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Comment by ufmace | Hacker News Reader

One of the things that bothers me about the startup ecosystem is how much it's oriented around VC. There's nothing wrong with VC, but you also have to understand that they have a specific business model and are looking for only a specific type of startup to invest in. They want the companies that are small enough that they can buy a big chunk for relatively cheap, and ambitious enough that they might possibly have ultra 1000x unicorn growth. They know that most will fail; that's fine, they intend to make it all up on the superstar.

It's perfectly fine to start a company that's only going to grow 10x or 20x best-case. VCs won't be interested in you, but that's fine, you don't necessarily need investment.

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"It's perfectly fine to start a company that's only going to grow 10x or 20x best-case. VCs won't be interested in you, but that's fine, you don't necessarily need investment."

I'm not saying this is your fault and I get where you're coming from. But saying 'only' 10x-20x growth is 'fine' as if that's something to be embarrassed about... Yeesh, talk about messed up perspective...

By my reckoning, if you're generating value, have a sustainable business and are giving people gainful employment that in and of itself should be reward enough.

Definitions help:

Start a company: You + enough business not to go under in X months = covering living expenses for one person or family = $50k / year starting negative of working up to profitable

10x = $500k / year, by the previous measure = competing with the top end of a big tech salary.

So there are people reasonably "unhappy" at 10x because of opportunity costs.

Yep.

Being able to create an honest, profitable business pulling in 'only' 500k$/annum. Must suck to be that guy.

It's real easy to play the 'grass is always greener' game. Everyone has their own aims in life. Some want money, some want to live a life they're proud of and pretty much everyone is some combination of the two. But trying to frame someone establishing a business with 10x-20x growth as a failure, assuming they're able to support themselves and believe in the value of their venture, is absurd.

500k profit a year (which is still good!) often means 5 mil/yr revenue. Considering the years of work, super high stress, lack of support network common to this, and generally bootstrapping from their own funds?

That is decent, but considering all those factors, far from a huge win. If they had put similar work (with the same skill set) into a normal job, they would likely have similar returns with less risk.

Especially since there is large ongoing risk of market shifts or the like making it fail with no warning in the future, and at least working in someone else’s enterprise they wouldn’t have their capital at risk.

Except that you can sell the business and get a windfall.

Very true - if you can get that far.

It’s very, very high risk even getting here though, and not just money.

It's subjective of course but most would call that a very far cry from a huge loss which was the original point.

For some of us there's a lot more to life than whether or not the wealth we accumulate squares up with the amount of risk that we take on compared to others. Being able to contribute to something you believe in while being able to avoid Taleb's silent graveyard doing it is enough.

I happen to agree with you.

There are many others who make different bargains of course, and for their own legitimate reasons.

Police to bank robber: “why do you rob banks?”

Robber: “that’s where the money is. What, do you want me to rob libraries?”

VC have money. Spending other people’s money is a frequent pastime. If SoftBank is willing to give you $100m to expand the reach of your IRC replacement, why wouldn’t you take it? Combine this with companies that are built to be sold to one of FAANG (ones that try to solve an actual customer’s problem but mostly just enough to catch the eye of a giant and sell to them) and you have SV.

> why wouldn’t you take it?

One reason is because of what you're giving up in exchange. Obviously equity, for one. Quite possibly also control, if the investors also get board seats as part of the deal. If they have a different vision for the company's future (not to mention your personal future) than you do, that could create problems.

Well of course. But between working as a drone for a company and getting VC money to spend (with restriction) on how you see fit, the VC option is pretty appealing.

There is a middle ground - start something yourself, bootstrap, get profitable, spend the revenue how you see fit without restriction, and own it all. And you can still exit down the road if you so choose.

The restrictions, stress, and pressure that comes with VC feels a lot different when you see them on a term sheet you are trying to decide to sign or not after already busting your butt for a long time making something real, vs from behind that desk at a company.

It is a real, and sometimes very undesirable tradeoff. Go big or go home, vs wealthy but not obscenely so through steady effort?

Sure, but a lot of people would rather own 10% of a billion dollar company than 100% of a 10 million dollar one.

While many others would prefer the other way around.

There's no inherently better model. Someone might prefer flexibility over ambition. Others ambition over flexibility.

I think bootstrapping is overly romanticized. In many cases those entrepreneurs aren’t good at taking feedback or telling their story or have a lousy idea to begin with. Not to say that it’s not going to work or not admirable, but getting VC money is a very early kind of “product market fit” in the sense that you need to sell people your vision in return for money.

I did both bootstrap and VC paths. You can get it wrong in each, but I know that my previous insistence on not taking external money was somewhat rooted in arrogance.

I bootstrapped a SaaS business from my kitchen table...it's now worth just shy of $100M.

I thank the heavens everyday that I didn't go the VC route. I can pretty much do whatever I want without this constant growth at all costs pressure. It also gives us a massive advantage against VC backed competitors. We can make decisions that reap benefits 2-5 years out.

This has created a situation were every competitor follows the same trajectory where it eventually leads to an over-complicated, bloated product that users hate. They come to us and it's like a breath of fresh air.

But now you have to look at the expected value as well.

A 10 million dollar company, lets say at a conservative 5x earnings multiple means 2mil annual profits. At 80% margin that's 2.5mil ARR. For a B2B SaaS product you should be able to get at least $1,000 / customer annually, which means you need to find 2500 customers to own 100% of a 10 million dollar company, which in the age of email and Facebook marketing is very much within reach.

And these are conservative numbers. A strategic buyer might very well pay 10x if you're showing nice growth, margins of 90% are not unrealistic in SaaS, and you could possibly raise prices depending on the value you are providing and who you're selling to.

