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Comment by bruce511 | Hacker News Reader

>> If you start from a wrong set of axioms, you would eventually end up with a flawed conclusion.

While cash flow comes into it, I think the primary axiom which is different (between VC and bootstrap) is the definition of success.

A bootstrap company is successful if it makes a profit, and remains in business. Some growth is nice, but there are plenty of one-man / familiy businesses to show that growth is not required.

By contrast a successful VC business goes out of business early, or with (these days) a multi-billion $ exit. Like a company that exits with a $50 million OVER investment is a failure.

If you want to win huge or nothing, then VC is the path to that. As a founder if you want to retire with money in the bank, then VC is "probably" not the right choice.

Of course the optimum might be a mix- take VC money till you're 30, if it doesn't work out you still have time to build a nest-egg the old fashioned way.

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I never understood, what is to prevent a startup from raising a VC seed round, then a series A round, and then simply grow at its own pace?

Is there something in the SAFE note or whatever, that says the startup MUST fail fast, go big or go home? It can grow methodically, can't it?

The closest explanation I've ever heard is that VCs do "signaling" in future rounds... but listen, if you have a few extra million dollars to grow your startup, and you still can't become profitable after that, then something's wrong with yoru business acumen, in my opinion. Anyone with a few million dollars is able to hire people and create a profitable product. What happens if a company pivots to being profitable "too early", what can the VCs do?

That is the ideal strategy, but easier said than done. Once you’ve got that cash it’s very very hard to act like you don’t have it… especially when everybody knows you do.

Huh, I’ve always assumed it has to do with some about of “de jure” control over the board that the VC assumes when the capital is raised. If they don’t like the founders growth strategy , can’t they just throw them out? Or is that not how it works?

I guess it mus be something like this, I don't think someone would invest a rather large sum without having something like this in place

Owning a company is different to owning say a bicycle. When you go buy a bike, you go into a store, get the bike, leave behind some cash, and you're done. Not a lawyer in sight.

A company is a different animal. Lawyers, bankers, suppliers, partners, accounts and so on. Lots of paper gets signed by founders and investors regarding ownership, liabilities ("for all debts current and future") and so on. When VC capital comes into the mix things get a LOT more complicated.

you can't just "give the company to the employees" because, frankly, that would be really bad for the employees (what liabilities are you taking on?) It'd also be really bad for current founders and investors. (There's likely paper floating around linking you to the company, and that doesn't go away just 'cause you lost interest etc.)

At some point it's all just too complicated and too scary for the old owners and the new owners etc. Basically the risk (to all) just exceeds the potential value of what is there.

Then there's agreements with banks, suppliers and so on, which can on occasion be "non-transferable" so it's not even just as simple as creating a new structure and moving all the IP into that.

I'm speaking generally here - your mileage will be vary a lot depending on the exact circumstances.

During the dot com boom / crash, I worked at a profitable, VC funded startup. I don't know the legal / financial mechanism by which they did it, but our VCs shut us down six months after the crash. They wanted to put all of their attention into the other company in the portfolio that survived the crash, Yahoo, because their revenue was already far higher than ours could ever be.

We were profitable (100s of K per year on revenue of a few million a year - small potatoes). Those numbers were growing steadily, even after the crash, but they weren't going to explode. We were given 30 minutes to collect our things and leave the building, but I suspect our founders knew a day or two earlier. They made a lunch reservation for all the employees that same day so we could say goodbye to each other, but we had to pay for it ourselves. It was a very strange experience.

That makes no sense to me. They could give the company to the employees instead right? Unless they wanted the code or something.

If the company was seen as a competitors to Yahoo, it looked reasonable to shut it down. The VCs invested in several companies that had a promising direction, then shut down all but one that was growing fastest and grew biggest.

We weren't in competition with Yahoo in the marketplace. But we were competing for the VCs' focus, and that's still competition.

But I dont see how they can force the founders to shut down the company

They maybe gave them a big carrot u didnt know about

I am close friends with one of the founders. That friendship predates the company by several years. He did get a payout - I was with him when he pulled it out of his mailbox. A check for 32¢ for all the stock he had.

