More startups throw in the towel, unable to raise money for their ideas

Even if you build something people love, that doesn't necessarily mean you can monetize it.

An old mentor of mine taught me this, and my personal observations over the years have backed him up on it.

Having too much money is a greater danger to your venture than having too little money. If you have too much, you're just going to spend it on things that not only don't matter, but are likely to incur greater costs down the road.

I'm a believer that startups should be cash hungry (but not starved). It helps keep the focus.

Interesting. I tend to think that every round of financing that happens indicates the opposite of that.

That's ridiculous. Some products need lots of development before they are ready to make money. You can (and probably should) still do smaller iterations to check market fit, but it's entirely possible to create products that take a lot of investment before they are able to make sense on a unit economic level.

Hell, ChatGPT, one of the most successful products in history at this stage, was the result of many years of work and research.

What you're saying isn't even just true of innovative startups - if I'm starting a restaurant, I'll often need lots of investment and multiple years to make back that investment before the restaurant makes sense, if it ever does.

https://www.kickstarter.com/blog/kickstarter-is-not-a-store

It involves modelling jobs to be done, importance and satisfaction at scale and then measuring areas that represent bumps in the market.

I think to appreciate this being possible one must understand that people are capable of describing their own wants, even if they can't imagine a novel solution that could satisfy them.

samsquire, I see you come up with a lot of ideas. How do you decide which ones to work on? Do you also enjoy building/executing? How important is this problem/idea to you?

I think the way you understand startup formation is wrong though. Most startups are not formed as ways to directly address existing desires or pain points. Most startups are, fundamentally, iterations on existing business models trying to unseat their predecessors through more subtle innovations, riding technology trends, or simply a large war-chest of capital and talent.

This isn't a completely accurate view either. You could cite things like biotech which have their own weird dynamics when it comes to startups. Fundamentally, however, I don't think the "market for ideas to solve problems" model works when thinking about startups. Many people have made some variant of this point, and probably argued for other things being the critical factor (e.g "investing in a founder is the most import important thing"). Ultimately, I don't believe there is one single way to think about how to fund companies that will be successful startups. Mostly, I think investors rely on intuition, which is often wrong, but perhaps better than anything else.

Honestly, I don't think it's any harder now than it has been before (in my adult life, anyway). It's always been very hard. Same with running a business post-startup.

There are also Genussrechte in Germany which are commonly used to pay interest not as money but as gift cards which can only be used at the company you invested in. This is done to fund local bakeries where the future customers essentially pay upfront for their consumption in exchange for receiving a return.

Also regulation has massively increased. There are tons of laws you might accidentally break as an early startup without even knowing it, and there are tons of laws that restrict entry into the marketplace through a high legal compliance burden.

Imagine trying to create Facebook today. With 3 employees and a few hundred users, what's your anti-CSAM strategy? What are the laws about who is responsible if some ends up on your platform, and how you need to handle it? Ask your $500 per hour lawyer. I'll wait.

Imagine trying to create Paypal today. Oh, wait, you need something like a million or more dollars to even operate.

https://www.amazon.com/Captured-Economy-Powerful-Themselves-...

Eventually, audiences just become fatigued and the 'business creatives' lose to some other genuinely creative theme that takes hold. Then they return to exploit it :-(

  Nothing new, just trying to capture industries/value.

Who cares about shifting paradigms / something brand new? Not every business has to change the world. Most shouldn't.

The whole point of a business is to capture value full stop. Not to play around with lofty surreal visions of grandeur.

This may work when interest rates are close to zero, but when they creep up, it becomes easier to make money holding t-bills.

And thus, those startups go kaput.

Startups are about increasing risk and that means good startups are about managing that risk.

There's different strategies for doing it. The current one en vogue attacks the ambition of the ideas

I’ll stick my neck out and say that the vast majority of startups never were innovative, it’s just that money was essentially free for a decade.

