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Comment by salomonk_mur | Hacker News Reader

Building a particular type of company - a tech startup.

I'd argue that we need to apply this to companies too. Stop building startups (which start losing money and may never ever make a profit in the process of scaling) and start creating companies (which make a profit ASAP and may never scale).

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"Tech startups" that make enough money to be interesting [1], but do not have the property of being a winner-take-all market, are the truly magical unicorns of software. If you have one, you should covet it and guard it viciously, because otherwise someone with more money is coming to eat your lunch [2][3].

OP wasn't talking about this kind of thing, of course. The phenomenon of hobby projects being "startups" has always been a weird fit.

[1] I define this at least as "supports more than one person's salary in perpetuity," but would probably add some things like margin requirements if I thought about it more. Obviously you can exist as a consultant charging by the hour, and that's not what either of us is talking about.

[2] The only examples of this I've personally ever seen have been dominant players in niche markets with high bars to entry. So they weren't hyper-growth unicorns, but weren't really your definition of "companies", either. You don't get to these kinds of businesses by aiming to be one - you get there by trying for something bigger and topping out the market.

[3] Consider the phenomenon of the small vet clinic, which is rapidly ceasing to exist. Private equity has been steadily hoovering up these relatively high-margin, low-regulation businesses for the same economic reasons that software companies get big. If you try to create a vet clinic, you will be assimilated or crushed by a bigger player with a brand and the ability to undercut your prices.

Is the vet clinic thing a lasting phenomenon? Are independent vet clinics not economically viable or is there just a VC/PE market imbalance where capital is overbidding for a business that doesn't really have a great moat. I would be perfectly willing to believe that if you knock on the door of a perfectly viable business and offer them more than it's worth as well as a salaried position at the new business, (almost) no one says no.

I think the cash merry go round will stop eventually because the moat, in as much as there is one, is the vet themselves, not the business. If my vet leaves and opens a new practice, I will follow the person. Vet services don't really scale either, you can hit efficiencies with admin, but I'm sure a software company is willing to eat the PE firm's lunch there. With software, costs are heavily weighted to the fixed side. With vets, seeing twice the number of dogs takes twice the number of vet hours, vet tech hours, etc.

Vet clinics have a moat (exactly as you're implying): the customer relationship. That relationship, plus optimization on the fixed costs, gives an incentive to acquire the practice, maintain the staff as employees, and collect the operating margin. It's not like you really care if your favored pet doctor works for Brand A or Brand B, and -- let's be honest -- you're price sensitive. No matter what you say, there's a limit to how much you'll pay in order to follow your favorite vet, because veterinary services are a commodity, and your pet doesn't know the difference. So there's price pressure as well.

You're right that vet clinics aren't like software in the variable cost structure, but that just makes the software business more attractive for consolidation, not less. Bigger players will have the customer relationship, lower fixed costs, and high margins, with little threat of competition.

Also increasingly discoverability. New customers must be able to find you. And how online advertising and SEO is going established player which has resources to waste will beat you.

Anecdotally, all of my friends across multiple friend groups found their vets via word of mouth. The only vet that I’ve visited that wasn’t word of mouth was an emergency vet (googled), although I later discovered that office was the one my vet recommended for after hours anyway.

In my area, the non corporate vets are turning new customers away and recommending other offices.

As you’ve pointed out, people are price sensitive. One of the substantiated gripes of PE owned vets (and many other things) is that they are more expensive, not cheaper. Price pressure is working against your argument here, not for it.

That is what happens in the later stages of monopoly. In any case, my point wasn't about vet clinics, it was about the business financial properties that lead to monopoly. Even a business model as mundane as the local veterinary practice is undergoing industry-wide consolidation.

Any profitable software business is vastly more interesting for consolidation than a vet practice.

Right, but the nature of veterinary practice don’t lend themselves to monopoly, nor is the excess cash even close to artificially achieving that. This is just what you see in an irrational market as well. All this stops when PE won’t overbid on practices, or when the vet pay is low enough that it makes sense to open your own practice. Many forms of software do favor monopoly. Rolling up all of the gov tech startups has network effects in addition to being an industry that operates on large fixed costs and low variable costs.

Vets aren’t like that, one vet has a limit to the number of dogs they can see in a day. I think it is mostly PE trying to mimic their success with doctors offices (which have massive network effects via insurance), and assuming that it will work the same.

It is very hard to have any monopoly power in an industry where there is no barrier to entry for your most valuable employees, and where, as you pointed out, customers are sensitive to price.

> I think the cash merry go round will stop eventually because the moat, in as much as there is one, is the vet themselves, not the business.

The moat is the land. It doesn't even matter if it self-owned or a lease.

The vet just can't walk away and open a new practice nearby.

Why not?

It’s loosely regulated and people will follow their vet just as they’d follow their hairdresser, no?

I’ve watched multiple vets do exactly that. I’ve seen vets in strip malls, converted houses, purpose built buildings, etc.

> I define this at least as "supports more than one person's salary in perpetuity,"

Only if you ignore the costs of risk.

Let's say you hear that 90% of businesses are financial failures. What is the profit hurdle you need to exceed before you could declare success?

Zombie businesses (one person just earning a living) are common and often the income doesn't cover the risk premium (e.g. of one year of opportunity cost wages/ladder working as an employee). If you're doing a business, then in theory only the financial returns matter. There are non-financial returns (pride, control, yadda yadda) but those apply more to hobbies than businesses (not that I think anything is wrong with starting a hobby business if you're honest with yourself about motivations).

I think the VC rule of thumb is that one investment needs to do better than 30x return over 10 years to cover the losses on the rest of the portfolio. Therefore as an individual unless you get over 30x the return (versus lost wages) then you are under water? i.e. if you quit a $50k/yr job for a year, then only when you're earning $50k/yr AND have gained $1.5 million more then have you broke even.

There's probably a middle ground here. Making a profit ASAP is only really possible if you're selling expertise, such as consulting. I really like the emerging term, "seed strapping" which aims to address this conundrum in the startup world: raise just enough to build the first iteration, then act like a bootstrapped business.

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