Hacker News Reader

Comment by bennyg | Hacker News Reader

This is why it always feels funky to me for companies to raise money at insanely large valuations. To me it should only be enough money to cover expenses (employees, office space if necessary, business deals, salary for the founders, r&d costs) for just long enough to where you can afford those things without outside money after. For instance, if you do everything by the business plan, and your business plan says you'll be profitable by the end of the year, and that profitability is enough to cover the monthly costs plus some - then don't raise after that year. You're good, right? This is why I think it's good to sell something if you're a business, and not just give free and then bank on ads or an exit later (which then means ads get placed on your product, or it starts being for sale and some other company gets the money for those sales).

Tell me I am or am not crazy in this philosophy.

View on HN

I think you are conflating two separate, but related issues: 1) Raising large sums of money, when is it right? 2) Having a business model.

For the business model, yes, you should have one and you should put considerable thought into it. You should always test it's validity given the market at that moment in time or in the foreseeable future. That said, if you are Twitter, you are affecting fundamental changes in communication and your impact is evident on the societal level. At that level of impact, you have the luxury and duty to take time to really work out the kinks from your business model.

Now, if you are not Twitter, raising money during a bubble or looser years and using it wisely could be the difference between life or death (or layoffs) during not so good years.

Having money in the bank is powerful, whether you are putting it there or your investors are. Just be careful not to have such a high burn rate that you cannot hope to cover it with your own revenues should push come to shove.

Joel Spolsky had an excellent post on the two models, Ben and Jerry's vs Amazon, and when each is appropriate:

http://www.joelonsoftware.com/articles/fog0000000056.html

I totally agree with you :) but I'm going to play devil's advocate and tell you why I think "those" companies do it that way.

1. Getting tons of money helps the company grow/scale much faster, and gives them money to market and sell their product

2. Getting a crazy high valuation lets them get that money in #1 from investors without diluting ownership.

3. The valuation in #2 means that in case of an exit (M&A or IPO), the investors get the most returns from their investment.

So while it all obviously points at a self-created bubble, it seems to me that all the parties (founders, company, investors) want to do this to grow/exit fastest.

Often yes, but "To me it should only be enough money to cover... for just long enough to where you can afford those things without outside money after" assumes you know what is long enough. If you raise money, raise enough that you have some time/room to figure it out, and make sure.

On a related note: Raising money at insanely large valuations sounds sexy and exciting, but can lead to serious problems down the road. The expectation with any VC-backed startup is for the proverbial valuation pie to expand after each round of funding. If the pie is already spilling over the sides of the pan after the A round, then the company is almost certainly destined for a down B round unless they can grow massively. That typically smells of desperation and failure, or a rotten pie, to continue the analogy. Damn, pie sounds really good now at 1:15am.

Reply on news.ycombinator.com