Why I turned down my Y Combinator interview
facetdev.com
facetdev.com
https://www.joelonsoftware.com/2003/06/03/fixing-venture-cap...
The fundamental reason is that VCs do not have goals that are aligned with the goals of the company founders. This creates a built-in source of stress in the relationship. Specifically, founders would prefer reasonable success with high probability, while VCs are looking for fantastic hit-it-out-of-the-ballpark success with low probability.
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Even though the second model has a lower expected return, it is vastly preferable to most founders, who can’t diversify away the risk, while VCs who invest in dozens of businesses would prefer the first model because it has a greater return. This is just Econ 101; it’s the same reason you buy car insurance and Hertz doesn’t.
Though to be fair, he also explained why he took VC for StackOverflow at Startup School 2012. Basically this:
https://www.joelonsoftware.com/2000/05/12/strategy-letter-i-...
tl;dr StackOverflow has a network effect and needed to scale fast.
1. As a first-time founder, YC (the community + the program itself) is a great education. I've learned a ton about different growth channels at a "growth bootcamp", about different possible business models (through the companies that have come and done talks and those in our small group), and about the pitfalls of a startup (through the former founders who are both in the batch and presenting at the talk). All of these have compressed a lot of informal learning into formal/less-informal lessons
2. You still get to choose how to run your company, unless you give up majority voting shares of your company and/or board control. Even that decision is ultimately up to you. It's important to go into every conversation having a good idea of what is best for you and your company, and then to consider what is best for the investor. You will face pressure, but it's essential to have your own perspective in mind and be steadfast in crucial circumstances
3. The community and credentialing is amazing. YC has a reputation that helps to hire and partner with other important companies and people
4. I put this last, but to some founders, this is the most important part. If you are raising money, Demo Day is just a completely unique circumstance to do it
I definitely don't regret doing YC, but I seriously considered not doing it before. I'd bootstrapped all of my past companies, but points 1 and 2 here were the ones my friends mentioned that convinced me to do it
If you get into YC you're guaranteed intros to anyone in their portfolio, press coverage from valley PR machines like techcrunch and will have a much easier time cold calling if you need to because you have the YC stamp of approval. You'll also have a much easier time raising on good terms because no VC is going to pass up a meeting with you.
Even with a weak product you'll be in a much better position because you'll able to meet with a lot of other founders/potential customers and get valuable feedback.
I'm running a small bootstrapped company and am helping a friend's project with fundraising. Some of my friends are also VCs in London, so I see both sides of the table. Very often I am part of discussions about fundraising with founders who barely have any traction with their products but are obsessed with fundraising.
I wish there are more stories about actual product building instead of people closing funding rounds.
I pocketed most this money (after taxes) ... had I raised money I'd be broke right now...
The motivation seems to have changed, and its showing...
Elon Musk is changing the world, works insane hours, but still lives the billionaire lifestyle by lending against his Tesla stock, while the other employees just get the insane hours part.
You could do what you are describing, but if you are up-front with your plans to grow slowly, most VCs will pass on you.
2. Fire you. Sue you for fraud. Talk badly about you in the media. Not saying they would, but there is a lot a deep pocketed VC could do to make your life miserable. It's generally a bad idea to lie to your investors. :)
Whether or not you want this depends on the product you're doing. Several companies tried to make an operating system for touchphones. Out of them only Android was acquired and successful in the long run. Plenty of digital game distribution platforms tried to grow, but were choked out of the market by Steam.
The author is working on contracting specializing in American companies. The market for that is big enough. Or if you were, say, a community based baby stuff e-commerce, which can compete with Amazon, that works too.
The other thing to note is that YC partners say they go big to have the most impact on society.
