There's a noteworthy pattern I've observed over the last 24 months.
I founded a design subscription service for startups [1]. Many founders are increasingly tapping into subscription based services, whether that’s for design, development, sales etc. to help them reach a certain level of scalability.
Historically we’d have a harder time getting clients, but for many startups having these plug & play teams makes the startup much more lean. You don’t have to provide a gazillion employee benefits or other cash draining things.
its nuts how so many startups just burn through their VC money buying things that do not directly impact their product and business.
A startup should do nothing except build something people love. To do so find more economic and effecient ways to get to product market fit asap. You can do all of the fun stuff later.
> its nuts how so many startups just burn through their VC money buying things that do not directly impact their product and business.
An old mentor of mine taught me this, and my personal observations over the years have backed him up on it.
Having too much money is a greater danger to your venture than having too little money. If you have too much, you're just going to spend it on things that not only don't matter, but are likely to incur greater costs down the road.
I'm a believer that startups should be cash hungry (but not starved). It helps keep the focus.
> If you have too much, you're just going to spend it on things that not only don't matter
Co-founder and I recently went through a round of VC interviews with at least 5-6 VCs.
Question I posed to him is "If we got $2.5 million tomorrow, what would you do differently than what you're doing today?" My point to him is that there's really nothing that we could do with $2.5m that we couldn't do today at a smaller scale/longer timeline.
It would be nice for other reasons like having a higher profile, accelerate some of our roadmap, etc.
Both of us walked away from the experience a little jaded, TBH. He's close to a circle of folks in YC and was perplexed by some of the folks that made the last batch.
Wouldn't a good answer be "run more experiments in parallel to find product/market fit faster?"
I'm not saying it's easy (or possible) in all cases, but an extra $2.5 million before you have product-market fit doesn't sound like something that is impossible to utilize in an effective manner.
One of my coworker used to work in hydrocarbons exploration. He swears that they multiplied their finding rate by twenty after dividing their budget by ten. It seems what you say stays true at any size.
It is fine to use the cloud for your initial landing zone project. But once you are n-weeks in, you really should have 1/2 or full rack at a colo with enough bandwidth and storage to backup your on two servers.
At the same time, I'd probably keep each project as I went. From day-0 you should have some form of cloud presence in all the providers, at least a root of trust landing zone you can work from to build out infra should you need to.
I don't think this is the right approach. The entire point of startups is that they are just starting up. A startup a few weeks in can run on a Raspberry Pi, but in three years they could need half a rack, or a couple dozen racks. Buying expensive hardware is pretty pointless when you already know that it will most likely be inadequate in a few months.
Not to mention that you need quite a lot of money and engineering resources to get it all up and running. And it's never one half rack because you also need to have a secondary site for disaster recovery and backup...
Running your own hardware makes sense once your cloud bill starts hitting five figures and your hardware needs have become predictable. Until you reach that point, you can save yourself a lot of headaches by just using managed cloud resources.
> From day-0 you should have some form of cloud presence in all the providers, at least a root of trust landing zone you can work from to build out infra should you need to.
I am not saying to not use Cloud. Use Cloud. But have your own hardware.
Frankly a many companies wouldn't need something like that for a while, if ever. If you're really doing compute intensive stuff sure, otherwise for your average webapp what would be the advantage of rolling your own infra?
A webapp isn't a company. If you have a company, you should have at least half a rack of hardware in a colo. Being 100% on the cloud is a grave mistake.
I guess Netflix isn't a company then, since they use AWS after all. You might think AWS isn't a good deal but it's hyperbolic to call companies that are on cloud services as not being real companies.
> A webapp isn't a company. If you have a company, you should have at least half a rack of hardware in a colo.
is the quote I was replying to. The parent doesn't mention startups, they say the word company so of course I'd have taken it as all companies as a whole. There is no hard and fast rule that every company must have "half a rack of hardware in a colo" or otherwise they're not a "real company." This is basically the No True Scotsman fallacy in action.
I mean basically a company just has to make money, and today, dealing with a colo and all is probably just going to get in the way of that for the vast majority of companies in the early stages. Making the claim that relying on cloud is a big mistake is a pretty bold claim as well
If you're trying to scale, fast, into the global stage "half a rack of colo" isn't going to cut it. You're going to need presence everywhere and that can be impossible to deploy fast.
If you're targeting say a single market, say North America, with fewer larger clients you're likely to be able to manage it from two DCs and can realistically manage it yourself.
It's just "right solution for the right situation". Cloud is absolutely not always the right solution.
