Advice to startup founders: prepare to fail | Hacker News Reader

Advice to startup founders: prepare to fail

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51 pointsgnicholas55 comments

> In today’s startup environment, raising money might be easy

I hear this a lot, but it seems like it's only true for people in specific geographic locations, who are well connected, and willing to pretend their problem benefits from blockchain or ML.

I scratch my head in confusion wondering how some of the VC funded start ups I see got millions of dollars for vague and likely unprofitable ideas. Meanwhile, my software company has an established customer base, has set up contracts that practically guarantee 10x growth in the next two years, and our options for funding that growth are effectively bank loans or working longer hours. At the same time, our VC funded competitors have spent millions of dollars just on office space, and have 15 times our development staff. The world seems absurd at times.

I have the same feeling when people talk about salaries, like 500k would be normal for a senior engineer. You could hire 5 people for that price tag who were equal or better in western Europe, let alone eastern Europe...

Maybe a few engineers are making that in SV, but the vast majority are under $200k for salary. With public companies that are doing well in the stock market, total compensation can certainly be $500k. But I think it is an important distinction to make that more than half is from equity and that equity is only lucrative while the company stock is doing well. If the stock market crashes or the company's stock gets in trouble, most of those engineers won't be making $500k.

This. A lot of compensation is tied to equity. Also adjusted for cost of living so naturally CA engineers are paid more over eastern europe.

Dont get me wrong - I would love to hire engineers from eastern europe there are rock stars there but without a local office or presence there it is difficult and there are risks (trust, enforceability of laws) as well as operational overhead with remote in a completely separate TZ

> Maybe a few engineers are making that in SV, but the vast majority are under $200k for salary.

There is a poll on Blind running right now asking "What's your BASE salary?". 13442 people responded, as of right now, and the responses are:

    < 100K  : 11.1% (1493) 
    100-149K: 33.4% (4487)
    150-199K: 34.9% (4699)
    200-249K: 13.9% (1871)
    250-299K:  4.0%  (533)
    300-399K:  1.5%  (203)
    >= 400K :  1.2%  (159)

So ~80% of the people who responded to that poll seem to be making under $200K base salary.

Thanks for the stats!

Interesting! Is Blind representative, or would it skew junior? I would imagine the most senior engineers wouldn't be as likely to be on platforms like Blind, but I could be wrong.

I suspect the sample at Blind is representative.

My guess is that only 20% (or less) of engineers are senior in any geography. The ~20% of the people polled who earn 200K+ would be senior engineers, I’d think. But even of those, 70% are in the 200-250K range base, which matches my experience.

It doesn't sound like you really tried to get this funding, but are mildly peeved it wasn't offered? If you want it, go get it. Unrelated: VCs aren't looking for 10x growth in the next 2 years. That's not a VC playbook.

Most are: The mantra 3, 3, 2, 2 (annual) adds up to 9x revenue growth in first 2 years, and presumably, higher growth in upstream metrics to feed that . They will invest at 20-100x (and even 1000x+) multiples of revenue if they believe it.

Can you explain the 3,3,2,2 in more detail?

This means tripling revenue growth for the first two years and then doubling for the next two years.

https://techcrunch.com/2015/02/01/the-saas-travel-adventure/

There is more recent content written on this framework - Google for T2D3.

Ah, good to see the context — which apparently requires having $2M of ARR before you start.

Mostly I'm amused, but otherwise you're pretty on point. As an outsider acquiring VC funding seems very challenging and time consuming. We perform on parity with our VC funded competitors, and 10x growth will make us about 10 times their size. We're pulling this off without the advantages of their funding. I'd imagine we could shoot a little higher than 10x growth if we had millions of dollars to spend. Despite being better positioned with a significantly more effective growth strategy, we are not well connected, and so actually getting that VC money seems like more time and effort than we have on reserve.

Why are folks so high on VC money, aside from having the network effects of a VC? Wouldn’t you rather get a bank loan if you have access to it without diluting equity?

