Don't Take VC Funding – It Will Destroy Your Company
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Kidding aside, it is true that raising money from VCs puts you on a very defined path with really only three potential outcomes: 1) failure, 2) sell to acquirer, or 3) go public. There are a small handful of exceptions, mostly for companies that throw off massive amounts of cash, but, realistically, those are the outcomes.
If you don’t like any of those end states and what it realistically will take to get to them, don’t raise money from VCs.
But, having done so and been successful and taken a company public, I can say: it’s pretty great and I have zero regrets about anyone we raised money from. And I’m proud that everyone who invested in us prior to going public made at least a 10x return.
While there are plenty of VC horror stories, there are fairytales as well.
(An extreme example to prime your intuition: imagine that there are one IPO and 10 VC deals annually. If every startup raises money annually and there are 10 startups at any one time, then every funded startup eventually IPOs.)
Statistically, companies that raise venture capital are vastly less likely to succeed than those that are bootstrapped.
Think about it this way: from the perspective of VCs, the most successful apps of the iOS era were Uber and AirBnB. But from the perspective of entrepreneurs, the most successful app of the iOS era was the Flashlight app.
Which one do you think was easier to build?
But for any individual founder, if you want to aim for 'successful enough to be relatively wealthy and worry free' then 'bootstrapped' is the way to go. If you aim for an outsize success, wealth for the next N generations and massive impact on the world (for good or for bad) it's going to be very hard to avoid the VC track.
I wrote about this long ago, but it is still quite relevant:
https://jacquesmattheij.com/three-roads-to-the-top-of-the-mo...
It seems likely that VC-funded app store pure plays without a recurring revenue SAAS component are much less likely to succeed than indie app store pure plays, but that's because VC is obviously the wrong model for one-and-done app store transactions. If you have a good idea for an app, don't raise for it (you'll have a hard time raising for it anyways).
I'd wonder if taking VC money five times, failing 4 times and building a large and growing company 1 time, isn't better than bootstrapping a small and profitable company just 1 time.
Any citation for this? I’m highly skeptical of this claim.
[0] And again, don't forget to assume the figures are even higher because the figures will never fully account for zombie businesses or quasi-zombies and the equivalent.
I don't have a link on hand, but I've seen studies from people that counted how many business actually closed due to money problems. The actual rate of non-problem business after 5 years is close to 80%.
If you go all the way until you realistically start a company, you are more likely to succeed than to fail.
And let’s not forget the ethics of continually selling a large chunk of their shares in the company they publicly believe will continue growing and is profitable.
Doing VC the wrong way can make your life hell, but taking all the risk yourself and bootstrapping is in its own right a special kind of hell if you're not careful.
IMHO, it's all about time horizon. Working on a startup for 3-4 years without a clear product market fit or some kind of exit is a waste of time unless you're a Jensen (which most of us aren't anyways).
There are smart ways to leverage VC $$ without losing your shirt.
I'd rather buy a car wash business from a boomer with a bank loan than risk my own time with a non VC funded startup.
Spoiler: most businesses fail.
I’d also believe that VC funded companies are more likely to fail as they are making all-or-nothing swing for the fences plays. But you need to compare to the correct baseline to avoid confusion.
2. Companies will have multiple rounds of funding before IPO.
3. Acquisitions are more common than IPOs.
4. Yes, a significant number of startups fail. If it were easy everyone would do it.
My intuition is that rate of failure in software, where its much more winner take all, would be higher than brick and motor businesses, which constantly fail.
So really, this doesn't seem surprising.
Not that you necessarily have a very high chance of the last two.
IPOs are just one of the positive outcomes, certainly the rarest.
https://www.wired.com/story/lee-holloway-devastating-decline...
It's a horrifying disease.
If what you are trying to do is capital intensive, has tons of competition and generally will need the scale in order to compete/turn a profit, you should probably take VC funding.
If you want full control over your product or are operating in a niche and think the explosive growth necessary will hinder you, you have different priorities. You might not be trying to make the next "big thing" and in this case probably don't take funding. In fact, you probably don't want VC funding because your goals don't align with theirs.
Like most difficult questions, the answer is: it depends.
It is a pervasive rhetorical shortcut.
1. Flatten a proposition to an all or nothing form to simplify communication.
2. The reader steps back into the real multidimensional world with clearer insight into one of its dimensions.
Anyone confused by this has deeper problems than VC or not VC questions.
has cloudflare ever had a profitable quarter?
I could give away my investor's $10 bills all day too
A big chunk of software VC success over the past 20 years has been public markets accepting loss making companies and giving them a lot of credit for potential future margins.
“Profitability” is a funny term on Hacker News. Think most people here aren’t accountants so they think of profitability as: do you have more cash in the bank at the end of the period than you did at the beginning. That’s “free cash flow profitable.” By that measure, we’ve been profitable the last ~12 months and have said we expect to be so every year going forward. We’ve had non-GAAP operating profits even longer. So next up is GAAP profitability, which I am confident we’re on a path to. We want to emulate Microsoft’s accounting financials, not Salesforce’s.
Even that won’t be “success.” Just another step in the journey. Success to me is living up to our mission of helping build a better Internet. Don’t get me wrong, financing and accounting milestones are all critical to us doing that. If we were burning through cash it would be hard for us to fulfill our mission. But I show up to work every day because I see the positive impact our team is making toward a more secure, more reliable, faster, more private, and more efficient Internet for everyone. Only steps toward that represent success to me.
[0]https://nymag.com/intelligencer/2019/11/softbanks-insane-pre...
not very amazon like at all
What's the ratio, though??? 10/1? 20/1? 50/1?
It's not for everyone, but eastdakota is right that it's not for nobody.
They’re looking for a 10+% return on the entire portfolio.
I had a lot of animosity towards VCs from several bad experiences (with a company of mine that got funded, and then with another that didn't). But I've come to realize the commonality of those bad experiences was that I was naive about what was going on. I don't go to my bank hoping for camaraderie and sage advice. VC is tricky because of the "sales" layer it adds to the bank. The best parallel (this is probably really offensive to investors but it's more about me than about them) is real estate agents --- who I also had very bad experiences with, until I learned what was actually going on.
