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Comment by gnicholas | Hacker News Reader

> For years I've been telling founders that the surest route to success is to be the cockroaches of the corporate world.

This has always seemed incompatible with the VC model, which involves raising a ton of money, putting the company on an 18 month clock, spending the money so you can hit key milestones, and then raising even more money when the clock runs out.

I have heard of a few companies that were on the VC track, raised money, and stayed frugal. But my impression is that investors want to see you swing for the fences, which involves spending all the money they invested, and fast.

How common is it for startups to buck this trend?

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Once you've taken VC money, its growth at all costs. Where "growth" is defined by inflating valuation, not necessarily "real" growth of the company.

If you want to be frugal and grow responsibly, you have to do it without VC money.

> its growth at all costs

If you’ve taken VC, you had a bad VC. Otherwise, this misconstrues most VCs’ advice in a downturn, which is to prioritise staying alive.

The key phrase is "in a downturn". When it is not a downturn, VCs encourage startups to grow at all costs. And it's extremely difficult to change course. VCs can change advice overnight but companies don't have that flexibility

> When it is not a downturn, VCs encourage startups to grow at all costs

The defining difference between a startup and small business is scaling potential. If you can’t grow, you shouldn’t take VC.

I think you are missing the bigger point. VC money puts pressure to grow at any cost and very quickly. That takes away the freedom founders/teams could have to do a few things at a different pace and more sustainably which can still lead to scaling. VC = fast or die. No middle ground. But there are ways to scale even without that level of pressure but VC doesn't allow that.

> VC = fast or die. No middle ground

VC is expensive capital. The same dilemma exists for companies that issue high-yield debt.

> there are ways to scale even without that level of pressure but VC doesn't allow that

Genuine question: what is this?

"Genuine question: what is this?"

More time. There are examples of bootstrapped businesses that may be took a decade to get to first few million which will be dead in VC terms. But they continued and got to 100s of Millions. VC model would tell them to kill it if after a decade, they were doing a lousy couple million in revenue even if on the right path with PMF.

> bootstrapped businesses that may be took a decade to get to first few million which will be dead in VC terms

Isn't the criticism of the last decade of VC that it backed many of these?

It happened last year to my current employer. It also was the 20 years anniversary of the company.

Everything changed and I’ve seen it change from a small agile business with nice people to a baby corporation with up or out mentality, useless processes everywhere, harassment methods from HR department. In one year, VC money created as many millionaires as employee burn-outs.

I don't think any VC would back a startup to get to 2M in 10 years. They may do it as a nice gesture if they were failing anyway but no VC would want that outcome after a decade. One example: Gumroad. The investors were nice to let the founder keep going while they let him buy them out for like $1 or something. Today Gumroad is much bigger and decently successful company. Mailchimp was bootstrapped for many years with a service component. If they had raised VC money, they would have been forced to pivot or die early.

Bootstrapped small businesses can have the same scaling potential as startups. They just value sustainable growth over business fragility. It seems foolish during summers but that mentality allows bootstrapped businesses to survive winters in a way that startups can't.

> small businesses can have the same scaling potential as startups

Usually not. Most small businesses have geographic limits to their scaling potential. That said, yes, there are niches where small businesses will beat a start-up competitor, at least in the short run.

So is this something PG wrote before YC was so deep in the VC ecosystem, and that's why it makes sense for him to have said? What would he have advised a startup to do back then, after raising a $2M round? Would he have told them to keep their burn rate low enough to stay default-alive?

What would he say now?

If you compare the pg essays from 2000-2010 to 2010-now, there's a very noticeable shift in tone on this exact topic, even moreso if you zoom out of pg and consider YC messaging then and now.

Tons of old pg essays sound straight from something like Indie Hackers or Microconf with their "avoid raising VC money" angle. He even literally predicts the death of VC in web SaaS, saying "investors aren't worth the trouble": http://www.paulgraham.com/divergence.html .