But now that most of those bubbles have burst, VCs are back doing what they were always supposed to do: due diligence. You’d be hard pressed to find funding unless you have a name or have a business that’s already doing great. And on the flip side, startups themselves are noticing this. My buddy’s startup has been approached by a bunch of different VCs encouraging him to pitch for funding and he’s refused. He’s realized that he’s already making money and has a solid business execution. He’s not willing to give up the gains for some extra cash. He’s taking the slow growth route.

But it's also allowed us to focus solely on the problems our customers actually have and will spend money for. It forces service/product-market fit before attempts to scale.

We are a services business so it is different than SaaS, but same principles apply.

There are benefits to bootstrap and benefits to funded. I feel as if bootstrapping first is a great way to learn the lessons needed to be successful when you do something funded later on.

Let's look at a large number of YC launches we see on here. Often they're 1-2 years after they joined YC. They took 1-2 years to get to launch with a team of employees. Sure, they had customers before the launch but really at that point it was still lets see what works and experiement and change ideas and whatnot.

I'm currently trying to bootstrap a source-available SaaS Subscription and Billing software. I've taken 3-months to work on the MVP by myself and still not got a MVP ready. (Almost there, working on final stuff like documentation and whatnot) Not many people can commit to that long before seeing if the idea is going anywhere. There are quite a few people who can't afford to work full time on their bootstrap idea for 3-6 months without an income.

On the flip side, if you can't convince someone whose job it is to give out money to give you money, do you feel confident you can convince someone else to pay for your product? For me, getting VC buy in is proof that someone else thinks that there is money in the idea.

If the idea is great enough for me to devote my life to, it's great enough to be able to do it without involving VCs.

That said, there are certain types of ventures (that I don't happen to be interested in) that require enormous sums of initial investment. That's where VCs can be genuinely useful.

But it isn't how most companies that take VC money are.

LPs are the real decision-makers on capital allocation and almost all of them are pension funds. Pension funds have almost zero chance of staying solvent unless they can drive above market returns.

Right now that can be done on interest rates alone.

Zero interest rates meant they had to deploy capital, so many VCs were able to raise.

But most VCs will never get a chance to raise another fund.

Like you pointed out: don’t be fooled by all the info out there about how VCs’ think. Watch what they do.

Like everyone, when it’s not clear how to deliver an expected outcome they flock to “what everyone else is doing.”

Today that’s generative AI. It’s a lottery, a few VCs will get lucky.

But the volume of future capital available to raise has collapsed & there’s no indication it will recover.

Worse, incumbents have captured almost all the advantage of AI’s current capabilities.

So VCs are going to return to funding startups in their social network, for the “hot topic” they must have an allocation in to stay relevant, and put all their eggs in the safest (perceived) basket.

Most will be out of a job as soon when the money runs out.

Those sectors rarely make sense for the VC funded model where money has to be returned in ~10 years.

Will they end up throwing a large amount of money at a smaller number of start-ups?

> More VCs will chase the best deals, raising the price of those start-ups. Then the 2nd tier companies will probably follow.

> Will VCs return funds to LPs? Give up on the being VCs and say "I always loved being an operator, so now I'm returning to that"

Both of those are likely outcomes. You'll likely see more late stage deals, competing with the likes of Fidelity.

One step further: startups know this, and VCs know that startups know this. So when you see a startup "making a pizza robot", they're probably not actually "making a pizza robot." That "business model" is really just an early proof-of-concept milestone to aim for while building up tech (and competencies) that can address much more interesting markets. And if you're a VC, they'll tell you as much in their pitch deck. Though they won't ever mention that in any of their marketing. Since, what if the pizza-robot thing does take off? May as well keep it around as a vertical for their tech, in that case.

VCs mitigate this by dealing in multiple ventures at the same time. Aggregate movements are easier to predict and, as VCs themselves often state, it doesn't matter if 90% of their investments don't pan out, because the 10% that do more than make up for the loss.