Success or failure aren’t the bad startup outcomes. The worst startup outcome is The Slog. The Slog sucks. I have several friends stuck in The Slog. Symptoms: you’re growing just barely enough to hold things together (call it 10–20% YoY on <$200k in revenue per employee). You keep thinking the next big thing is just over the horizon. You have a handful of customers who say they love you but won’t buy any more from you. Every once in a while you get some press or show up on HN saying you’re cool.
THAT is the recipe for disaster. You can wake up and realize 10 years have passed and you have nothing (economically, educationally, or emotionally) to show for it. It’s possible both with bootstrapped and VC-backed startups. The Slog is the worst startup outcome.
Bad VCs can definitely make The Slog worse. There’s so much money in the system there’s almost always someone who will put more in, even if on worse and worse terms. Good VCs, on the other hand, can help get you out of The Slog. They can counsel you when it’s time to give up. They can introduce you to potential acquirers. And while it may not be a huge financial win for you or them, it’s a much better outcome than slogging on indefinitely.
About the same as the ratio of successes to failures in a VC portfolio.
(cloudflare, shopify, databricks, coinbase, stripe, openai, freshworks, gitlab, dropbox, hashicorp, amplitude, vercel, plaid, hubspot, quip, notion, twilio, etc)
Superior tech, maybe hyper efficient, hyper profitable.
If that’s what you pitched them. Most businesses are private. Most rely on outside funding. Most of them never exit, and are never expected to.
It’s not so rare in some industries like oil and gas, etc where cashflow is the purpose of the work.
Add software that does what nothing has before.. and the table turns.
From my perspective, it's effectively the PE model except the funding source is the company's own revenue rather than investment capital.
Maybe those strings line up with what you want anyways, which is great. If they don't, don't take the money.
Just like everything else, the real approach to this is nuanced. It's important to highlight that as many fundraisers are operating under misguided thinking on this topic.
When you have a choice between being a long-term customer of a VC-funded company vs a self-funded business, think about long-term incentives and don't follow the rich and shiny.
Disclaimer: I run a self-funded SaaS business and sometimes explain why I never wanted VC funding and why a LARGE BUSINESS is not necessarily better for customers.
So, lottery expected worst case: you lose all your money. VC-backed startup expected worst case: you learn a ton and end up no worse financially than you started.
As an aside, whether venture-backed or bootstrapped, having gotten to know a lot of successful founders the characteristic that seems to set them apart is their rate of learning. The best are relentlessly curious, always assume there’s something they don’t know, and seek to learn from as many people as possible.
For anyone not upper class, if you spend 6 or so years chasing a startup and fail, and you’re a good software developer.. once you factor in savings and interest, your total opportunity cost is something like 2-4 million dollars. That’s making a good software dev salary for 6 years and saving some of it. That’s life changing for someone not already rich. And you’d still be learning a lot, plus working a much more relaxing job with time for side projects.
Your broader point is important too: startups are unfortunately too often a luxury of the upper class. It is extremely scary to take a risk when you don’t have a safety net. I was personally broke when we started Cloudflare and had to borrow money from my mom to pay my rent. But I could borrow money from my mom. And I had a mom and a family that if I failed would make sure I didn’t go hungry. My family wasn’t anything close to what I now see really rich looks like, but we weren’t scraping by. Had I not had that safety net I don’t think I’d have had the confidence to start Cloudflare. And I think that’s a real issue with entrepreneurship we don’t talk enough about.
If you’re learning as much at terrible companies as at good ones, then you’ve had rotten luck. A lot of what I’ve learned at rotten companies is how not to do things, and how important mental health is to physical health. There’s much more negative space than positive space, so you have to learn hundreds of ways not to do something for every handful of ways that actually are sustainable.
If I do something dangerous and win, then a roomful of people copying me have lower odds than I did, not better.
You're still unprofitable after 13 years though, aren't you? Growth is prompted by skyrocketing sales costs.
Does any VC funded company ever ends up not losing money?
Unless you're lucky enough to be in a market segment without competition, you need to keep an eye on what your competitors are up to. If they can expand faster, add features faster and get more customers than you, it damages your chance of success in that market segment.
Taking VC money could provide that velosity.
That said ofc I do agree that, if your goal is to run a profitable business for a long time, taking VC cash is quite possibly a bad idea, depends on what the founders goals are.
- Million startups - put loads of cash into thousands of startups globally and play a huge vegas lottery - there is a lot of work there for the BC companies but played well it will have influence at the levels seen by newspapers or major consultancies used to
- the current much maligned approach that is going to creep further up the series A B C tree supplying capital to companies that have developed the model to just churn
- your one. The one I and half of HN is looking for :-) Honestly this confuses me - there is a large chunk of people on this very site that you could have convinced to leave what they are doing and set up a company with the risk of doing so mitigated by "nice VC" cash.
And since everyone in the industry claims they invest in people not ideas then they are turning away people because they won't raise their price to meet a new point on the risk threshold curve.
So yeah something like VCs that fund profitable non IPO businesses seems a good idea. I mean if you stop asking people to make moon shots maybe more of them will just make 20% per year ROI
If a company has a vision fulfilling every request outside of the vision could be considered a distraction. The VC has legitimate concerns outside of the scope of the company vision.
Apple is one of the few modern companies that I can think of where the VC money was useful.
If anyone can remember google before going public and after going public might mourn the old google.
Imagine if google wasn't romanced by Wall Street but followed their own path like craigslist.org. I believe that google would have been much more collaborative. I can't see where going public helped google be good at internet search.
For example, if you're selling any sort of business SaaS product these days, the regulatory regime has changed greatly from 20+ years ago. The cost of just something like SOC 2 or ISO 27001 certification, which most enterprises will require to even talk to you, often prohibitively prohibits bootstrap-like funding models. Couple that with the fact that software engineering salaries are comparatively way higher than they were 20 years ago.
The short of it is that a lot of people take VC funding not because they want the "misery of competing, stress, exposure, running all the time etc etc", but because, in many industries, there is simply no other option if you're not already rich.
(2) That's a dollar amount that most bootstrappers can swing.