His YC cofounder Jessica Livingston wrote a book "Founders at Work" and about half the founders in the book are bootstrappers (DHH, Joel Spolosky, Craigslist). The other half are mostly founders recounting horror stories of interacting with VCs.

Compare that to modern YC where there are videos where they say _everyone_ should consider applying to YC with the _only_ exception being people that want to bootstrap. Modern Startup School says: "Without startup funding the vast majority of startups will die." (https://www.ycombinator.com/library/4A-a-guide-to-seed-fundr...).

There's something very important to note which is that YC did not change the deal from 125k for 7% to 500k for 7%. It's still 125k for 7% plus 375k worth of equity on your next raise. Which only makes sense if there is a next raise. So obviously they discourage bootstrapping since their whole model has been built around you raising at least one more round after YC.

Seems a pretty simple case of "follow the incentives." YC basically became more of a traditional VC over time. And I think pg was still closer to a founder in the early 2000s, from a founder perspective, it's more of a set of tradeoffs whether you should bootstrap or seek VC. But from a VC's perspective, obviously they want you to seek VC since they can't get involved if you bootstrap and bootstrapped startups won't get the outsized returns they need.

My opinion is, pg is a smart guy, there's still a ton of wisdom to learn from in his essays, but as with every other person on the planet, consider their motivation and incentives for telling you what they're telling you.

Also worth noting the 14 year tech bull run and ever increasing amounts of capital looking for a return. In 2000-2010 it was in many ways easier to bootstrap as everything was smaller, complexity was less with simpler browsers and no smart phones, UX expectations were less, and salaries for software engineers were more in line with average professional salaries.

Not that I disagree with your assessment on pg's incentives and YC's change in position over time, but the environment for software startups is also materially different now that affect you whether you take VC money or not.

I'd argue the exact opposite.

Key costs like hosting are way cheaper, back then you probably had to rack server in a data center, now you can deploy a free/cheap PaaS with a free/cheap database while you find PMF.

Marketing is way cheaper, social media is a grind but it's a game you can play to acquire users/customers for _free_.

There's more stuff going on online, more people, more businesses, more everything. Think about the entire "creator economy", other bootstrappers, Shopify sites, etc.

Yeah some stuff has gotten harder, more platforms, higher UX standards. But on the whole I'd rather bootstrap in 2023 then 2010.

Check in with me in a year though.

> Key costs like hosting are way cheaper, back then you probably had to rack server in a data center, now you can deploy a free/cheap PaaS with a free/cheap database while you find PMF.

Back in the day I have delivered several different cheap 1U rackmount servers to data centres. Once took one - using public transport - to whatever suitable spot in the Docklands in East London. Travelling on the DLR with a server under one arm was a a memorable experience.

Long story short: you can do a lot from a $1000 server, if you put your mind to it.

Yet these days it seems PaaS is better, (over-)paying GCP/AWS/Azure, while you grope around to find a product that will sell for $$$ before your cloud credits run out?

Back in 2009 I had a dedicated server for $89/month

It wasn't the greatest thing in the world, but it was dual-core, 2GB RAM, 160GB HD. I ran a small forum, email server, and a couple buddies used it for shells and running whatever PHP apps they wanted.

An $80 Linode these days only has 16GB and 320GB.

A better comparison is something like Hetzner dedicated server.

Here's what you can get for $89+: https://www.hetzner.com/sb?price_from=89

For 92 euro: 128 GB RAM, 3 TB SSD, 8 core i9-9900K, unlimited bandwidth.

You get 50x value for the 2009 price.

you don't get 50x value, you have to do more to stay competitive.

If in 2009 you served 480p videos that was fine, now you have to serve 4k or you will look like a tool. Various grumbling about JS bloat is optional.

>Marketing is way cheaper, social media is a grind but it's a game you can play to acquire users/customers for _free_.

free marketing through effort is by no means a new concept.