In the US debt financing is really only available for small businesses or well established ones.

There is an exception: there are specialized debt providers who lend specifically to venture funded businesses. I’m not sure if this is even an option outside the west coast.

Hard to judge your numbers without knowing the baseline since 10x growth means very very different things at 100k MRR vs 1M MRR, but you are right that fundraising takes a lot of energy, and frankly there are strings attached whether you are connected or not. If you are already profitable and have good momentum there is huge value in controlling your own destiny.

If you can do it without them you’re better off. You’ll own more of your business.

Some businesses simply cannot operate that way (e.g. require a large cap ex) and so do need the outside money; for them the trade offs are worth it.

If you already have significant traction and really can grow 10X in two years (where 10X isn’t 200K->2MM) then there should be plenty of investors interested, if you know where to find them.

Awesome. You don't want VC, and you don't need VC! Stick to it and it sounds like you'll have a great outcome, entirely under your control.

What do you mean? What is a VC play?

The more I see the more I believe connections / networking are the only thing that matters.

I has always been about who you know, not what you know.

That first word reads a lot differently without a t at the end of I.

The VC market is based on power laws and hype, much less to do with the actual business fundamentals itself. PE might be more suitable as a funding option for businesses that are stable and have demonstrated decent (but not astronomical) growth.

Not sure what you mean: VC is a small corner of the PE market.

Are you thinking of a VC crossover fund or late stage only fund?

Forgive me for shilling, but have you taken a look at Pipe or any of the other revenue receivables companies? If you have contracts with customers, Pipe can often help you sell the future value of those contracts to investors in exchange for cash today, without needing to know the right VC or spend two months sweet talking a bank. I'm an early employee and therefore a bit biased, but I'd be curious if we can work for your use case -- our whole goal is to be a growth partner to healthy businesses. Feel free to email me peter @ pipe if you'd like to get in touch, or check out our home page https://pipe.com

I feel much in the same boat. I think all the noise that VCs make about demonstrating revenue and traction and all the other rubbish they talk about on their blogs about why they invest in particular companies is more about having convenient excuses for not engaging. It's a list they use for letting you down easy rather than things they are actually interested in investing in i.e. in Australia it's their mates, who they went to school with, what social circle you happen to circulate in. Nothing to do with making a sound business or doing something truly innovative. They'll fund 100 dog shit fintech businesses "revolutionising real estate / supply chain / insurance / banking" by "putting it on the blockchain / reducing friction in finding a provider" etc. None of them are worth a damn yet they hoover up money like a Sydney socialite hoovers up coke. I have given up trying to raise money here.

"...failures more often come down to a misjudgment of market need, growing too fast, and overly idealistic visions (all things, notably, that VCs encourage)"

So avoiding VC funding might drastically reduce failures? :-P. There are many opportunities for niche software and services, but most would never turn into the next unicorn. If you have a validated idea that has real potential and you are willing to take a huge risk, then by all means go for VC funding and talk to places like YC. This is what they are made for, and they are good at it. However, if your idea is part of the other 99%, there may still be real opportunity to create and build a successful small business. Just set your expectations appropriately.

I'm nobody special but have co-founded 2 small software companies in the past 8 years. Both provide much-needed niche software and services. Neither has taken any investment capital, and combined they employ about 30 people while paying above average wages.

If you really want to start a company, there are other paths, especially if becoming a millionaire isn't your primary motivation.

Any tips for finding these niche opportunities?

How did you find them?

No magic formula, but in my case I worked for a research & evaluation office at a university for a number of years. I did everything from tech support to building small databases. During that time I learned about the needs of research projects, and a few specific grant programs, which led to opportunities to build systems to automate collecting and organizing data, then expand those beyond a single use case.

I'm no expert, so don't put too much stock in this, but a few tips from my experience:

1. Don't set out to start a business, then look for an idea. Instead, look for opportunities while you gain experience in a particular industry. I had 14 years of experience in the research/grant world before co-founding my first private business.

