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Comment by derefr | Hacker News Reader

> I have great admiration for the entrepreneurs I have worked with who have slogged it out. There is very little upside for them in this scenario.

These two sentences seem contradictory. Why admire an entrepreneurial Don Quixote?

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It's admirable to make tough choices and try to return as much as possible to your investors even when the prospects of a big payday are slim; and to keep trying to change the world and achieve your vision even if it eludes you for a long time; and to stand by your customers and employees who believe in that vision.

Less admirable to jump ship from a going concern because there's no rocket ship payday and let the VC and everyone else try to salvage as much as possible.

Think about something like Next... was a struggle and had to be scaled back... Steve Jobs could have just let it go and moved on to the next big thing.

A VC makes their money on the few times they win, and it more than makes up for all the companies that lose completey. Just barely making back their investment is no better for them than returning nothing at all. (In fact, they could be putting the money into market securities with risk equal to your company's likelihood of return, so you have to give them [that same risk multiplier] * [their original investment] or they lose money, even if you give a "positive return.")

A VC would much rather give you 1mil five times and have you kill four of those companies and make a 100x return on the fifth one. Sitting around forever on the first one trying to eek out a 2x return means you never build the fifth one, and that's a much lower aggregate return.

That's exactly why. Because they're acting out of responsibility to the company and the VCs.

No, I just mean--why admire someone who is doing something "responsible" with negative marginal utility? Wouldn't it be better to kill the company, start a "better" one with higher likelihood of "blowing up", take investment from the same VCs, 5x their investment this time, and redeem oneself that way?

As an entrepreneur, growing a "runt" company is basically wasting your talent, and that of anyone else you have working for you. Your own skillset, and all the company's other assets, are locked away doing something that's not making anyone--especially you!--nearly as much money as you could if you tossed the current company out and rolled the dice again. If a larger company was responsible for the project you were managing, they'd shut it down and move you to something else where you could make them more money (see: Google Reader.)

In economic theory, this is why layoffs and recessions are good: they kill companies that were just getting by, and release the human capital "stored up" there to move to newer, brighter ventures.

I mean, it's fine if all you really wanted was a lifestyle business--but lifestyle businesses don't take investment.

One of the better predictors of who is likely to succeed as an entrepreneur is determination. Closely related is truly believing in your idea. If you're the kind of person who easily gives up so that you can try and roll the dice again, then you clearly lack those traits and would be a bad bet.

So VCs learn to respect people who are determined, and truly believe in what they are doing. The entrepreneurs who stick it out are therefore demonstrating that they are people the VCs should respect, even though the relationship is not working out well for anyone. On top of that working together through shared hardships tend to create bonds - and these are people who work together with the VCs through shared hardships.

Moving on to the second half of the equation, what about the VC? It may be tempting to quickly abandon all of your failures. But doing so means making worse returns than you could otherwise. Furthermore developing a reputation for abandoning too easily hurts your reputation as a VC, and therefore hurts your ability to find good future deals. So a VC is stuck with their bad decisions as well as their good.

And a final fact for you. The bigger the investment that you take, the harder it becomes to win big. There are many reasons for this. One is that too much money makes people complacent. Another is that there are more potential markets out there that are worth $50 million than are worth $250 million, so it is more likely that someone you invested $2 million at a $10 million valuation can earn 5x returns than someone you invested $10 million at a $50 million valuation can. Therefore VCs are on the lookout for opportunities that are big enough to be worth their time, but want to invest as little as they can in each one.

So, the scenario goes something like this: you've been in business for a few years. You've got let's say 20 employees. And you're profitable! Barely! It looks like with some hard work and a couple more years, you can get the company to about 2x the valuation at its last round. From there who knows.

You'd just fire everyone, walk away, and hope to hit bigger next time? Your investors are unlikely to agree that this is the best way to use your talents...

If you do a startup because you think it has high marginal utility, and you won't keep going when the going gets tough, you're doing it for the wrong reason, and you should save everyone a lot of trouble by not doing it in the first place.

Maybe there's an inferential distance problem here--as far as I'm aware, the most ethical thing to do, is to make tons and tons of money, in a way that isn't that bad for the world (selling people virtual goods in an addictive casual game will do as an example), and then donate a large sum of it to efficient charities. The role model for this is Bill Gates--he ran Microsoft (a company that some revile, but which isn't that bad in any global sense) until it paid him out a ton of money, and then he is using that money to prevent malaria and so forth.

By comparison, creating a company that will both make money and do good in the world is not nearly as efficient for actually doing good in the world.