( and it's not free. )

Does the current VC model only work in a bull run driven by cheap money? One the one hand cheap money driving growth of unprofitable startups subsidizing a market and on the other hand cheap money is ready to acquire these firms and /or invest in them once they IPO...but this only works if money remains cheap and in plentiful supply.

I wish this comment was on the top level comment in this thread. The divergence of pg from his original message is really sad. The more you gaze into the abyss, the abyss gazes back into you.

This is an excellent point. I'm with you - I still trust his advice if not for his judgement for the fact that the sample population of startups he's worked with is so high.

But this bias is there. I'd wager if YC started HN today, it wouldn't be called HN. That name is uniquely related to the times YC & PG came into.

I think you're right, but I think it's unsurprising.

It's a bit like trusting an insurance broker's opinion on your own personal insurance necessity -- it'd be unsurprising to me for a broker to tell me that I need the most comprehensive (expensive) plan that they sell.

Sounds like a pyramid with extra steps

To a cynical curmudgeon, it is a pyramid scheme for 100% of startups. To normal people, it is a pyramid scheme when you have a company like Theranos, which represents a very small percentage of dishonest founders in technology, overall.

A ziggurat?

We NEED more of those

Summon more Ziggurats

Maybe that's what the VCs want, but you don't have to do what they say. It is your company, after all.

That's an interesting question. If you are dead set on being frugal and don't need help from your investors (in the form of introductions, etc.), then you could draw a line in the sand and refuse to cross it.

If things don't go well, it would probably be hard to raise money for a future startup, due to the reputational damage of not having followed the VC playbook.

If things go fine, the VCs would probably say you could have grown even faster by spending faster. And what's considered a 'fine' outcome for you (selling for $15M with 1/3 for you) is not considered 'fine' for a VC whose model requires bigger wins — even if they take much longer.

sometimes this is true but not always, there are smart and patient vcs who trust their founders

What is the difference between a startup and a business nowadays?

I can start a business without an investment round, but not a startup? Is it a startup if it involves tech, a business if not? What if they use SOME tech, but not necessarily innovative tech? Or is this one of those 'you know it when you see it' kind of things? Has the term startup become a buzzword like "optimize" or "synergy"?

Seriously asking, not being snarky.

edit: thank you, for the responses that clarifiesthe distinction

According to PG, a startup is a company designed to grow fast. [1] Again, this is a bit at odds with the advice to be frugal. It's not that you can't do both, it's that you have to strike a balance because they are in many ways at the opposite ends of a spectrum.

1: http://www.paulgraham.com/growth.html

Right, and most often that growth is tied to a digital product that can scale to infinity with little additional capital needed.

My colloquial understanding is that Startup is meant to grow fast, Business is meant to grow slow.

Some of the causes and effects:

1. New business may have a proven business model, customers, product, market. Startup may have to find or create any of those

2. New business may have some capital to build/invest itself (I've worked in a restaurant, saved up, now opening my own). Startup is based on idea/people/work, but likely has no internal capital

3. Both have risk; but in some ways New business risk is known & understood. Startup's risk may be as undefined as their product/market.

As frequently used, there's also a

4. Expectation of profit / failure rate. A new business would be happy to succeed with small profits, certainly very much over bankruptcy/shutdown. Startup ecosystem/expectations are built around fail or succeed wildly.

I think the first point is probably the most differentiating characteristic. Startups are typically about innovating, doing something differently from what's expected or the norm. Typically, but not always, this leads to disruption in the domain if the startup is successful. But it should always be about innovating or attempting something different in its domain, otherwise it's just another business.

> I can start a business without an investment round, but not a startup?

The answer around me seems to be that a startup comes out of an idea without the capital worked out. That the equity they have to offer is worth nothing, unless they execute the plan with money they don't have.

If you have the capital worked out, you can go ahead into the business phase of the process right away, where profitability is king and there's no plan needed to answer the "how to raise more?" question.

A lot of what we associate with startups is the justifications towards raising and a lot of what we see from a "business" is geared towards margins.

