisfaction that we can have and still remain in business". Compare, say, what Comcast says about customer service and what customers say.
The ideal of capitalism is that you can have profit AND happy customers. And I know it's possible, I've seen it any number of products...but I also see tons of successful companies get "killed" by short term greed, even if that company sticks around and is profitable - compared to what it was, it is dead.
So let's stay I start a startup, grow and manage to take it public, what happens next? Is the company expected to keep growing indefinitely? What happens if growth is stagnant, but the company is profitable?
I also hear about the mid-life and late stage of companies. Can you explain what these terms mean and how being in these stages affects the company?
Are there any good examples of publicly traded companies which have lasted a long time (more than a few decades) with minimal impact of the "we have to keep growing" mindset?
Finally, what are the pros and cons of being private without vc funding and being a public company?
And what role does VC play in the broader economy? Does it manage eg pension money? Are there good resources to understand the lifecycle of VC funded companies and what role VC plays in the broader ecocomy?
Are there publicly traded companies which _didn't_ have a thirst for growth? By definition, companies which go to the lengths of raising money on the stock exchange are exactly those who grew beyond small business / private equity levels. So this question seems paradoxical to me.
My understanding is that big value stocks which pay dividend have less pressure to grow, while growth stocks use growth rate to justify their extreme PE ratios, and so might seek it more.
Say you are a founder, you've got a killer idea, you think you can change the world with this idea but you need capital to bring it to life. Say you can demonstrate on a small scale that your idea does work, you have analysis that the market will support your idea, but you need money again to make it a reality. VCs come in, say we'll give you a boat load of cash today, in exchange for a hefty portion of your company, based on an evaluation that we're going to make. They usually take a board seat, and will be a part of your company's leadership, but remember the goal of the VC on the board may not always align with what other board members want for the company, VCs are looking to make the company's evaluation value grow so their investment is worth more than they spent, usually for a set amount of time or some sort of liquidation event occurs, be it acquisition, IPO, or shutting it down.
VCs work within a fund, a set amount of capital to invest, and that fund generally has a timeline, say 10 years, for the fund to end and realize any and all profit and losses and close the fund down. Once a company goes public, the VC can choose to do what they want, including completely selling all the shares they can convert into straight cash, or holding onto it, or devise some other strategy to distribute stocks to it's limited parters (the other groups of capital such as pension funds, college endowments, etc. etc.) for them to do what they wish.
Early/Seed, Mid-Stage, Late stage, these are generally terms to describe where a company is, and sometimes can be seen as part of the VC chain, seed / series A, Series B-C, Series D and above if additional rounds of funding are needed.
There are plenty of companies that exist to purely exist and serve their customers, by the time a company goes public, VCs are generally long gone as their funds have run their course. The VC model is a relatively new investment invention compared to industrial companies of the early 1900s in manufacturing let's say.
The pros and cons of a public vs private company can fill an entire textbook. They're just different models of operating, with different legal ramifications, different things you can and cannot do as a public company versus a private company, as well as access to capital which as a public company comes much easier (sell your share to the public) than it can when you have to pitch private investors.
In the broader economy, VCs play a small part, endowments, pension funds, other investment groups, may as part of their investment strategy partner with various VC and PE firms. But there's there's a diversity of firms that operate VC funds, it's not all just in one company (although one could argue Softbank Vision fund is just that), and each VC and PE firm has their own investment philosophy on how they stay successful.
One example of the VC model has been around as late as the early/mid 1800s (or perhaps as early as 1600-1700s) in a different industry.
Look up whaling ventures.
Probably multiple other, older examples as well.
There definitely are companies that are on the stock market without a growth mindset. One way to identify them is to look for companies that return a significant amount of money to their stock holders in the form of a dividend.
Many REITS fit this description as utilities and telecom companies.
I'm always surprised this answer doesn't come up more, but I guess these companies aren't particularly sexy.
Note: These companies still feel market pressure. No one is staring at Duke Energy expecting them to grow 15% a year, but people would be pretty frustrated if DUK broke its 13 year 4.5% dividend streak.
[1] https://blog.ycombinator.com/vinod-khosla-on-how-to-build-th...