How big is the market for "niche" companies being acquired for USD 50m, if it was bootstrapped? It seems that there are a lot of acquisitions or acquihires in that range if you are VC funded and are working on innovative tech that makes sense for bigger companies to acquire. But if you are focusing on revenue/profits, and lets say you get to $6-$10m usd in revenue, who are gonna buy you? And an IPO doesn't seem factible since you are not big enough. And if you are outside USA its even a harder sell. I guess it could happen that a lot of transactions of "niche" companies exists in that price range but they are not publicized by journalism because they lack relevance, and that would give you a biased perspective of lower sales of companies, but I wouldn't be that sure of that hypothesis. So, what do you think about the odds of exits strategies for a $30-50m bootstrapped startup?
Look at it this way - say I'm super wealthy and I have $100M sitting in my bank account. It earns a tiny interest rate at the bank. Where can I put it to work for me so that it's growing? One option is to buy a company for $100M. For $100M I can buy a company that produces $10M/year in profit (roughly speaking). Now I'm earning a 10% annual return on my investment. I might even be able to grow the company, so when I sell it 5 years later, I sell it for $200M. So I've taken my $100M and turned it in to $250M.
That's the great thing about profitable companies. There is almost always a buyer.
In addition, there are cases such as building rockets or a factory or other regulated industries where you need capital. If you can bootstrap, do it. However, many people don’t have the upfront investment, connections, or education (in the case of YC).
I agree with the author if we were discussing standard “dumb money” VCs. But in this case, we are discussing YC, it’s community, reputation, and educational resources. You don’t technically need to take more money, just take the 7% hit and gain access to more resources. It may be worth it (it also may not), it depends on the situation.
Aside from that, bootstrapping and not raising money could work for you.
[1] - https://techcrunch.com/2019/03/07/ycs-latest-moonshot-bet-is...
Because people have always liked to pursue things that interest them regardless of the odds.
(cue Han Solo's "Don't tell me the odds!")
Why do aspiring writers work on novels with long odds of it ever being a bestseller on NYTimes -- or even being published by a reputable publisher for that matter? Because, writing is what that person wants to do. Telling them it's a "waste of time" isn't going to change their mind if writing is what makes them happy.
Why does the high-school basketball player keep working on his jump shot even though the odds of NCAA players getting picked in one of the 60 slots of the NBA draft is ~1%? It's because playing basketball is what interests him.
Same for aspiring actors pursuing Hollywood fame that probably won't happen, researchers toiling away on scientific breakthoughs that may never materialize, startup founders building elusive unicorns, etc.
Yes, the similar DHH essays promoting "bootstrapping" and "slow growth" are always highly upvoted on HN because VCs are widely perceived as detrimental. However, both your and DHH's philosophy leaves out a crucial detail: What is the entrepreneur interested in working on?
If the interests happens to be a business that can be bootstrapped, then great. Pursue that option. However, if it's a business that requires millions to build out infrastructure (e.g. many consumer-facing websites), somebody with deep pockets (e.g. VCs) is the typical financing option since banks won't provide loans.
Yes but other financing options such as crowdsourcing (e.g. Kickstarter, or blockchain initial coin offerings), or charging consumers via subscription payments ... all have their disadvantages compared to VCs.
Another factor that may handicap your business is how your competition is financed. E.g. if your competition has $10 million in VC money but your business sticks to "bootstrapping" out of principle to stay anti-VC, you will be outspent in scaling out and may fail anyway.
Really, the critical advice is to be smart about analyzing the VCs and their financial terms before accepting their money. If VCs don't make sense for your particular business, don't do it.
It's a fair mentality but it changes the nature of the game because most founders back in the 20th century wanted to helm their company until their last dying breath. So the fact that this person is already targeting a $50M exit makes it less interesting to me. I just don't think I would get excited working for someone I know with that short term of a mentality.
Exactly the same mentality 20 years ago, except back then it was mostly about the IPO.
Edit:
For further context: It used to be that a technology company could go public and provide an exit to investors. After the dot com crash, Sarbanes-Oxley regulations made it much more difficult to IPO. It has many administrative requirements, greatly increases run rate to support and raises the finanical bar significantly to which companies can go IPO. The VC model however remains the same, they need 10X returns. Thus you see them pushing entrepreneurs to go IPO which post-SO means a longer runway to exit fraught with a lot of risk mostly placed on the entrepreneurs (compared to pre-SO). It became a rational choice for the founders to take smaller, faster exits since "the big one" (IPO) now looks less certain for all but the most successful startups.