For instance, better margins by extracting more profits on a lower revenue is better for one, but looks bad for the other.

Joel Spolsky explains it well in this article: https://www.joelonsoftware.com/2000/05/12/strategy-letter-i-...

The grow fast part is key. If you can out spend your competition and out grow them it is much easier to monopolize your market. That is how you become a FAANG. Not all businesses have that potential however - which is why so many fail. Failure in this case does not necessarily mean the business is not successful - simply not successful enough.

I like a definition from Steve blank (I think).

A startup is an organisation in search of a scalable, profitable and repeatable business model.

(Scalable is relative but at minimum exponential. Linear growth does not a startup make.)

The above definition has helped me delineate between a tech smb and what one feels is a “startup”.

Scale and speed of scale. Planning for fast growth.

Most small businesses do not plan to grow very quickly.

Also the dual is true - bigger risk of failure is acceptable. Normal business investor typically cares between bankruptcy and having merely poor RoI.

Startup incubators would rather have their 999 startups go broke and the 1000th become "next Google" than have average RoI on all 1000.

I'm not a business person, but I always assumed "startup" meant that you take venture capital. That in turn means you now have a financial need to grow to a certain size for the investors to recoup.

the word "startup" has been a buzz word since ~2012 from my perspective. Ever since I saw established companies start to describe their approach as becoming more "startup-like".

Startup means a business that is "starting up". People have become so divorced from reality that words don't even have meaning anymore.

Computer means a person who "computes". Photo-shop means a shop that "develops photos".

We've bucked this trend at auxon.io, and for the large part it has been stalwartly supported by our investors. Quality pre-seed and seed stage investors seem to have a different mantra than is being expressed here. Though I've certainly encountered investors who typify the criticism here. However, what I heard a lot of from our investors is something more akin to, "The biggest killer of startups is premature scale."

Somewhat amusingly now that the capital environment has shifted dramatically, we have investors coming around who used to give us side-eye for being discerning and fastidious (and also our investing resources early to acquire government & adjacent customers), but now they treat us like secret geniuses or something. Because we have a reasonably stable baseline to build from. We're aligned with key markets that continue to spend money even during down markets and recessions. Not to mention we're also not in crisis having to massively disrupt progress and morale by laying off a bunch of people (in fact we're hiring, though still judiciously of course), which is HUGE since team and execution is everything.

You can also just not take VC money. There are a couple of ways to do this:

(a) Work at a big co, save a boatload of money, quit after a few years, and then fund it yourself without the bullshit coffee chats* and 18-month clock.

(b) Work somewhere that has good work-life balance, pays you enough, is okay with you spending your free time doing something that doesn't compete with the company, and then build it on the side until it makes enough money to replace your day job, and only then quit your day job.

* There are good VCs out there, but 95% of VCs will waste your time, and you'll have to wade through them in your search for funding. The amount of coffee chats you'll go through will literally destroy your company because you won't have time to do real work.

The difference is pre versus post PMF.

When you start your startup, you are by definition pre-PMF. There is only a weak relationship between what you spend and what comes out the other side. Once you're post-PMF this changes and you may need to jack up the spending in order to grow as quickly as possible.

Lots of companies screw this up and scale up spending when they're pre-PMF. In 2021 those companies could keep raising, but now they're probably going to die.

Pre-PMF companies need to experiment and nail down their PMF. So what should they be spending on, and what shouldn't they be spending on? I assume conference booths fall into the latter category. Is there anything other than product dev and design that falls into the former? Where does marketing land, in order to make sure enough people are in the funnel to be able to meaningfully experiment and gather data?

IMO sales and marketing expenses should be minimal—essentially limited to testing different channels to see if they work.

I'm sure this depends on the business but I'd say if you need a lot of marketing spend in order to experiment it's a sign that you may not be enough of an expert on where to find your customers and you either need to find a way to gain that expertise or pivot to an area where you already have it.