The fundamental impetus of VC's, i.e. 'capital' is generally a good thing for Entrepreneurs.
I don't think they're bad people or anything, and even quite like some individuals who work for VCs. But the way they operate, seems to perpetuate monoculture and wealth inequality. I know first-hand there are brilliant, ambitious people outside of the SV/NYC bubble, and I don't think VCs really give any care about those people besides perhaps offering to pay to relocate them. As a result, the mindset of these VC people is increasingly isolated from the nation and world as a whole. I've read so many stories about how they are encouraging diversity by funding immigrants who went to Stanford, as if race/sex/nationality is the whole picture. Where are the founders who grew up in trailer parks or projects? Who speak with a noticeable apppalachian, southern, or AAVE accent? Who worked their butts off in the military and community colleges/state colleges, because those are actually the most accessible doors to learning for Americans not from privileged backgrounds? Where are the people who want to build things, but value their family, extended families, local and religious communities more than the promise of extreme wealth in in a few select cities?
Those people are out there, and they are capable and ready. I know it's still just talk, but very soon, I'm going to put my money and my body where my mouth is and return to NC. I'm going to build things with those people. If by good fortune we see success - the money won't go towards making rich californians richer.
There are a lot of women-only funds but in terms of total capital + efficacy so far they are essentially nominal
Regardless, my short summary is that VCs, in my experience, are the worst of people who don't give a shit about you or your team, and just want to see more and more money. I don't want to deal with or be involved with people like that.
Edit: Also I should note, many of our VCs pitched themselves as 'angel' and 'impact' investors. So, while I didn't expect them to just hand us free money, I also didn't expect quite the level of cut-throat behavior we've seen.
On the other hand, you could easily argue that almost everything is "just business". The doctor is there to treat you, not care about you, your boss is there to extract labor from you, not care about you, your child's teacher is there to impart knowledge, not care about her.
Such black-and-white separation of concerns doesn't really fit well with being human, IMO. In most of these cases we want something less than intimacy but more than indifference.
I fail to see how a nightmare isn't just code for, I don't like what this person wants me to do, I did this startup to get away from having a boss, but feel free to correct me if I'm wrong.
If you bootstrap a company, and it's successful enough to turn a profit, you're still at the mercy of finding a steady stream of customers. Most successful bootstrapped companies usually find 1 or 2 anchor companies that then start dictating how your company should run so that you can get paid and continue the relationship. Also, companies will prefer to have other options, so your bootstrapped company will be one of many options. (or replaced internally)
There really is no magical solution to working and making money. You should just approach this problem as, I want to build a company, I believe in this idea so much I'm willing to risk a lot to make it happen. If a VC gets you what you need but forces you to get there in 3 or 4 years time, but you think you need 5, it's not like you have a better option to prove your idea, so figure out how to get there in 3 or 4.
How do you establish that a VC has any skill? If the game is to throw a load of money at different firms, in the hope of getting 99 losers and a massive winner, how do you tell the good ones from the bad ones? Keep in mind there's noise; a guy with alpha might have a bad day before going to meet Uber or Facebook. He then gets 100 losers instead of 99. Or vice versa.
This is called skewness in traditional markets. People can sell options and make money quite often, until they blow up, ie the reverse of what I described above.
There also seems to be opportunity in less-than-insane growth. I've invested in a couple of firms personally, via connections. Small businesses, with a few sticky customers, and decent scale potential (they both sell via the internet) that need a little bit of cash to grow. You can't throw a few million bucks at any one of them, but you can get a reasonable rate of return. I suspect there's opportunities like this everywhere, but the VC theme creates so much attention people forgot there was an investment world before VC was a thing.
The Queensland University of Technology study showed that startups that took VC funding were no more or less likely to succeed than those that didn't.
This suggests that the average VC cannot pick winners better than chance, and that "skill" is therefore not a requirement to be a VC.
I find this disturbing.
Another thing -- for a lifestyle business it's just very hard to hire anybody good without options that have no chances to be executed. Also, a good business model without aggressive growth could be copied easily by a big company that targets the same audience. Yeah, it's difficult to build a Basecamp. There are just so many examples that managed to do that. Even Atlassian took VC money at some point to be able to secure stability for the team.