Now ask how many stars have to align to reach a billion dollar valuation, assuming you haven't been screwed over by your investors by the time you reach that point.

The money added to the company’s coffers gets added to its valuation, so you are not trading equity really unless you are personally selling (a “secondary”). It’s just that the pie becomes larger.

Now, most VCs don’t want to be in the business of management. Each partner oversees 5-10 companies, they do not intend to be managing each. Most intervention comes when the founder is running the company into the ground. I can find many more cases of scandalous compliance by VCs than active intervention. The first thing VCs look at is the quality of its founding team, it’s not for wanting to kick them out.

> the founder is running the company into the ground.

Except that their definition of running a company into the ground is more about whether or not the company is track to be the their 1000x return or not. They push for high-risk, high-return moves, which are not the same thing as striving for a sustainable business. I've seen founders building companies that are stable and growing, and still getting booted by the VCs because they wanted to push for higher returns.

Growing for aggressive returns is the deal you sign up for getting VC money.

That said, I haven’t seen VCs pushing a founder out for this offense first hand, even in companies approaching somewhat of a zombie status. Usually VCs will just divest their attention.

I have seen companies run into the ground with the VCs pushing the throttles forward though.

Yes, this. I get the impression that VCs are mostly looking for either ultra-growth no matter the risks or a high-value buyout by one of the tech majors. If you want steady growth and modest profit, your interests will be misaligned and there will be trouble. I'd say, don't take investment unless you have both a plan for exactly what you want to do with the money, and a vision for the company's future that's well-aligned with your investor.

What if I don't feel like building an irc replacement? There's real problems that don't have a potential for multi billion users. For example, working on problems that working scientists face: there's a potentially huge second order impact, but a small potential user base and not necessarily a lot of cash floating around.

Let's not forget that vc money is scarce outside of the US. If this is actually better or not is difficult to tell.

Softbank et al isn't giving you anything. It's an exchange; and with that comes responsibilities, and so on.

There is actually a very good reason why a VC-backed/VC-backable business shouldn't take 100M from Softbank at a 1B valuation:

Because it removes the possibility of exiting for tens or hundreds of millions--the preference stack will eat up all the equity.

Most VC backed companies that exit do so for far less than a B; if the startup has been responsible about fundraising then a 50M, 100M, etc exit can be life-changing for the founders. Raising too much makes this impossible and turns the whole venture into much more of an all-or-nothing affair.

Of course, the VCs don't care: they make money from the big winners, so they could care less about a 50M exit, but the founders should not.

The sibling comments go immediately to the evils or virtues of VC as though that were justification to stay small or go big, but this comment captures the vast majority of small business activity that produces thriving economies and stable lives for owners and workers alike. I have friends who opened automatic garage door repair shops. They are a two-state business and live comfortably and are engaged in the lives and wellbeing of their employees.

Disruption is glamorous but small is foundational.

I’m sorry I feel like we should clarify your numbers. VC money hopes for 10x or 20x as a goal and is quite happy to have that in their portfolio. If you are a 1x-5x company that isn’t enough return for the equity risk.

1000x is an anomaly and would make one fund round do exceptionally well compared to all others but most funds don’t ever get that kind of investment return.

One reason of many that I like Indie Hackers, it's geared towards bootstrapping without VC involvement [0].

[0] https://indiehackers.com

>It's perfectly fine to start a company that's only going to grow 10x or 20x best-case. VCs won't be interested in you, but that's fine, you don't necessarily need investment.

But is that a startup at that point or just a small business ?

Well,it's just a business if you self-referentially define startup as a business which must have the characteristics that would make VCs interested in investing in it.

(In fairness, I'd probably roll my eyes if someone called their McDonald's franchise or arts & crafts retail store a "startup" but plenty of today's big businesses got to where they are without VC funding or really looking much like what people think of as a startup today.)

To me (just some random person on the internet that works at startups) the defining characteristics of a startup are growth and employee equity as compensation. The second has to come from the first, since equity is worthless if there isn't some future promise of payout.

We've been over this a lot before. I'm not saying pg's definition is the end-all and be-all, but for usefulness in discussion "high growth potential business" is the most reasonable definition: http://www.paulgraham.com/growth.html

I don't really disagree. Much as the "But pg says..." school of argument is like fingernails on a blackboard for me, there is clearly a qualitative difference between a business that's just intended to support one or two people and maybe some other employee--and has no larger ambitions--and one that will possibly take off or, more likely, close down within five years (or whatever).

Obviously there are still other businesses that aren't inherently self-limiting but that aren't really constructed for go big or go home either.

The problem with "startup" is that there are two separate issues mixed up in the same word. PG defined it as hypergrowth which is certainly one class of startup, but there's another one as well. The other aspect of startups is that they are newish products doing something new in new markets. As such, issues like product-market fit are key. The problem is when you start to say things like you're not a startup, you're a traditional business is that most traditional businesses don't have the product market fit issue, and thus most traditional businesses are far far less risky. For example, I don't need to convince a bank that my coffee shop will achieve product-market fit, we know people love coffee and have lots of tools for evaluation the financials of a potential coffee shop, which is why I can get a bank loan to go start up my shop.

Now there's the issue of starting a company that is trying something new and lacks product-market fit, thus is higher risk and we don't have good tools to evaluate those risks, but is also looking to grow conservatively thus isn't able to get the interest of those looking to give out high-risk funding, ie VCs.

Not that I have tried to get a loan for a coffee shop but IMO there's very much a question of fit of your particular coffeeshop concept and your particular market (and location).

The parameters are narrower than in the case of some totally novel software or hardware product but just because "people buy and drink coffee" is not remotely a guarantee that your particular coffeeshop will be sufficiently successful to stay in business.

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