(3) Critically, you don't do SOC2 until you have a critical mass of purchases requiring it.
(4) Many (most?) of your customers, especially your early customers, won't require it, and/or will have alternate paths for companies without a SOC2 attestation.
(5) When you finally do hit the big deal that absolutely demands an attestation, you can often cut a contingent PO: you sign the deal, deliver the stuff, but you don't get paid (or you don't get the last tranche) until you get the SOC2 attestation.
(6) You can get a SOC2 attestation real, real quick.
There may be other things keeping people from bootstrapping SAAS businesses, but this isn't one of them.
Have you ever run a business before? The belief that you can build a business without dealing with competition is a myth. Having a successful company requires picking your poison.
Non-VC is a different poison than VC, and I do agree that it is a much better approach for far more many businesses. But make no mistake, having a company with "no stress and making millions for all to live" is not a realistic goal. There is no free lunch in the world of business. Competition is everywhere. You can either ignore it or embrace it.
Only 30 years. You? Not mean to be as snarky, but this US all or nothing stuff is getting on my nerves just a bit. I came from a simple background, but in a country with free education, so I got a degree in uni, opened a company in high school, all without too much risk. Didn’t need to work myself to death, didn’t have much stress, didn’t need VCs and make more than most here who seem to be dying of stress, lack of proper healthcare, free education etc etc. My clients like I have no funding and that I have enough money yet want to keep working as I like it.
If you expect company to reject money in order to stay nice, you should be ready to do the same personally. Otherwise it will not work.
Your colleagues can get better jobs elsewhere, so you are constantly competing for talent.
Your customers can get a better deal, or product or service from one of your competitors, so you’re in constant competition with them too.
From 2000(!), still a must read today.
My takeaway is: you either raise (and spend) more than all the competitors in your field, or you spend very little. In terms of funding, be the 1st or the 100th. Don't be the 3rd.
> which is to grow faster than (or as fast as) their competition
But I also work for a privately held company and there has been a whole series of companies pop up outgrow us … then fold … It’s like a parade of VC failures. They weren't bad people or bad ideas, they just had so little time and sometimes were so focused on their one cool trick, that was it.
Velocity also means velocity to failure, and arguably less time to learn from mistakes or just make money. I've seen a few who didn't even have time to learn.
That might work for some ventures, much less for others. Just gotta know what you're signing up for.
Could you provide a few real examples where VCs money helped companies making better product and moving faster than self-bootstrapped competitors?
Then I talked with other people in the startup world who said it was a perfect match.
That's when I realized that I just worked at competent places.
Then another type: some of the deep tech startups full of super smart people, even publishing papers, and are usually backed by one or more major institutions (universities, companies, etc.) you can literally feel the passion pouring out of their employees
Then even still there is a third but very rare type: that startup that bootstrapped itself to profitability without any VC at all! (IMO most impressive and difficult)
There is no way I’ll start another startup unless I receive backing from a huge VC company.
Current economic paradigm is more similar to centralised/controlled economies of USSR. Thus if you want to succeed, you will need friends with connections to central banks.
I've had what I can only assume to be a VC-funded competitor study my endpoints for high latency / expensive queries, then saturate them with millions of requests a second across thousands of simultaneous IP addresses.
Business is survival of the fittest. Pressures and growth gradients come in all shapes and sizes.
- IP and CIDR blocks
- A few trivial heuristics to catch certain behaviors they were using
- In-app query caching for read-only endpoints that serve the same data to all users
- Redis TTL caching for read-only endpoints that take view arguments. A means to manually expire on writes.
- Runtime control plane additions to dynamically block IPs/CIDRs, user accounts, and endpoints (if they find another hole to exploit, we can just block a few endpoints rather than the whole service)
- A tool to inject bad responses (we found another, probably different actor consuming and reselling our service)
And Logitech, who backed Spotlife was more than gentlemanly about it, they sent us all of their traffic for years and years.
Would you be willing to give a few more details about what happened? I'm not interested in the identities of the companies or people, just interested in a high level overview of what happened. We don't hear these stories often.
- Used an APT for hire but I don’t believe they did succeed , still it is quite insane. I was lucky enough to catch a targeted rootkit but issue was quickly remediated. I’ll eventually find a consultant to analyse the Win 11 rootkit. They were definitely not script kiddies.
- Some black hat SEO and shills for hire, but that is expected.
I’m really surprised by hired journalist / APT aspect. Something I never imagined would happen, but apparently it does happen.
Probably someone asked long ago "What if traction itself could be a moat?" and the rest is history.
I think you mean big banks. Aside from maybe a line of communication due to their financial size, VCs have very little to do with the Fed or ECB.
I've bootstrapped businesses too, and it's an arduous process and often far slower. If you're successful you're then lucky enough to be fully in the drivers seat, and that's great. If you're not, chances are you've wasted far more time.
Overall it boils down to what do you want? VC accelerates the the whole process, and multiplies outcomes - both risks and rewards. If you feel comfortable with taking a higher risk for a chance at either making it big fast or failing fast, then VC investment can be great. If your idea is your baby or your life's mission and it's what you want to keep doing whether or not it's a runaway success, VC might be a poor fit for you unless you happen to strike it lucky very quickly and can dictate terms - control can slip away very fast if things go in the wrong direction or too slow.
I'm far less likely to take VC money if I were to start something today largely because I've got enough money that it'd take far better terms to make it feel worth it, but I don't regret taking investment in the past other than maybe that single one I mentioned.
If you don't have a rocket, the rocket fuel will be wasted and disappointing in any other vehicle. Ideally you bootstrap until it's clear. But if you start the company with VC funding, you should know the expectation.
If you truly have a rocket the economics of VC funding is favorable for everyone.
To be honest, startups play on another level than most SMBs. With a SMB, you can double your growth every year for 5-10 years straight, and do very well, but not be interesting for VCs. To be interesting and relevant for VC money, you need a business that can scale to millions of users.
If you can show that you're able to double growth every month (or similar short-window metrics) with an idea that could scale to a billion dollar company, you'll get the interviews all right. Hype is a big part of growth.
The problem, so to speak, is that you'll be competing against other startups - and if you they have the VC money, but you don't, there's a good chance they'll outpace/outgrow you.