So, there is no sense in the article. If founders were clueless enough not to understand what they get into by taking VC money, maybe they deserve the results.
It's important to understand from the get-go that VC money is just a tool that serves a very particular goal. If one does not target that goal, not need to get the money.
Which is all fine and dandy, but the founders are likely risking most of their net worth, including the potential income of some of their best years. Taking outside capital not only means growing faster, but also diversification.
"No VC" can also mean the founders take on loans, angel investors or friends&family.
A founder for most startups is either trying to find product/market fit or raising money. Many VC/Angels are great for the operational/financial side of the advice but at least in my experience when it came to finding a proper market for your company their advice often sounded right but wasn't possible to implement for various reasons as it was very generalized.
One of the primary and perfectly reasonable reasons is that VC's are thinking about an entire portfolio of companies and doesn't have the same kind of skin in the game as the founder which mean they will think differently and less contextual about the companies.
There is definitely an argument to be made for the fact that it's not the VC's job to care about the specific company more than they need to and there are plenty of VC's out there who are perfectly able to care properly but it's also a very exaggerated market and let's be frank not everyone who has money to invest have a lot of experience in "the work".
After I left Square in 2017, I wanted to find a way to help both with getting much faster to product market fit but at the same time also having the opportunity to provide capital alongside which I believe will align my interest with the founders much more.
So I ended up deciding to set up a creative venture studio which so far has been a great decision as it allows me both do my own and invest either capital or sweat equity in other companies AND I get to meet some really amazing people from around the world.
Aniyia Williams, who started the nonprofit Black & Brown Founders, said a venture-funded system that encourages many failures for every one success is particularly unfair to black, latinx and women founders who “are rarely afforded the opportunity to fail, period.” Members of these organizations, she added, see more value when whole groups in their communities thrive, rather than venture’s winner-take-all model.
The transition from good-of-the-few to good-of-the-many means we might be at a crossroads in finance. Agism, nationalism and even wealthism (among many others) have been running rampant for centuries. Discrimination is so interwoven into US culture and history that the major issues of our time (like wealth inequality) probably require revolutionary rather than evolutionary solutions.
I've also been watching a lot of VICELAND lately and have been following the mantra of: cultural revolution requires personal evolution.
Get customers. But also, ask founders for advice and seek accelerator programs for mentorship if VC is something you want to pursue. Financing is much more nuanced than HN / movies make it seem. There’s tremendous selection bias around advice because a good proportion of founders who succeed at it are unreasonably lucky. A good chunk more, though, just grinded it the hell out — and those in this category will often just tell you they worked really hard and got lucky.
Be persistent. Build your company. Luck comes to those who position themselves to be lucky.
I've also found that some VCs don't get what we're doing (because they're not part of the industry) and some do. At least here in the UK anyway. So I've shifted my strategy somewhat to try and leverage corporate VCs while also getting them to bring us into the enterprise market.
Highly recommend folks checkout the indie.vc terms - I describe it as even more founder friendly SAFE note. Not every investor will be comfortable with it. Took us longer to raise and lost out on potential investors and plenty of funds as a result; but was still worth it in the end IMHO.
What's to stop VC fraud? Generally when you accept VC money, you're giving a board seat to said VC, who is there to yes guide with experience, but is also there to protect their investment.
The same thing that many VC-backed companies like to ignore (Airbnb, Uber as the most egregious): laws and courts. This kind of behavior can be classified as fraud, intentional bankruptcy or securities law violations.
This is the principal-agent problem and VCs have a particular way of working around it, traditional private equity has another way and banks have yet different one (and crowdfunding does not https://medium.com/@zby/the-problem-with-crowdfunding-81b53f...).
I've been writing at length about this movement (https://medium.com/swlh/the-new-bootstrappers-how-alternativ...) and the kinds of startups that will emerge as smart investments (https://medium.com/swlh/rise-of-the-transformers-db7887c2668...)
The famous Fortune article about the IPO covers all of this:
http://fortune.com/2011/03/13/inside-the-deal-that-made-bill...