2. (Maybe) Look for a job as an SWE or IT support person within a non-IT company. Do a great job serving others and you'll become the go-to person for solutions. By the time I started the first company, we had already built over 10 small databases to solve specific problems, but none turned into anything more than one-off solutions to streamline specific processes.

3. Work hard, persevere, have a positive attitude, and always look for ways to help and serve everyone around you. Software is just the tool to provide a service. We support our clients through the software we build, but also through a very in-depth understanding of their world and how we can best help them. You also need a support network to start and grow a business, and people are much more likely to help and support you if they value and respect you.

4. Maybe owning your own business should be a 10 or 15 year goal. I know that's probably hard for people early in their careers seeing so many others self-employed. But there's something to spending a decade learning an industry and building a network. I'm not sure either company would have been successful had I started them in my early 20s. Just because the unicorn tech companies we hear about were founded by young college drop-outs doesn't mean that's the norm.I read somewhere that the average age of small business founders is somewhere in the 40s.

That was just my path, so take it with a grain of salt. There are many paths to starting a business and you'll want to decide what you want to get out of it. For me, it was never about making lots of money. It was about building something that helps others, creating good careers for people, and having the freedom to make our own decisions.

Thanks for your insight.

Yes - you're right - having some prior domain knowledge or being exposed to it or partnering with folks who are is probably the most obvious one. I was hoping to hear about a shortcut ;)

RE: It was about building something that helps others, creating good careers for people, and having the freedom to make our own decisions.

Respect. Everyone chasing after Billions and trying to achieve the goal of buying yachts within yachts is not sustainable anyway. Should be more along your path... achieving happiness without needing millions and also giving back to your community.

Definitely not a nobody. Results count. You made two companies and created 30 jobs. That's great.

To me it seems that in today's startup culture it's all about becoming another gigantic successtory. Every startup I visit (see more than 10 every month) people tell me that they envision the next new big thing with their product/company. Taking over the world, becoming multi billionaires. No wonder that there are so many failures. And sad at the same time. waste of resources, just because people wan to much.

Another consequence of this is the culture of "never be profitable and always aim to grow". Imagine what the world would look like if this was applied to every type of business? It's unsustainable and prevents legitimate businesses from making a living

For private companies, profit is largely an accounting fiction. And re-investing every cent earned into the company while you're growing it is perfectly reasonable.

The import metric is cashflow. Positive cashflow == sustainable. Aiming to be permanently cashflow-negative (because you're burning through VC cash) does seem a little crazy. But if your VC's handed you a huge pile of cash, then they expect you to spend it growing the business. Sitting on that pile of cash while carefully being cashflow-positive is not a good plan.

Aiming for growth is also reasonable for most organisations. Aiming to shrink is clearly not a good thing, and aiming for stability is tricky and can backfire.

True, but that is the defacto definition of "startup culture" - go big, go fast, be huge... or fail.

Never fear - there are a huge number of people running slow growth, sustainable small businesses and projects. They are talked about on HN on occasion, but for the most part they just quietly exist and do their thing. And based on my experience, they are far more enjoyable to work in.

If you aren't running into those, is it safe to assume you live in a tech hub? If so, leave the hub - you'll find much more variety in the goals of the people you run into.

That's only the definition of "startup" because VCs keep pushing that definition. They hogged the term "startup" as they are trying to hog the term "web3" now. It doesn't need to be that way. Just keep pushing back.

It’s a culture of a bs vc funded hype non-business. I’ll stick with my on boring “lifestyle” biz (I think that’s how they call businesses that make more than enough yearly to their founders).

That or “mom and pop business”. What a silly misnomer - a software business that generates six figures of passive income is nothing like an old-school mom and pop business like a hardware store, which carries inventory, pays rent, and requires daily staffing.

