if you have a product thats selling so well, is growing organically, and is already build...why would you ever consider outside funding?
As silly as it is, taking VC money gives you that in a way that is much harder to achieve with actual tangible success. You might be killing it with your product but carefully explaining your company metrics to someone over dinner is seldom more impactful than saying you took $10M from Andreeson-Horrowitz.
This is not entirely unreasonable as most people realise they are unable to judge the success or otherwise of early stage companies (even VCs struggle). Telling someone you were invested in by a great VC tells them that someone who knows their stuff things you're great. It's a marquee endorsement.
If you'd asked me whether I wanted the status I'd have always said yes. At the same time though I never acknowledged it in my life-calculations. I always wondered why I gambled on a big outcome when I knew a smaller outcome would (financially speaking) make me very, very happy. I doubt there are many people who can point to the happiness bump from the second $30M.
Acknowledging that recognition was one of my goals made it all of a sudden easier to rationalise decisions that, while optimal for my investors were actually totally sub-optimal for my personal financial utility. One of those decisions may well be having investors in the first place.
http://www.autoblog.com/2010/09/07/pagani-zonda-hh-commissio...
@jsprinkles: do you have a blog or website? Really enjoyed your xip.io comments (http://news.ycombinator.com/item?id=4082017) and would like to keep up with your adventures. On a related note, it would be nice if HN had RSS feeds for specific user submissions and comments.
Thank you for the kind words.
I think entrepreneurs should always maintain a tunnel-visioned focus on hard results and performance, if you absolutely kill it and dominate your market, everything else will follow. Fame, recognition, and status are for tech scenesters and bloggers - not startup founders.
Startups are the ultimate test of your inner scorecard - http://therealfoxyroxy.wordpress.com/2009/07/11/an-inner-sco...
The journey really is the reward.
You're paying out quite a bit of your company, in most cases, and getting some capital in return. But what you're also buying into with your equity is a large network of alumni and connections.
In addition, just like how some (silly, IMO) companies hire Ivy League grads because they've passed someone else's rigorous selection process, getting funded by an A-list VC proves to some that your company has chops. So for many founders, trading equity for VC investment is also a hedge for the future - a glowing resume item useful for driving business or acquisition at this or the next venture.
Personally, I think the more early-stage-successful companies stand on their own merit rather than buying into the "old boy's" VC club, the better. I think more weight has been placed on VC selection than is reasonable of late, both in M+A and the tech media. The more successful companies buck this trend, the more likely non-VC companies are to get considered for acquisition down the road, and the more likely said companies are to be able to drum up press for an IPO, as well.
Obviously a $10MM investment does not equate to a $10MM deposit in the founder's personal bank account, but at what point is the founder no longer expected to live on Ramen?
(Not claiming that this particular company has a lot of profits, the question is more meant to be general. lets take rovio as an example maybe)
To take this way past reasonable, consider Instagram. If they could convince someone to give them 250 Million for 25% of their company instead of selling the entire company, that would be huge FU money and they could keep running their company, while evening maintaining a majority stake. I could see that as a very tempting option.
Also, it allows the founders to diversify a bit. Consider that these people are multi-millionaires on paper, you wouldn't generally recommend they put all of their money into one investment, even if it is their own company.
What, do you expect to grow organically from 10k users one year to 40k, then 160k, then 640k, and so on, hoping the market stays EXACTLY THE SAME FOR THE NEXT 8 YEARS? (Oh and you can't spend anything on development because you're rolling all the gross profit into reaching new customers.)
Or, you know, do you want to speed up the process and try to get as much of the six hundred million this year as you can, while the iron is hot - and stay ahead of your competition, who will be vc-backed?
In my example, you're actually asking the VC to speculate on what you say is the size of the market. Sure you can grow from 10k to 30k easily. The question is the size of the market you're trying to get them to invest into.
Whereas, at 8 million, the question is, do you really have a model that you've proven? Or, have you been spending more on getting the customers than you can ever hope to get from them? (wihout mentioning any names!)
If you're doing a good job being competitive and ensuring high customer satisfaction, it's hard to see how you can quickly grow organically from 8m to a size of market of 700m (say), if that is the size of your market, in just a couple of years.
I mean, you have to be providing these customers something, and at a competitive rate. that has to cost you money. no business just explodes without any marketing or other costs to a size of 700m (say). This is where VC money comes in.
in the concrete example of an 8million user organization, it would be impressive of them to get to 9m, 11m, 12.1m, 13.1m year-over-year all organically. It would be impressive of them to, profitably, get to 20m from 8m in 10 years, all organically.
If, however, the size of the market is more like 200m, this is a good place for VC money instead of that 10-year plan!! Especially if competition might end up better-funded.
(also see my cousin comment here - http://news.ycombinator.com/item?id=4085660)
" and all told you need to spend $5 on a new customer, and make $10 from a customer in a year"
who is making this demand? if you're lean enough you should be able to keep growing at a more organic rate.
I think it's fair to say you must spend something on customer acquisition and infrastructure to service them: it's impossible to spend $50,000, get to 10k customers, and not spend another nickel but three months later you have two hundred million of them. There are a lot of variable costs and acquisition costs, even though they get factored into your total expenditure.
I mean, what fixed costs does a 3-person startup actually have? 3 times 160 hours @ $0.00 per hour, i.e. the founders' time, sure, and then what? If you get to two hundred million customers, every item in your budget is much greater. I can't think of a single service that can get those customers for free, and on a paying-for-conversions rate a few bucks seemed realistic (rounded to factor in all your variable costs broken down to customers).
I think though that pretty much any numbers you pick you will see that if a startup is 'taking off' it needs more money to address the money left on the table (from the rest of its proven, addressable market) if they want to do it fast. (Whiile the iron is hot, while they have momentum and maybe press coverage, while they're young and hip and new, while market conditions don't change due to unforeseen external changes, and finally before well-funded competition arrives on the scene, including from big companies who will enter if the growth holds out. Big companies don't just enter any market that has 10k customers, they might not even do market research yet, which you already have. Etc etc etc.)
What startup can you think of in which if you bootstrap to $100,000 in revenue from 10k customers, and let's say miraculously have the complete $100,000 to spend, you can magically address the whole 600million person market your 10k customers are in by the end of the following year?
I think that's what I meant by the word 'all told' - factor in every cost into those 10k customers. (Except your fixed costs of 3 x 160 hours @ $0, of course! And a $10 domain name.)