I think it's very noble to grow as much as you can organically - but realistically speaking, it's difficult to compete against those that are funded.
And you don't really need to use the money you get - being funded also comes with a signaling effect. You get lots of publicity, and get to signal that serious investors are willing to back you.
One common benchmark for startups at the $1m/year stage is T2D3 (triple, triple, double, double, double).
That’s the trick… you don’t. And neither do they.
I believe it’s a pretty well-understood statistic that most VC-funded businesses are not successful, and the VCs are only successful because a small number of investments are massively profitable.
Neither VCs nor companies know for sure if they _will_ rocket. VCs are looking for businesses and founders who _could_ rocket.
It's not necessarily better to be one or the other, I just don't like people who work solely for the money. And people scamming VCs (who want to be scammed) are not people I choose to hang with, even though I met quite a few.
> Remember when I wrote earlier that the VC dudes definition of “making everyone happy” after investing in your company doesn’t mean making it profitable? So now you might ask: Okay, so what do my VC investors want? ... They want to make a lot more money.
> ...
> Now, all of this might be none of your business, you might think. But it is! Because now the inevitable consequence, once you’ve taken VC funding, is that the objective of your company has changed: You’re no longer building your company the way you like it. You’re building your and the VCs company so that they can sell it, for a price higher than the one they paid. There are no alternatives. The course is set. You’re building to sell.
Why? Why do you have to respect the VCs' desires? Why can't you take VC funding, then use it to build a company that yields modest returns and live a comfortable life running it (and paying modest dividends to the VCs that over a few years return their investment)? Doing so would (I presume) not constitute any kind of breach of fiduciary duty, so what right can the VCs possibly have to enforce their preference for a more aggressive strategy?
People commenting on startups often imply - like in the quote above - that VC investors ultimately control any business they invest in, and not the founding CEO, even when that founding CEO holds the majority of the voting stock. This strikes me as bullshit. At least, nobody ever spells out the mechanism of control, and their inability to do so makes me think they don't know what they're talking about.
If I'm right that the narrative of VC control is bullshit, then what's the alternative explanation for why CEOs so often choose to pursue aggressive growth and sell their "babies"? Simple: the CEOs themselves want big money. It's not that the evil VCs are forcing the CEOs to do something they'd rather not do. It's that the VCs and CEOs are aligned in their objectives in the first place.
Why do you think VC control is bullshit?
A couple of years ago when the VCs were throwing money around like crazy, I had this bright idea that perhaps all I'm ever going to need is a single round of funding. Use the money to put the company on a modestly profitable track, cut the head count, cut the cloud costs, eliminate the office, and cruise along indefinitely. Just like passive income, but on a corporate scale.
The reason this doesn't work is that the market changes very, very quickly in our industry. You can't just put your app on cruise control and expect a consistent ARR forever. As soon as some other VC finds out that you aren't making an "optimal" use of your money, they'll invest in a competitor who will eat you alive for breakfast.
Would be interested in stats on how normal this is or information about VCs' policies on it.
This is why we should never trust anything that isn't in writing. No matter how many times someone promises to "do good by you" there will be a moment where that promise won't mean a thing or will be interpreted to have meant something different.
https://www.youtube.com/watch?v=fhuSM8JTSpU
I think the biggest stain that was left from this era is that it mixed the millionaires made from cash flow with the millionaires made from empty valuations, and now the two are inseparable
It’s fine for the author to be all high and mighty about looking down on taking funding, but for most people bootstrapping isn’t practical or even possible, the business they want to run requires full-time focus and attention, and they don’t have the means to work for 2+ years without a paycheck. VC funding gives people like that a chance to try!
The only thing I can comment on here with any authority is the consult-to-product model, which I've attempted a bunch of times. It is drastically harder than this post makes it seem to pivot from a viable consulting business to a product; it's notoriously difficult, consultancies are constantly trying to do it (it's the dream!), and very few of them succeed.
That's not to say you shouldn't do a consulting company! They can be great. If you are comfortable with the idea of settling into a long-term consultancy if the product doesn't work out, it's a good way to hedge. Most products fail too! But consultancies (as opposed to products bootstrapped by consultancies) are probably a lot safer to build.
For a lot of companies this is true, but tons of business models require economies of scale to be profitable and there's nothing wrong with that. It's not a failure to say that a company can't be profitable at a small scale.
The real issues are the plethora of companies where the unit economics will never make sense regardless of scale. Painting VC money with such a large brush is unhelpful.
> VC Funding Means You Will Sell Your Company
I think this is the more serious critique. Your VC investor wants you to make an exit, either through IPO or acquisition. This is the VC business model. A steadily growing profitable business will almost never provide the kind of return neccesary to compensate the risk of a VC firm.
If that's something you're okay with, great.
"If you want to run a company that looks like X, then taking VC money will prevent that from happening" is a pretty easy conclusion to make, though the only value in it is in the description of potentially surprising parts of what not-X looks like, to allow readers to judge whether they care.
You should actually do the complete opposite, the billionaire entrepreneur said during a panel at SXSW last month, and opt to start a business “with as little money as possible.”
https://www.cnbc.com/2023/04/09/mark-cuban-best-way-to-start...
Terms matter a lot too. If you raise a ton or raise on a super high multiple you will have to show cocaine growth to make that make sense. If you raise sanely the expectations are going to be more sane. (Lots of companies raised overstuffed rounds in 2021 to 2022 at batshit multiples. Expect some carnage soon.)
That being said it does put you on a certain track. If you don’t have something that can show VC scale growth, you shouldn’t take VC money. As with all other things know what you are getting into.
Right now I would consider VC for B2B but not B2C. There are no VC scale B2C business models right now that do not involve exploiting people. B2B can be done in much more above board ways because businesses will just pay for things directly. You will have to build a sales org though.
That's only if "you" are not a smart manager. You hire some 'B' players, and they in turn hire 'C' players. An 'A' player will hire other 'A' players.
The article assumes that your business is already there and running. Many VC-funded startups only really get started when they have enough backing to do it. Hiring really good engineers and marketers takes some money (although less than it did back in the day).