Yeah, SO raised the bar to get into (and stay in) the public markets. Maybe regulation minded Congress had a point there. In any case, this correction didn't prevent private MA. Moreover, VCs still get their funds funded. So SO hasn't killed any golden gooses.
Maybe we should have corrected something in 2008. We certainly un-corrected Glass-Steagall in 1999.
But how do you know how much time will it take to reach that $50 million? If it was a VC backed company sure it might have taken couple of years ie short term. But for a bootstrap company focusing on a smaller pie or niche markets this could take years to happen.
This.
I was recently the first full-time hire at a seed funded company that was in the right place and the right time. They grew to 10 people over a few months, and I loved the people I was working with.
Knowing that the founders had a 10-40x equity stake larger than mine made it nearly impossible to feel invested in the company.
Until you become a founder yourself and know how hard it has been might change your mind. Otherwise we're all just employees. One big difference is that founders take bold moves and risks. I also consider this is capitalism at work.
Knowing that you don't have an equal stake in the company makes it almost impossible for the founders to view you as a peer. This is bad for everyone involved.
I'd say the much bigger change is that randos have a real shot at getting funded today, due to YC and the syndicated convertible debt round. It's hard to overstate how much more open the funding market is now than it was even 15 years ago.
I think part of the difference between the late 90s and now (besides scale) is that small IPOs don't exist anymore. VCs need exits and once founders own n% of a $100m company, they need a way to realize those, unless they're willing to totally ignore their own financial interests.
The 1990s IPOs didn't work out well though. These companies were still longshots, and public markets lend better to lower risk-reward companies.
The second part of the problem is tech "monopolies," in the thiel sense. Google and FB's business models, for example, needs massive scale. A social network or search engine with 10% of the user's is not worth anywhere near 10% of what FB or google are worth.
So... the "highest value use" of a smaller startup is to help maintain a larger company's monopoly.
Finally, the tech space (especially consumer web stuff) just changes too fast to "build something lasting."
.. I'm not sure everything needs to be lasting. Do we even want dating apps or online loyalty programs that last a century? Maybe we just need classier ways of doing shorter horizon stuff.
Yep. I worked with a startup that, after a few months, obviously had this as its primary motive. They made an app similar to another big-name (at the time) app, with the intent of having that bigger app buy them out.
When the big fish didn't swallow their little fish they blew all of their remaining cash on a big party in New York and flew in all kinds of bold-faced names to bring attention to themselves. And it worked. A few months later they were eaten by another company, everyone lost their jobs, and the founders retired at 31.
The irony is that a few months after that, its only competitor "pivoted" and abandoned the space it was competing in. If the small fish had held on, it would have owned that market.
I gave them data from my company, and they gave me things in return. Through a bunch of sales that database ended up being the core of a large mobile app that's a household name, but you'd never know it from the outside.
When we got bought the founders complained about how it wasn't enough to retire on. Aww, poor babies. We were too early (Apple introduced a similar product 6+ years after we started ours), so the payoff was only enough for them to live comfortably for the rest of their lives. Except they immediately got condos downtown with unobstructed water views so I doubt that lasted very long.
I think you had the same problem we did. Potential investors take competition in a space as validation. Legitimate competition just solidifies that validation. The moment you folded, the screws got tightened on the other company. Either they didn't get any offers at all, or with terms that were terrible. Founders don't want to be treated the same way they treat their employees.
(This thing where companies get bought out and discontinue their flagship product is, in my mind, a failure mode. That's not success if you make things for a living. Somebody, not us, got rich, while we have a project on our resume that was a failure by our standards, but makes us more attractive to the next guy who wants to pump and dump a company. An attractive little cog for their big wheel. And maybe, just maybe, enough from shares or bonuses to get a loan on a new car)
$50M is short term or long term depends totally on the growth rate and while bootstrapping, that target could be a formidable challenge.