Problem with these businesses is that they can only be small. When your niche becomes considerable enough to attract VC funding to your competitors - you are toast with that model. So probably you never get above ~$1M MRR, or even less. Which probably means an income of not over 2-3-4M per year to the founder, at best - but this is the amount you can (in Western countries) do by simply having a custom development team.

Unless you actually need to solve a specific problem, or you just don't want to work for a big company, the primary reason to found a startup is to make more than you could make in a regular job. With the amount of money FAANG companies pay, that means aiming very high. It doesn't mean founders won't be happy if they walk away with less, but if you say you'd be happy with a smaller exit everyone just asks "why not just join a FAANG?" You kind of have to say you want to be a billionaire.

I don't think money should be a driver to start up a company. Anyway not in my case. The product must be the motivator. Not money. Never seen someone succeeding with just money as the motivator. I rather make 200k with my own business than working for a large company.

Eh, I'd suggest your case may be an anomaly, at least in the VC/unicorn world. Products are "fluffy." Your idea for a solution or useful tool may or may not take off, for a thousand different reasons. If you're married to it, you may never pivot enough. If you have too much integrity, you may not be willing to bend the story about the problems it solves.

But if you just care about the money, none of that is a problem. Product doesn't have traction? Pivot to something else. Product doesn't _really_ solve the problem that the market is telling you would have value? Just fake it or fib until you that next round of funding and then maybe - just maybe - go back and build the actual solution. You just have to live long enough to position yourself for the big gambit, which should give you enough time and money to try to figure things out.

Perhaps I'm too cynical, but I've seen first-hand a situation where the product meant nothing - we sold the story.

Startups are hard: even for ultimately winning ideas, likely to see poor win/loss rate, unknowns, few resources, no 40 hour work week, etc. with 5-10 years to exit or more likely, failure. Even when things go super well, they just go to your limit in other ways -- most of my male CEO friends went prematurely gray/bald/etc, irrespective if $30M co or $30B.

I was just advising a new founder yesterday: one of the best advices questions I received when working through some ideas is which I cared enough about to do for the next 5+ years. Money can be the motivator, but extrinsic motivators are hard over long periods.

The billionaire thing matters more if you are taking VC money, bc they need people (a) with big ideas and (b) willing to repeatedly increase company risk in exchange for VC capital and that unlikely shot of going from millions to billions, even when the numbers stop making sense. But for non-VC startups, (a) is enough!

Not to mention that every one of these startup CEO's thinks they are the next Steve Jobs and find it necessary to act like him.

It's VC culture, doing what VCs need and want, which is looking for outliers and expecting 1 or 2 bets to return the fund. "Founders" and engineers should really understand what the incentives are and how the math in this model only favors the investors.

What about startup engineers and managers? A book about red flags and signs that a startup is about to crumble would be very valuable.

1. No name investors

2. Executive churn

3. Down rounds

4. Shifting from product focused to "consulting" or building solutions for 1 large customer

5. Focus on marketing / sales with no mention of retention or churn

I'd add unwillingness to share financial details including money in the bank, burn rate, cap tables, etc at small (<10 person) company.

i know for me assuming my business would fail was a natural assumption.

what i would like to see is more articles on bouncing back after a bad failure, or dealing with the rejection from friends and family during the building process.

mvp’s do not come over night so any advice on sticking in there until you have an mvp would be highly valuable especially with those of us who started out in extreme poverty and don’t have anybody else to look towards for support.

If you're inclined to read up on this topic, read Paul Graham's (free) essays instead. Don't buy this VCs book.

For instance, here's an article which talks about unit economics, aka why the bird company mentioned failed http://www.paulgraham.com/aord.html

They are not in audiobook form

I’ve found that Amazon’s TTS service is a great way to listen to any kindle book (including ones borrowed from the library). I don’t have any Alexa devices, but I downloaded the Alexa app and use it to read books aloud as do other things.

The main annoyance is that when resuming a book, it often restarts a couple minutes before I left off.

Why do you prefer PG’s essays to these books?

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