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Comment by willsmith72 | Hacker News Reader

It totally depends on the investors. In the given example of raising at 3m and selling at 10, a lot of investors would call that a failure and push instead to raise more for a bigger eventual exit.

It sucks, but the failure rate of a startup is so high that it's understandable when VCs need their successes to make it big.

On top of that, for a founder that ~5m exit may be life-changing. For the investor, probably not.

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They can "push" for whatever they want. I think this is the trap a lot of founders find themselves in.

I know someone that did a couple rounds (2 plus a bridge) and pretty much just stopped listening to the VCs after that. They essentially pivoted it into a lifestyle business with no dreams of IPO or exit. They pay themselves (and a small handful of employees) a nice salary. The company is minimally profitable and very stable. The VCs are never going to see a dime of return. I think its kinda hilarious.

The VCs won't see a return, but what's the upside for the founder there? Paying yourself a "nice salary" is not a win considering how hard it is to get a company off the ground.

Who are you to judge what someone picks for their own life?

It's fine if they're happy with it.

I'm just saying that this would be just as much a "failure" as it would be for their investors.

I know I never would have quit my well-paid, enjoyable job to start a company if this was the outcome.

to you it would be a failure. to many a sustainable, profitable small business is the dream

It’s fine if they’re happy with it, but you then go on to again state that there’s some sort of objective failure here. There’s not. If you think that there is, you’re living in a bubble.

I put "failure" in quotes because they absolutely did fail in what they originally set out to do. Nobody raises venture capital to build a "minimally profitable and very stable" business.

Thinking about it like the old joke that "if you want to be a Millionaire, start with a billion dollars and launch a new airline."

Even if the outcome is desirable, it can be a failure if you started off with a different/bigger outcome in mind.

> Nobody raises venture capital to build a "minimally profitable and very stable" business.

You're not understanding the article. The point is to implicitly want to run a lifestyle business from the onset, it's just that you don't tell the investors that explicitly. So you do set out to raise (one round of) VC just to have a cash cushion and then continue on as if you're bootstrapoed. From the VCs' perspective, you've failed, while from the founder's perspective, you've succeeded. See the top comment from the user cj for clarification. In other words, it's a "hack" around the traditional thinking of VCs.

Don't patronize me, your comment would have been better without the asshole remark.

In fact, it's you who struggles with reading comprehension. All of the examples from the article are massively successful businesses, not lifestyle businesses.

An article about planning to build a small lifestyle business wouldn't focus on examples like Klaviyo or Zapier.

It's not about lowering ambitions or setting out to build a small business. It's about being more capital efficient on the path to building a big business. In fact, that's the entire point of the article: how you can potentially get to a huge outcome without losing control across many rounds of funding. Nothing in the article is tailored towards small lifestyle businesses.

The decision point isn't when you raise the first round, it's when you decide not to raise a second one. You will have already spent a lot of time trying to build a big company and realized that isn't going to happen. Now it's time to figure out whether to convert your previously-ambitious startup into a stable, small company. Depending on the sector and business model, this may mean you don't even have to work that much. If you're selling SaaS and have low churn, you could hypothetically take it very easy and just pay yourself. VCs would not like this, and if you try to raise for a future company, funders would be wary for sure.

Sometimes scaling to the market size even means smaller.

I don't know about that. Paying yourself a nice salary, having a stable job doing something you probably (at least at one point) find interesting, and having lots of autonomy seems like a pretty nice gig.

Raising a couple of rounds can reliably render solo founders financially independent.

If you can easily cash in for $5MM+ and a steady salary while maintaining full control of a startup with loads of cash in the bank, would you risk it all for much more, or ride it out for as long as you can in comfort?

Many founders would choose the latter.

Honestly, it's a pretty great outcome. Maybe not if you aspire to be a billionaire, but that thinking is just a trap for most people.

In his case, he's now CEO of a stable small business. The whole company is WFH permanently and he probably only honestly works for 20-ish hours a week and doesn't have to answer to anyone other than the customers that use his product who are generally pretty happy. Of course there is the occasional fire to put out, but WAAAY less stress and work than a big corp for similar pay. Plus a ton more freedom and control. Not to mention, cashing out (eventually) via acquisition is still entirely possible.