I don't know the details, but I believe they did it via a redemption rights clause in the investment agreement. https://venturecapitalcareers.com/blog/redemption-rights

Strangely, transferring a company can be more complicated if you care about liabilities, contracts, assets, non-tangible and otherwise.

That flavour of VCs don’t have time nor care. Maybe they had several more companies to close that day.

They sold off the assets... the most valuable asset was our data. I don't know what they were paid for the data, but I'd guess a couple of million dollars given what I know they spent to migrate it to the buyer.

Unless the founders own 100% of the company (which they don’t if they raised money), no, they can’t give it to employees.

To be clear I mean the investors! However it sounds from another comment like the investor instead got some money from it they didn't just drop it like a ball.

Your experience reminds me of how Google just cancels products, instead of figuring out some way to spin them out. Like maybe pass a product over to Google Ventures. Or set up an incubator.

eg I'm certain that Google Inbox could have been a decent modest company on its own.

I learned from reading u/patio11 that there's a market for buying and selling small businesses. Is it weird that nothing like that has popped up for VCs/investors who want to divest from their non-unicorn companies?

Google can sell projects after or while shutting them down. Make them a large enough offer, and they might bite.

IIRC, one plausible reason for not spinning out products is their dependence on Google's infra. Which, okay, ya, sure. Grant the fledgling a year long grace period to extract itself. Business units are spun out, traded like baseball cards, all the time.

Of course, I'd bet the biggest reason against is "Why bother?" Though if Google had been nurturing spinoffs all this time, maybe it could have salvaged it's brand / mindshare.

Given that Wistia, MailChimp, Patagonia, and GitHub, among others did the seed/series A, profitability thing you suggest, there are other mechanics at play here. Specifically, as the article raises, profitability as in net revenue isn't everything.

edit: swapped Basecamp for Wistia, because Basecamp did not take VC money.

Basecamp took no VC money

(Except for Bezos Expeditions many years into it)

you're right! edited.

It depends on the product. The longer you have to push for the profit the hogher the reward sonce everything easy is already done. Things that are left to do have higher and hogher barrier of entry and depending on the business it will take a lot more time and up front capital to have a chance at profitability.

VCs with board seats vs you are trying to run your company with all its intricacies while VCs are often managing you as yet-another-in-some-tranche.

>I never understood, what is to prevent a startup from raising a VC seed round, then a series A round, and then simply grow at its own pace? Is there something in the SAFE note or whatever,

You're looking for something in legal paperwork with Terms & Covenants that for some reason is unstated in public discussions.

The real underlying reason your idea of "just take the VCs money and do the opposite of what the investors want" isn't common is that it goes against the founders' personal integrity of doing business honestly. This means the founders not lying to VCs when they make presentations with the reasons for raising capital. I.e. the founders forecast TAM Total Addressable Market for revenue, forecast costs for servers and employees, explain their ambitions for growth, etc. The type of founders trying to get in front of VCs to convince them to fund their startup are supposed to be a self-selected set entrepreneurs who inherently want to grow fast and don't need VCs telling them to do so. If honest business dealing is the premise, then there's no need to "trick" the VCs into wiring them millions into the startup's bank account and then tell them "oops, I lied in my presentations and now that I have your money, I just want to grow slow at my own pace."

Your question can also be modified to ask about a VC fund's intentions: "Why can't a VC fund raise money from LP (Limited Partners) and then just live off the guaranteed 2% management fee instead of taking risky investments and possibly losing money?" -- What stops VCs from doing that is the venture capitalist's personal integrity when asking the LP for money.

With that said, there can be a difference in legal mechanisms between an angel/seed round with no board seat taken by a VC -vs- Series A with a VC on the board. At later stages, the board can outvote the founders and/or fire them.

It's interesting how, in this view, founders and VCs compartmentalize. What you call "honest business dealing" between founders and investors usually implies quite dishonest dealing with customers of the startup. The established pattern of growing fast and aiming for an exit already necessitates wringing in growth through dishonest means and, in the best case of a successful exit, eventually leaving the users/customers out to dry while the founders ride off into the sunset with full bank accounts.

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