Relationship building is pretty important pre PMF, especially for industries with larger contracts and longer sales cycles.

VC care about three things: percentage of ownership, growth, and a liquidity event.

If a startup doesn’t need the capital to grow, they’re not likely to take on VC funds. If they do, the startup will need to sell equity, which based on funding round have norms based on equity given for capital received. If the startup is frugal with the capital, but still manages to hit growth targets and reach an acceptable liquidity event for the VC, then any unspent capital would only add to the valuation of the company.

Is that common, no, but it does happen; if it does, generally means founders gave up equity unnecessarily. Regardless, VC measure ROI on capital invested in the startup not if the capital they invested was spent by the startup.

Scott and I were part of the cockroach batch (W09). There's a (little) bit more detail here: https://news.ycombinator.com/item?id=25382902

Budgeting for 18 months of runway doesn't mean "waste money on frivolous things as fast as possible"

Not on all cases, but I personally know one startup where the VC told the investors to hire as many people as possible, regardless of whether they were actually needed. This anecdote seems to ring true with what I hear elsewhere.

I think you might have conflated a few things:

No VC is telling companies to just to wastefully hire people they don't need. That wastes money and creates friction and bigger problems inside of a company.

They do tell you to hire aggressively, and you often present them with a model that shows _how_ you will use the money you raise, and sometimes you hire too many people on accident. But no VC is pounding their fists on the table telling founders to explicitly go hire people that aren't needed. That's directly against the interest of both the founder and the investor.

This is easy enough to understand when you decouple “success” vs “VC success”. If you survive as a business long enough you’ll be successful almost by default. It might not be the next Facebook, but it should net you a nice life.

However, a long-lived, yet non-home-run business is actually a negative in a VC portfolio. Because of the nature of VC, they need big wins to give returns to their fund investors. Their model intentionally decreases average success probability for a business as a filtering mechanism to find big wins as quickly as possible, so they can provide those returns to their own investors on an acceptable timeline.

You shouldn't need VC to start (maybe ever) and probably shouldn't be thinking about it until you've got some traction and customer validation - which can take some time.

It depends on what you want to do. Some things can take too much time without investors, like building new kinds of nuclear reactors.

Uncommon. You're right. This advice just doesn't work for most startups.

If you're pre-seed stage, in Silicon Valley, and the founders have a "good" background (the right companies, knowing the right people, etc), then sure you might raise a small round. If you're any later than that, or anywhere else in the world, you need results, and results don't come as easily in a recession.

Eh, it depends.

Depending on your segment it may be easier to sell products in a recession. Tools which cut cost and are below a certain monthly spend actually become easier.

Hiring is MUCH MUCH easier.

Raising money is harder.

IMO start up or not depends on growth, growth in terms of learning the product/industry. Many VC funded companies achieve growth by throwing money on to problem, which works. But if you manage to out learn your competitors while still staying alive, essentially being cockroach, it is still start up.

You might be able to raise seed money from VCs and not swing for the fences. If they are good VCs, they aren't depending on their seed investments to all necessarily pan out within a few years, if there is good reason to be more frugal. Series A+ is a different story.

I've heard more startups taking this route after the new YC deal. 500k buys a lot of ramen.

Yeah, I know of some that have pivoted at least once and are still alive and kicking. I wonder how YC thought through the costs/benefits of increasing the invested amount so much.

I would assume they did by using their data on how companies progressed, raised money, hired and died/exited.

That was the way in the days of negative interest rates, and cheap and easy money. We are headed for the greatest contraction of capital since the great depression soon[1], and that will no longer occur.

1. According to Zeihan, who points out that with the retirement of the boomers their 401k accounts that have been funding all this money are going to get cashed out and withdrawn, reducing the amount of money for lending, leading to an overall capital contraction.

You can push back in the early stages before >50% board dilution (and this is who pg assumes is his audience), but typically founders are very willing participants in all the spending

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