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Comment by tptacek | Hacker News Reader

It doesn't matter whether VC's motivate the moon-shot business model or simply enable companies to try it. Either way: a VC investment usually implies a moon-shot.

We've had numerous articles, many of them by VC's, explaining the economics here. VC's need their investments to wrap up within a specific time frame. Near the beginning of the time frame, VC's resist liquidity. Near the end of the time frame, VC's push for liquidity. The companies that hit the moon pay for the ones that don't.

Nobody is taking VC at gunpoint, so bickering over whether the founders are the ones begging to get to the moon or the VC's are pushing them to go there is besides the point.

Either way, customers are strapping themselves in alongside the company for the ride.

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"Either way, customers are strapping themselves in alongside the company for the ride."

And then increasingly being the losers when the capsule fails to reach escape velocity and burns up on reentry into the atmosphere.

There are lots of pros and cons for the 37 Signals model vs VC backed companies, but I've personally reached the point where I won't even bother using a service unless there are strong indicators it will still be around in a year.

Both types of businesses (slow organic growth or VC backed) are capable of reaching that point of earning my trust that they will continue to exist. However, I do think that over the past couple of years that VCs throwing so much money at so many smaller moonshot ideas have really biased me towards distrusting in longevity as being the default state for any new company, and IMO that's a real problem for companies who want to provide their software as a web service where if they go belly up, I completely lose whatever time investment I've made in become their user.

Right, I think we're in agreement. VC backed companies are usually shooting for fast growth. If you hitch your wagon to a VC backed company, you might be getting in early on the very first Google ad buys when they were underpriced. Then again, it might fail.

But "Keep in mind that VC companies tend to go big or bust, with large rewards in success and none in failure" wouldn't make such an eye-catching headline.

They're virtually always shooting for fast growth, and have to, to work with VC economics. There are exceptions, but they seem to fit a pattern of "person we believe can hit the moon repeatedly has developed a weird fetish for counter service peanut butter & jelly sandwich shops".

Actuarially speaking, you are not getting in early on the next big thing. You're one of a cohort of 10 in which 9 are expected to fail; indeed, in which all 10 are being pressured to make longshot bets that hasten failure, because the worst case for the VC actually isn't "company goes out of business".

"All 10 are being pressured to make longshot bets that hasten failure"

Failing fast isn't necessarily a bad thing. I'm sure there are many companies that have gone out of business because they took VC and tried to grow too fast, but what percentage is that really? When bootsrapping you often don't even know if the business will be viable for a couple years, which IMHO is a vastly worse situation to be in.

Careful. We're not talking about failing fast.

We're talking about being presented with the choice of a medium-risk medium-growth model, and a high-risk fast-growrth model, and invariably selecting the high-risk model.

That's what VC means. At the strategic level, it means invariably selecting the higher risk business model.

Again: "company going out of business" is actually not the worst case for the VC.

The assumption that growing slow is less risky is not necessarily a good one.

Different types of businesses need different growth rates to be successful.

People taking VC money take it because they need to grow fast or it won't work.

Examples outside of tech: Green Mountain Rosters: They make K-Cups. They have to get as many Americans to buy K-Cup machines as possible so that they don't buy a potential competitor's product. If they went slow a competitor would go fast and destroy them. So they sell the machines near cost or less and try to get market penetration. Once everyone has those machines they sell the K-cups which is where the money is.

That business would be ridiculously stupid to go slow in.

Same thing with something like Twitter. If that started catching on but they didn't put any money in it for marketing and growth some other Twitter replacement would have come along and taken their market by being aggressive.

If your goal is to have control over your world and not have a boss, don't take VC money. Build a slow growth business in a saturated market and deliver top quality products. You will be happy and that is OK.

But don't look at what other people are doing with disbelief and frustration that they are "shooting for the moon" and "ruining customer's lives" (not really your words) because they are trying to win in a hard to win place and trying to represent their investors as true fiduciaries.

The country is chock full of successful independent coffee roasters. Some of them have in the past 5 years gone national in scope. Yes, it takes outside financing to replace real coffee with pasteurized process coffee cups. So, don't do that.

And coffee is a good example. Because among those indies, there are coffee roasters that have taken outside funding and suffered as a result.

GMCR isn't a coffee shop, it is a company which makes coffee machines and K-cups that go in those machines.

# of coffee shops that went national with no financing = zero.

You can argue about the type of financing, but any type Starbucks had after the first investors expected big growth. Even today their stock price is at a P/E of 30 which means the market thinks they will growth at double digits every year.

I'm not saying going VC is good, or not going VC is good. Rather I am saying that each strategy has its own ups and downs depending on the type of business. Some businesses need VC funding to beat competitors, some can grow slow.

I'm not talking about coffee shops, and your second sentence is incorrect.

I looked around before writing it and couldn't find one. I'm interested in hearing which ones went national without financing.

Different types of businesses need different growth rates to be successful.

Yes!! This is the essential point, and I'm surprised pg didn't bring it up. It depends on the nature of the opportunity. If it's a large market that has recently opened up for some reason, you have to attack it aggressively or you will lose. Conversely, if the market has to be educated about the virtues of your product, you're better off going slow, because educating a market takes time.

I'll agree with DHH to this extent, though: I wouldn't be surprised if there were a lot more bootstrap opportunities out there than fast-growth opportunities.

a VC investment usually implies a moon-shot.

You lose me here. 'Lean' startups can benefit from a VC investment as much as 'Moon-shot' startups do. My experience is that a VC investment implies that someone believes that the product can be accelerated by the application of money. When I hear 'moon shot' I hear mostly a pejorative 'high risk, publicity loaded but ultimately no follow-on project' (which is what the NASA Moon shot was)

I also agree with the 37signals guys that money in the bank is great, but its only great if you getting somewhere. John Walecka was one of the investors in FreeGate and he used a car analogy where money is the gas, and if you're sitting there idling you are using gas and not getting anywhere. Money, like gas, should be enough to get you from here to your destination plus a little reserve to cover contingencies.

"Lean" vs. "fat" is orthogonal to "steady growth" vs. "moon shot".

Again, think of it this way: the runway is 18 months, whether you took 2MM to "go lean" or 15MM to "go nuts".

The fact that you're hiring slow has nothing at all to do with the economics of a venture capital fund. The fund wants your company wrapped up within a fixed time frame either way.

2 great things about "lean": (1) it enables some companies to find their market without ever needing VC, and (2) it sets some companies up to confidently shoot for the moon with a validated market. Lean is helpful. It just doesn't change the mechanics of VC investment.

(I voted you up; someone voted your comment down, which is annoying, because it's a good comment.)

Isn't high risk by definition what a VC investment is? I'm asking, not stating because maybe my assumption is wrong. I thought VC's look for the high returns which come along with high risk (vs. banks looking to make low risk loans).

Yes, but that risk has flavors. Funding the Moon Landing was exceptionally high risk [1] because NASA did not yet have a minimum viable product. VC's that I've met don't usually take that level risk, they wait until there is at least some expectation that the team can deliver something (hence the MVP requirement in many series A rounds).

[1] In "Proofiness: The Dark Arts of Mathematical Deception", Charles Seife claims that NASA asked GE to calculate the chances of success in the Moon Landing and came out with 5%. http://www.amazon.com/Proofiness-Dark-Arts-Mathematical-Dece...

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