Let's say as a VC you invested $3m and are holding 20% of the company at exit, that means you'll make $10m. A 3x return is nice but not going to be fund-maker.
If you're a $50m fund then you're expected to return >$150m, 10m will nudge you along to that target, but isn't going to be significant. Because a majority of your investments will go to zero or be small returners (1x-3x), it essentially means the good exits have to be >10x in order to be able to achieve reasonable returns for the fund.
1) Go for the experience. If you get accepted, take the $100k+ and invaluable mentoring.
2) There is no requirement to play the VC's game. Take the money and play your own game.
Any example here?
If your funding arrangement allows a minority investor to veto future fundraising, subordinate liquidation preferences, etc etc, they can kill your company.
Of course, most deals aren't on such onerous terms - but they do happen.
* You can make something lasting
* If you dislike authority, and like independence, this is the way to go
* I have total control over my company
* I can’t be fired"
I know what this author is getting at, but as an employee, I like that my boss could be fired if they, e.g., were sexually harassing employees.
The risk profile of your company increases dramatically when you take VC funding. You start spending more money than you are earning, your focus shifts to raising your next round, and your VC now has veto authority over the sale of your company. Your company is now a ticking time-bomb.
You can literally NOT do those things. All the VC has is signaling. Theh can’t block your future raises, only have drag/tag along rights, first refusal or whatever.
Most companies that go through a program like YC are pretty early. Entering and accepting the funding means that often times companies have inflated valuations. Being accepted into a top tier program is not enough to pull in investors in many cases especially if it means that the valuation is inflated and the company is still working on product market fit or early revenue.
See this article for a standard, clean series A term sheet. https://blog.ycombinator.com/a-standard-and-clean-series-a-t...
However, that is a Series A term sheet. When you turned down YC, wasn't that at the seed stage? You would have still retained control until you converted later.
But are you saying that even only accepting a SAFE puts you on an inevitable path?
Google did something like this. They wanted to avoid VC as much as possible and when they did get an A round it was on their terms.
Ultimately, the best analogy is baseball. Raising money is like going for home runs, higher chance of striking out.
The fact is that some founders, including the author, feel that VC confirmation is a validation of their idea/business. So, while founders shouldn't raise huge amount of money for niche projects they do it anyways because that's how they see validation of their idea.
B..but that's what they're doing
They're betting with demands
I have seen this used in Grad school applications by ESL students.
But neither test "native"-ness. Just fluency.
I don’t see what the problem with that could possibly be, just like requiring a candidate to have a certain amount of proficiency in Python.
If they mean "as fluent in English as a native speaker", then that's arguably much too high a standard.
My university got a lot of international candidates whose first language wasn't English and who hadn't been educated in English up until that point. As a result, they established a process to assess your fluency so they could accommodate you with additional training on English to ensure you'd be successful.
https://uwaterloo.ca/future-students/admissions/english-lang... lists 6 standardized tests that prospective students could use to demonstrate proficiency.
You're right that all of them give a quantative score, not a qualitative score like "native". There are qualitative scales where one of the labels is "native fluency". For example, the Interagency Language Roundtable has level 5 (native/bilingual fluency) which means the speaker has "complete fluency in the language, such that speech on all levels is fully accepted by educated native speakers in all of its features, including breadth of vocabulary and idiom, colloquialisms, and pertinent cultural references".
Other people have devised concordances that map the quantitative scores from things like TOEFL onto the ILR labels.
ILR level 5 is a very high bar, though, as you point out elsewhere. It is unlikely that Facet truly needs someone at that level, they'd most likely be fine with level 4 or level 3 speakers.
But reaaaaaaaallllly, I suspect we're all ironically missing the point of the communication. On the one hand, we can construe it narrowly and it may be technically flawed. On the other hand, it's marketing copy and I suspect most readers treat it informally, especially since their audience is entrepreneurial people who want to do contract work -- a pool who is likely to ignore the strict letter of the requirement and apply anyway.