He's right, though, that bootstrapping is cool and worth trying. It forces you to think about profitability right from the start, instead of all those BS metrics he decries.
I have never seen this effect in practice. I believe it is a trope.
Answer: typically, you’ll walk away with $5m (25%) or less. VC funds usually have a 1x preference, which means the get their $10m back (plus interest), and THEN they split the remaining proceeds with you 50-50%.
So if you take VC money, you might have to double your valuation just to keep your take-home value the same.
VC makes sense if you can grow fast and very large. But assuming you have scenarios to grow slower or to a smaller size, those scenarios often turn into bad ones if you’ve taken VC funding.
> VC makes sense if you can grow fast and very large.
I could also argue that such companies are often a blight on the ecosystem. They're an invasive weed that outcompetes a rich variety of smaller companies, sucking the resources required to sustain such companies without doing nearly as much to enrich the environment. And then they tend to die off (perhaps through acquisition and having their product cancelled/absorbed into the larger company's), leaving customers high and dry. If they hadn't been there, some of the smaller companies would have still been around.
>OpenRegulatory is different. It's 100% boostrapped. Ironically, having no investors (and less money) opens up interesting opportunities: We can serve customers who don't have a lot of money, like, Healthcare startups. And we can build software which only solves a tiny problem, and solves it well.
While eating your own dog food has a certain face value, future employees most likely won't be pure idealists who will take a lower pay out of the satisfaction that their work helped others who "don't have a lot of money".
If you rewrite that to "a much smaller percentage of prospective future employees won't be pure idealists..." then I would agree. But it's about the pool being smaller, and in fact small enough that you risk not being able to find anybody, but the fact that 95% of people are not going to be adequately motivated by helping underserved people does not mean that the remaining 5% won't be.
Existence proof: I am working for substantially less salary than I could get elsewhere. I can prove it, I've been offered the higher salary at a FAANG and turned it down twice. It's financially irrational. I don't think it's wrong for people to work for directly ad-funded Big Tech. Or even for me. I'm not ecstatically happy in my current position. If I were younger I might make a different choice.
But I care enough about working for a mission-driven organization that I basically have no intention of leaving as long as the organization doesn't lose my trust about being mission driven. (There's often a gap between stated positions and reality, and I try to watch closely to monitor how big that gap is.) And I think I'm far from being the only one in this position.
I'm also aware that it's a privilege to even have the option. I grew up poor. Now I have a spouse and kids and live in an insanely high CoL area that we mostly don't get much from, but our past work was enough to make us financially comfortable. (Actually, I suspect it probably has more to do with the extremely unfair macroeconomic situation that has inflated our real estate and other investments, but whatever.) When I go to feed the worms, I won't be leaving my kids with as much financial security as I could have, but I hope to leave them with better respect for my values than I would have otherwise.
That said, "mission-driven" doesn't actually mean that much. Any mission is going to have unintended consequences, and it's pretty dispiriting what people are actually using my mission-driven labor for. There's no easy way to sort companies into "good" vs "bad". It's often not even a meaningful distinction at a whole-company level. But there are still large differences if you pay attention.
Working on interesting problems, working in specific domains or working for a mission-based company trying to make the world a little better are all strong motivators.
I suppose the overall pool of available candidates is smaller, but I don’t think the pool of candidates with strong skills is necessarily smaller.
Once you find purpose in your work life, that becomes a compensation all on its own.
I presume those engineers and their families already solved some problems like having what to eat and having where to sleep, so they have the luxury to pursue other objectives.
I also presume only a small number of engineers are in that position.
Broad rule of thumb in finance is to understand how the people giving you money make money. Traditional VC is high-risk / high-reward. If that’s not your strategy, don’t take VC. OP seems to be describing small businesses. These frequently do need to raise capital to get going, and they do it through banks and the SBA. (That market entirely dwarfs traditional VC.)
This is absolutely false. Company may be at a stage where they are profitable, but lack the capital to establish themselves as undisputed market leader before competition catch up.
Banks only allow you to leverage so far, thus VC makes the most sense for truly scaling globally.
I'll skip all the other things in the article, but there are plenty truism like this to watch out.
Also it tries so hard to not be just an opinion piece, drawing for own experience, but sample size and none of the other details are never mentioned again.
The reality about raising VC versus not raising VC is never "yes or no" it's "on what terms." During the heady days of 2021, those terms were incredible for founders -- favorable multiples, lax governance, clean sheets, no loss of control. You'd have to be an idiot, or an incapable fundraiser, to not to take that deal because it was free money. And the reason why that money was free was because we were in a ZIRP environment where debt was extremely cheap as well; just not as cheap and unencumbered by equity for many companies.
Today, the situation is more varied. If the terms of the deal are not particularly founder favorable, you won't take it unless you really need it. That doesn't say anything about whether you should or should not take VC -- just that the cost of capital has changed.
To the author, all I will say is this -- be wary that a VC funded competitor doesn't look at your business model, say "that's a nice business you got there, shame if anything happened to it" and raised a ton of VC to build a competitor, out-execute you at lower margins and take a ton of territory from you, and effectively eat your lunch. There are long-term strategic costs to bootstrapping. There are costs to everything in business.
What's missing though is so critical for our time: R&D.
Yes -- it's usually wise to act like investors don't exist. But are you going to look at the world and go "oh, what we REALLY need is another SaaS company!"
The most pressing problems today require hardware, software (incl. data science), and a research component.
How to fund it, if not with investors? (They don't fund R&D anyway.) Take a dual-use approach. Bootstrap with government R&D contracts -- and in parallel, commercialize it, so that you don't get stuck in gov too much of course. And/or license technology from federal labs or agencies. E.g. go to Lawrence Livermore National Lab, or Lawrence Berkeley, or Los Alamos, or the many agencies, NASA, NSF, DoE, DoD (which is colossal) and connect with tech transfer folks. They have advanced technology sitting on shelves, waiting for capable entrepreneurs to come and pick it up. Same for many academic institutions.
This is how we get true technology companies like Qualcomm, and many, many smaller but by no means less significant companies.
Make not just "what people want" but also what is technologically needed in this partly fallen world today.
I guess some companies like Yahoo were never profitable but some people got rich buying and selling shares.