They also didn't IPO because they specifically needed the money from the IPO.
The parent comment carefully qualified their statement this way:
"Most successful startups are self funded for most of their life"
Emphasis on most of their life. Amazon was financed by VC for only about the first 2 1/2 years. Uber for example is nearly a decade old and still drinking from the VC tap; Quora is another example of that. Amazon's IPO was just under three years after the founding. Thereafter most of their business expansion was financed by operations in one form or another (including a bunch of debt they took on).
Fundamentally new businesses fail at a high rate, it's the nature of new businesses. But that means cost of capital is going to be high to cover the cost, but without high-growth it's hard to justify that cost (and that's not even getting into things like fraud which are a big reason new businesses can't get financing)
In this scenario, the bank charges interest and does not get an ownership stake nor input into how the company is run.
Whatever happened to this way of doing things? What is it about VC that is so much better than small loans from a traditional lending institution?
The idea that startups are rejecting venture capital en masse on the basis of interviewing a hodge podge of random startups and micro VC's this journalist seems to be friends with is absurd.
If I've built a company with an implied valuation of 200 million, why can't I bank a couple of million for a rainy day?
I've heard VC's state with a straight face that this is a misalignment of incentives.. apparently if the founder is financially comfortable they aren't "hungry".. this from a venture capitalist who is guaranteed a juicy carry whatever happens to their fund I find this insulting.
None of the founders I know that raised seed capital even had a business plan.
Hard to turn down $1,000,000 when all you have to do for it is say yes. Maybe go to a few meetings, make a PowerPoint. I mean really. Some of these investors haven’t even asked for any metrics, a web app was enough. It’s... shocking how cheap VC money is.
VC money is relatively easy money to obtain versus trying to grind for the same amount of capital yourself, but there's certainly a cost to any transaction.
It's a full-time job for 1 person for months, or even the better part of a year. That's one founder taken away from keeping customers happy and building on the product.
The cost off the term sheet is real.
VCs asking for order of magnitude ~$100ks ARR before a seed round in '18 and '19 makes total sense for VCs. Lower risk of failure with revenue as evidence.
If we get to that point of ARR, we are closer to being a free cash flow positive business and will consider forgoing VC altogether.
- Costs are low enough I don't need them for much if anything.
- I'm unwilling to accept any form of liquidity preferences. Not under any circumstances. They don't get to further offload risk upon other owners like cowards, they have to ride the same risk train as every other owner. Liquidity preferences and the various types of abuses deployed through them are the greatest scams going in the VC world. In a typical start-up there is no greater way that VCs cheat the other owners.
- I don't believe in vesting the founders in cases where they've built the initial product over time (eg 6-12 months). I found the company, I build the product, I launch the product, the VC gets to ride my train, then they want me to vest my existing ownership. Nope. My shares are already fully vested, it's my company. These days I only allow VCs to pitch me, I never pitch them. If you build something that matters at all, the VCs seek you out anyway. In the US there's a hundred billion dollars in VC money every year desperately looking for ventures, make it beg for your attention.
- VCs are only allowed to have common shares. They ride in the same boat as everyone else. They get no choice in the matter.
- There is a lot more money chasing few decent start-ups. That equation is only going to continue to get worse in the favor of the founders. There are a lot of reasons for this, including the cost of starting up being low, and also the requirement for the Fed to keep interest rates permanently low so the US Government doesn't collapse (that will perpetually keep money sloshing around the system looking for returns, feeding bubbles, etc). Just ~4% on a soon-to-be $30 trillion in public debt would collapse the US Government, they can never allow that, which tells you how they're going to be forced to behave over time. There will be periods of ups and downs to this, however it's going to be higher ups and higher lows for loose capital over the near term, due to the Fed flooding the system with liquidity (at least for the next few decades, who knows beyond that).
These terms are non-negotiable. The VCs can take a hike if they don't like it. For practical purposes there's an unlimited supply of other capital and other VCs, especially if you have something good at all.
This is how all start-ups should deal with venture capitalists for the next 20 years or so, until something breaks with how the Fed is going to be forced to finance the US Govt with perma low rates. Capital is in a begging position during that time, use that fact to your advantage.