Seen this several times in my career. It's not all VC hockey stick growth, many companies are just profitable, they have 10-20 employees and the owner lives a great life style. Generally the pay is pretty good and they focus on customers like any other company.

It doesn't have to be billion or bust, only once ego is involved does it become billions or bust.

Right, but it sort of needs to be hockey stick growth for the math to work out at the VC firm. So, like, fine, you can glide into a steady state of comfortably running a company over the long term; that's great! You should do it if you can! But you can't go pitch that to investors, since you're basically pitching a loss for them.

It seems others are suggesting you simply take their money and ignore all their demands (so long as you aren't violating any contract).

I'm not saying you're really facing any legal liability here but the strategy you're proposing here involves defrauding your investors. They're going to make these demands explicit before you close the deal!

What demands are you thinking? That you raise future rounds? That has not been my experience.

I don't see this as a strategy so much as just a natural consequence of the system. Most companies "fail" from a VC perspective; some percentage of those are still profitable and keep the founders/employees engaged. Everyone wanted the hockey stick but they got something else. It's not fraud.

Right. It's fine/expected if the "failure" comes in this category (though many investors would encourage you to simply repay them and move onto something with more growth potential).

The unethical thing would be pitching a unicorn plan when the actual strategy is building something much smaller.

It is if you assure your investors you plan to take risks to pursue hockey stick growth, but instead you intend to keep the money in the bank and putter along.

> I'm not saying you're really facing any legal liability

Why would I?

> but the strategy you're proposing here

I am re-framing the words of others. Didn't propose anything.

> involves defrauding your investors.

I don't have any investors.

In my example, the company was in no way planning this to be the outcome. They were shooting for a big acquisition or even IPO by capturing a sizable % of a $400b market. At some point it became clear this was not going to happen, but a path to profitability became clear so they followed it. From a fiduciary responsibility perspective this is a perfectly fine choice to make, but it is the last thing the VCs want as it results in zero ROI for them.

Right. Everybody who works in startups has the experience of shooting for the moon and getting as far as, like, Tulsa. No harm in that! Tulsa's a big city. It's only a problem if Tulsa is where your sights were set before you pull the trigger, which is the feels I get from people talking about this as a company formation strategy. No VC is going to wire you funds on a pitch that's about making high 7s, low 8s tops if it ever succeeds at all.

But that's the point isn't it? If you only raise one round, like the $3m, a round is only like ~15% of the company so they don't have the power to dictate whether you attempt a bigger exit or not. I also don't understand why this "third way" isn't more common because you get the initial big boost of being able to hire a team, but you still retain 70-85% of the company instead of repeated dilutions where founders end up with 5-10%. I know I know, 5% of $1b is more than 85% of $50m but it usually seems like you become worse off and just another job you don't have control of where someone else is putting their thumbs on the scale and you can get ejected from.

I think the point is it may be hard to get investors to ever give you $3m if you don't have the 100x exit in mind.

The counterpoint is that it's impossible for the seed investor to read minds or force a majority-owning founder to take more funding.

Liquidation preferences make a difference to the math here. For example, a 3x liquidation preference would guarantee the investors the first $9 million of proceeds from any exit in the $3 million investment example.

Liquidation preferences rarely kick in until later rounds. Most seed rounds are just 1x.

I know some late stage startups with multiple rounds where _all_ are 1x. Most likely ZIRP but still.

1x IS a liquidation preference. I very, very rarely see in excess of a 1x liquidation preference, regardless of the round.

Right, but you more or less have to lie to raise money for that strategy.

I think that distinction firmly lies in what founders decide to tell themselves.

Imagine, founders _lying_ in their pitch decks.

Founders are wishful in their pitch decks, but that's not the same thing as misrepresenting their intentions.

Really? You might've been in these investor meetings. AFAIK, founders are telling investors about the big vision, we'll raise money right now and wishfully become very big. In what way are investors stipulating, "ok we'll fund your seed/A but only so that you can hit certain benchmarks that you will definitely be raising a series B in a year or two." Is it that direct?

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