As of right now, the single greatest example in modern business history is Uber. Although they continue to trim their operating losses and it appears they may reach sustainability ($14.1b revenue with $8.5b operating loss in 2019; trimmed to a $1.8b operating loss on $31b in revenue the past four quarters). Their history of loss generation is astounding. Upwards of $30 billion in operating losses since 2009. Even in an ideal scenario it'll probably take them 10+ years after they finally reach an operating profit to turn that net positive.
I feel like the startup game for a while now has been… and the numbers are arbitrary but I don’t think the dynamic is wrong… raise about $100 million to get a total of $10m in revenue and then be worth $1b. That’s not business as we think of it.
This week, water, but the same happens over and over again in every sector: https://theconversation.com/how-thames-water-came-to-be-floo...
All of the offers have just had equity is compensation. I’ve dodged the many of bullet, but I definitely would’ve taken cold hard cash.
My advice to a lot of them was "Get funding, I'll come work on the idea". How does HN propose they do that instead?
I am a person who is a non-founder startup CTO; my company does not have any venture capital funding and we have enough capital to go to market.
However, certain institutions (especially US ones) give great discounts, insider incentives (such as early access to features or access to people) and so on to venture backed startups.
I have even been explicitly told this by AWS and Google; I am basically invisible to them except for the fact I have previously worked with a small handful of people coming from a large organisation. I have to use personal contacts which wouldn't be necessary if I was venture backed.
VC's also seem to open doors into other companies that they are invested in, which can be hugely beneficial.
Even companies that invest egregiously in everything, like Tencent, can't command such door-openings.
So, if you absolutely need some doors to open, VCs can be a good way to go, but it's very much a "selling your soul to the devil" type deal.
I think it might be an issue that people shoot themselves in the foot by going for insane valuations to get more money for less equity- I think if you’re honest about your valuation then theoretically this system can work.
Figure out what matters to you and act accordingly. And you can’t decide “money and passion” because, in my opinion, they’re at odds with each other and is usually just a self-lie.
Like always, no post has a one-size-fits all answer. Well, except for this comment. ;)
By that logic - why even have staff in the first place? Pay for a catering service, don't make the food yourself.
> This may sound obvious. Yet, at VC-backed software startups, I see software engineers spending months on building “internal tooling” without shipping an actual product.
That may or may not make sense; but more importantly - it's independent of whether or not there's VC money. In fact, VC's may want to supervise you to make sure you're only working on getting something to market.
Still, many of those companies try to become cashflow positive (especially right now). Which means they earn more than they spent, but they invest a lot in their expansion (and as soon as they stop it they could show instant profit).
Ultimately, a very small share of companies ever raise VC funding.
It's completely OK to bootstrap your project, focus on the revenue and profitability from day one. But it's also difficult, especially you're building some kind of a SaaS product in a competitive space. Not everyone can be Basecamp (which started a long time ago and built an enormous marketing operation to get "free" leads).
The entire concept of corporations and shareholder capitalism is what is wrong with human civilization. It destroys the environment and reduces harmony in society.
And mindlessly taking in capital, whether VC-funded or not, creates overhead and bloat, along with so-called "bullshit jobs." You still have the same number of productive developers, for example, as you had in the early garage startup phase. Only now, a bureaucratic machine is created around them, making things even slower and less effective than before.
Every product that transitions from a startup to a bloated corporation produces a less useful product now. Look at Slack, Figma, Notion— they are all stagnating.
We should commend companies that resist artificially expanding the scope of their products. Sometimes a product is done. I recall Antoine de Saint-Exupéry's aphorism that "perfection is finally attained not when there is no longer anything to add, but when there is no longer anything to take away".
All your examples are of single-product companies. They should expand their product portfolio instead.
And I would have kept it the same until we discussed with my co-founder about https://getfernand.com
The reason that makes us consider VC funding would be for the network and the exposure.
It would help us get in touch with other (big) founders with a broad reach and help us grow more. That would be a legitimate reason for us to get a (small) round.
(We are already profitable so we don't need the money for the money. But we need to find a VC firm that is not too manipulative in its investments. That might be the tricker part).
Just as I would not suggest to start a relationship before healing, same principle applies here: don't ask for money while a company is on low (financial) morale. But once the company is (financially) confident - all VCs and investors will come along. And that's when you can set a tone. For example by not giving up baord seats and restricting what investor can do. Simply offer them 10x return + dividents and nothing more. This capital will be enough to further boost your company.
Not all company can be a lean one, some just need external investment to gain speed to survive, some indeed has no needed for VC.
Take it when it's good for you, avoid it if you don't really need it.
Many of us come to HN for the discussion and don't even care for the articles. Threads will often digress into interesting and orthogonal tangents.
A better way to respond might be, "your comment is true in some circumstances, but the article states condition X, which makes the advice applicable."
People wondered how Google and Facebook will going to be profitable with billions of users and gaining no money from those users. There's always going to be a way to convert users into money.
Many companies are trying to grow at first and then find a way to monetize the user base.
We stupidly agreed (everyone understood the $4k per user was a crazy aberration, but it triggered thoughts of "but even if we get to just $400 per user fast enough to get acquired...), and ended up selling off that service a year and and a half or so later for a pittance after pivoting (we did the ".name" top level domain, which was not a great money maker either - was eventually sold to Verisign and I got a little unexpected cheque years after I'd left, but nowhere close to f-you money), but the point being that there were a whole lot of companies spending far more on acquiring users at that point on the basis of crazy per-user valuations than there was any realistic way of earning back.
So, yeah, you can always convert users into money, but that doesn't necessarily mean you'll be able to convert them into profit.
There are some kinds of startups so capital intensive that they came only built with massive external funding, notably hardware and biotech (and probably most deep tech).
In addition, products that face very slow sales cycles selling into enterprise or government can benefit from the time that external funding buys you.
What’s true is this: if you yourself are a builder and can run a very capital efficient software business in an industry you know well where you will not get lost in the idea maze, then you may not need VC funding.
In most cases, you will still need external capital from your savings, day job or friends/family.
According to current research, this is false.
Not coincidentally, this may be when VC money is most interested in the business. Peter Thiel quipped that he knew that Facebook was a good investment because what they needed the cash for was more computers. To use an exceptional case to make a point that is broadly applicable.
For the rare small businesses that ever get to this juncture, what I also notice is that an acquisition tends to come soon after.
Every time you take someone's money - you get a new boss.
VC can be a great deal for the company and the founder, or it can be a really bad one. That often depends on what ends up being negotiated into the term sheet that is signed by the VC and founders: what’s the pre-money valuation, what’s the liquidation preference, etc etc.
Basically, this article says “don’t buy a cheeseburger, it’s a bad deal” without having a discussion about how much the cheeseburger cost.
> "Company MagicalUnicorn has still not figured out how to perform food delivery in a profitable way. They’re going to run out of money soon. But to buy themselves more time, they sold parts of the company for 10m € to the VC investor DudeFund."
I never thought of this alternative opinion like that when reading about a startup raising more money!
I'm open to criticisms of VC models, but I don't see how this argument is going to dissuade many founders, who are the ostensible audience.
I remember when a small company I worked for was super excited to announce how much of a loan they got. I took that as a sign to clean up my resume.
A bunch of very smart bankers have spent an enormous amount of time doing due diligence on the company you work for and they think that the risk is low and repay-ability is high … but the contrarian always knows better. To them this is a sign that the end is nigh, and they rejoice in the feeling of their beautiful superiority.
But your right, I'm sure the 5 shareholders and the bankers did fine for themselves.
This is patently untrue and deceiving by the author, doubtlessly set to tell a narrative. Sure, some companies that receive VC funding are not profitable, maybe even most, but a sizable portion of the companies that receive VC funding ARE profitable. Denying this is deceiving the readers. In fact, the easiest way to receive VC funding is being profitable!
BTW that's not even entering on the fact that "profitable" is not even clearly a financial goal for large companies: on one end Amazon has been "unprofitable" for a decade or so but that's BS ofc. On the other end WeWork was unprofitable as well but was highly valued, and that was BS ofc (being highly valued).
That's it. You can never make more time for yourself. That's the lesson.
How is that not destroying the company from the founder's perspective? Is there any way to take the "don't accept VC money" relevant to anyone that's not a founder?
Your business entity will still exist if you take VC money. However, the VC now has a say in the business and its profits, while their target may not be aligned to the founders' vision, hence a wedge that splits the company from the vision. That wedge may immediately divorce (what most would call a destruction) or it may take time.
It all depends on how capital intensive your business is, and how fast you want or must grow to become how large.
As long as your shares are becoming more valuable, what's wrong with that?
If your goal is to maximize the amount of money you make from a venture, there's nothing wrong with it. There's everything right with it, that's why it's done that way.
If your goal is to produce value in the world over a long term, then there's a lot wrong with it. Optimizing for actual value delivered is disincentivized.
With how ubiqutous VC funding became in recent years, only small market niches are "viable" for non-VC funded startups. VCs will often still fund small market niches if they believe they can expand easily.
I think most people start a business to make money, not to gain friends or enlarge their families. If your objective is to gaing friends or enlarge your family, there might be better means to accomplish that than starting a business.
I take issues with some of the second order effects:
1. "Because your goal is to sell the company later, it has to grow."
You don't have to hire just because you take VC money. You should hire at the right rate.
2. "You’ll be spending much of your time on finding the next investors".
If you manage your burn properly you wouldn't have to and you should aim to be default alive. http://www.paulgraham.com/aord.html
3. "You have to focus on large markets with many (or large) customers"
Yes you shouldn't take VC money if you don't want to go big eventually.
4. "Making existing customers happy is less important than acquiring many more new customers"
You have to do both and the goal should be to make existing customers so happy that tell others which will drive growth. If you don't make a product people love you won't win in the long run anyways.
Finally I think a common mistakes for Founders is making their VC's their boss. Although I agree with some of the sentiment of there is some perverse incentives with VCs as a founder you should take ownership of the decisions that impact your company.
>3. "You have to focus on large markets with many (or large) customers" >Yes you shouldn't take VC money if you don't want to go big eventually.
One can want to grow to a point of organically understanding the problem domain before going big.
The VC and the company may differ on the short term but agree on the long term.
Which is a distraction. If the company is doing everything else suggested and the VC pounds on this issue.
I would think the ideal time frame for the use of VC funds is probably about 2 years. If the company can't make productive use of the funds and return it in 2 years the timing of the funding is bad. If funding is needed for some large capital expenditure that will depreciate over decades should have existing revenue support.
I think Wall Street has created a different industry that is a business model of its own fantasy.
anyway, the point was that it became possible to launch and run with small capital investment. But at some point you had to hire more people to do the extra coding bits.
I am wondering if LLMs are about to chnage that. The coding output is so good it could put off hiring a tranche of new devs for months or years. "create a web page to show the cities in yellow where users > 1 poker per month" is something you used to hire someone to do, and correct their work. now you are hiring OpenAI.
How much early phase work can be delegated to OpenAI if you know the right questions? Can the onboarding work through a chat bot? the initial demos? And is the next ycombinator skill set going to be "I know the right questions to ask ChatGPT to allow you to keep lean for another year?"
It's not common and it's a great place to be in (it's easier to price your company, and to bargain).
What's wrong in building to sell?
“Don’t hire employees. They will destroy your company.” They will! If you hire a bunch of people just because it sounds cool and you think it’ll magically make you rich.
The fact is, getting customers is the hardest part of any business. Unless you're capital-intensive, that VC money is going into customer acquisition.
Just think it twice before you accept this kind of responsibility.
Nothing beats the feedback loop of profitability.
I like DHH, and his and his cofounder’s opinionated approach to, well, everything. Ruby on Rails was opinionated. Their company stood for building products you charge for and never taking VC. (I think Atlassian and JetBrains toom that even further.)
Until today, we never took VC. The way I live my personal life I have never attracted gold-diggers and I guess the same thing applied here… both my largest companies are a open source platforms, each builds an alternative to Big Tech, and I even extol the virtues of Utility Tokens and Web3 smart contracts in the face of massive opposition here on HN which has mostly ever seen Shareholder Capitalism. They haven’t really understood how taking VC or going public creates a parasitic class — equity investors — who every earnings call expect profits and rents to be extracted from all sides of the market. I think a word got pioneered recently by Cory Doctorow — enshittification — to describe what happens in Shareholder Capitalism, whether a company ends up being run by a benevolent dictator (Zuck, who isolated himself from ever being removed, or Elon, who straight up bought Twitter together with a group of friendly sovereign wealth funds) or bought out (FogBugz, Reddit) or acqui-hired and turned into a money-making machine (WhatsApp, Instagram, Oculus) while its founders leave in disgust after their golden handcuffs are off.
I recommend everyone TRY to start a project funded by sales of a utility tokens, similar to FileCoin or Ether. Even better if your project already works (IPFS, Ethereum, BitTorrent) by the time you introduce the utility coin.
The reason I prefer this is the same reason funding DisneyWorld through Disney Dollars are better than Disney Inc. shares. It’s “stakeholder capitalism.” The people using the network own the network. The incentives are aligned and there is no parasitic class.
Well — here is an important caveat. Do this only if you are building a PLATFORM, like The Web, because it can benefit the world more by being permissionless and open (and not fake-open like OpenAI).
Tim Berners-Lee on why the Web stayed open and permissionless: https://m.youtube.com/watch?v=QXmEcku6Udk
1) Raise $1-2 million (ideally from multiple small investors rather than 1 big investor, many smaller investors increases your control since every investor alone is too small to make serious demands about how you should run your business)
2) use the $1-2 mill to find product market fit and (more importantly) achieve profitability (or be cash flow neutral) within 12-18 months. If you can’t reach profitability, close your doors and start another company with a new idea rather than raising a 2nd VC round (fail fast)
3) reinvest new sales into growth, and don’t raise another round of capital even if people are offering you lots of money
Some advantages:
- Fail fast. It’s better to be resource constrained in the early days so that you don’t spend many years chasing an idea “just because you can afford to” when it’s destined to fail
- It lowers the valuation where selling your company will be a profitable transaction for founders & employees. If you raise $2m you can sell for $8m and make a good return for founders/employees, whereas if you raise $20 million you’ll never be able to sell your company for less than $20m, and you now need to sell for $25m+ in order to see any meaningful as a founder
- Without huge investors, you have a lot of latitude to operate your business however you want. When you raise $20m+, you basically become an employee of your investors
- You typically retain full board control if only raising $1-2 million, this amount is low enough that the VCs probably won’t even need or want a board seat
Disadvantages:
- You’ll get less support from your investors because they invested less. The less money VCs invest, the less attention they give you. This can be a downside if you actively want VC help (which personally I find overrated, very few VCs actually add value beyond the money invested, most VCs have never actually run a company and have only watched from the sidelines)
—
TLDR: raising low single digit millions in seed money to get going in the beginning is rarely a bad idea. Raising too much money too soon (especially before reaching PMF/profitability) severely limits options for a future exit and potentially creates difficult dynamics with VCs to deal with, if you accept a lot of money from a VC most will want you to do whatever necessary for them to get their money back.
VC isn’t bad, there’s a time and place for VC. But it’s 100% a game.
You must know the rules of the game before playing.
Not all VCs operate on the "we just need 1 unicorn" model. Some VCs are a bit more conservative and would be happy with a 4-5x return on their money.
What's nice about the seed-strapped model is primarily optionality (which is good for you and also good for seed investors). Meaning you can start out with a seed-strapped mentality and flip to a "Big VC" mentality later on IF it makes sense. IMO during seed stage, most founders won't know upfront whether they would benefit from a huge capital injection or not, so IMO it's best to start with raising a small amount and then raising larger amounts later if/when you want to.
Again, VC is 100% a game. You need to know how the game is played in order to know whether you want to play it in the first place. So many founders don't understand VC/Founder dynamics, especially first time founders. Starting with a seed-strapped model gets your feet wet in the VC game without diving head first.
If the company receives 10 millions for 50% of the shares and it becomes valued at 100 millions, you can sell the other 50 % of the shares for 50 millions and let the venture capitalists deal with the business while you enjoy cocktails at the beach.
I see nothing wrong with that.
And yet, venture capitalists are making money and many founders along with them.
Ok, if your goal is to have a very small business, with just a few employees and a few customers, rule that business how you want and have fun, you can bootstrap your business and keep it small.
But I think the majority of founders would prefer a fast grow and making lots of money relatively fast, followed by starting a new business.
So they are not carefully trying to grow each company - they are adding lots of fertiliser and seeing what survives. In fact they make success harder for you by the things they force you to do. This is fine for them because one company will grow big but not fine for you unless you are that one company.
Investors are experienced business people, and they will help you to know if what you have is ready for prime time. Listen to them.
Investors are business partners: they are not loan officers or casual kickstarters.
And one more thing: the “VC” stereotype being discussed here doesn’t really exist. All investors are unique.
I've worked at bootstrapped companies, I've worked at VC funded companies. I've seen exits and I've seen deaths. I've done the solo founder thing, raised money, blah blah. What I'll tell you is, raise money if you believe there is no other way for you to achieve the goal of turning your vision into a reality without it. Seek out the expertise, the past experience, the people who will be most helpful to you. If they happen to be in venture, then there you go, but if there's a different path, take it. If you have any sort of incentive misalignment with your investors, yes it's going to destroy your company, but even more so it's going to ruin your life, your relationships, the joy you had in the thing you were building. You can either see VC funding as a game and the hot shiny thing to chase that will solve all your problems or you can be truly realistic about it and understand that it's a tool like any other to build and manifest into reality a product and vision you have for something you believe should exist.
Today due to the saturation of accelerators, venture and the abundance of capital it's basically just a lifestyle thing that you raise a round and hack on side projects like it's a job but there's also the self selecting group within there who take it really seriously. So you know when I bootstrapped for 4 years solo, raised funding and tried to build a product/team/company through COVID it was a brutal experience but one I took seriously and tried really hard not just to manifest my vision into reality but also take care of the people on that journey, be forthright with my investors, etc. It's hard man, only do it if you really get that.