I'm trying to come up with a charitable read of this that isn't no true Scotsmaning the concept of a corporation but frankly am coming up short. I might be missing some part of your argument here - why do you believe that dedicating resources (cost and time/expertise) to having your own hardware is always the right decision for a company with a software/internet based product?
Yes at some level, every company should have at least one rack in a colo and I think that point is very soon after it starts, months.
I didn't say only, and I did say you should have footprint in every cloud for when you need to scale or deploy in a region.
If there was an "App Template" for a company, I think have your own hardware in a place you control is super important. Cloud providers literally don't give a shit about you. It is about agency.
Where your rack is is basically not relevant. For most startups, AWS is great, even if it's more cost of colo, it's the opportunity cost and dynamism it offers. Use AWS until the savings of not doing so will not affect your ability to grow, or costs are not dreadful. Moving away from AWS is a cost optimization, it depends on the kind of business you have.
But more broadly, the value is IP, essentially know-how and lock-in with customers, relationships etc..
Not really, once you are up and running even then the economics of cloud are usually better than self host. Instance time is 10x more costly on AWS than self host, but, it's still very cheap.
Things like 'egress data' can be a problem, but for the most part, even if AWS is more expensive than self hoste - the 'total cost of ownership' is much cheaper in the cloud - usually.
Where a company puts the bulk of its resources, that is up to them for whatever reasons they have. I am not arguing against that. What I am arguing for is that you every company needs to have >1u running in a colo, with hardware that is largely theirs. Every company I have ever worked would be in the >=1rack range.
I will only address TC comments with supporting numbers. Just math, no boogeymen.
I hate to say it but it isn't though. In 2023 you'll probably want
Automated rollouts and rollbacks,
Storage orchestration,
Secret and configuration management,
Service discovery and load balancing,
Self-healing,
Horizontal scaling,
Automatic bin packing (on vms)
k8's gives you this if you want BUT you don't even have to use those things.
> Similar story for cloud services, we've seen startups burn through 100K in AWS credits before they even launch a product.
I've seen and experienced this too many times already. And AWS knows how to play that game better than startups. By the time credits run out the startup is so locked in to AWS there is no way out and then the big invoices start coming in.
No, but if you burn through cash on, say, Jira and a ton of plugins and a guy to admin it, developing your own UI toolkit, going full Web Scale DevOps Kubernetes madness from day one or building a designer microconcrete-with-gold-inlay ballpit-slash-lunch bar, you can monetise something and still run out of cash.
Oh, totally true. But its also possible to build a startup where you get customers contacting you that they love your product daily and its almost impossible to monetize.
Because most of these startup ideas are rubbish and won't be viable in the marketplace. That's the real reason they can't raise money. Really, if the people with the startup put their own money into the product or took out loans in their own name then it would show it's serious. But most startups should just die.
If you need to raise money to stay afloat, you're not going to be successful (except in a very minority of cases like Airbnb and Uber but your startup will most likely not be at that level). Your startup should be profitable on a unit economic level and you should be using VC to scale that model, not to prop up a failing business.
Often VC is also for signaling to the market for valuation, as the Retool founder says:
> We actually didn't need the money (we're cashflow-positive). In fact, we haven't touched the money from our Series B (in 2020) nor our Series C (in 2021). But raising money is helpful because a) it gets prospective customers interested in the product (oh, X company raised, let me check out what their product does), b) it gets prospective employees interested, c) it allows people externally to see that the company is making progress rapidly (I wish we could post revenue metrics here, but I... think that's a bad idea?), and d) we sold very little in this round (1.4%, so there is minimal dilution to employees), for those advantages.
> TBH, fundraising is kind of like charades: it's a way to signal you are doing well, without telling people your private company metrics. I wish we never needed to fundraise, and could just focus on building great products and working with customers instead. :)
I worked at a place where they took VC backed rounds even though they didn’t need a cent to get access to the VC networks’ businesses for fat client business and keen supplier discounts. They seem to run like a kind of clan structure, and give you access if they get done if the upside in equity it seems…
You also have industries where they pull the ladder up behind them.
A few successful companies, they encourage or allow the creation of laws that govern behavior in this space, at the cost of much larger overheads and barriers to entry.
The only way to break into those markets is with a war chest. You aren't going to start by selling a handmade product to a bunch of locals because one phone call and you'll be shut down.
> If you need to raise money to stay afloat, you're not going to be successful (except in a very minority of cases like Airbnb and Uber but your startup will most likely not be at that level).
That's ridiculous. Some products need lots of development before they are ready to make money. You can (and probably should) still do smaller iterations to check market fit, but it's entirely possible to create products that take a lot of investment before they are able to make sense on a unit economic level.
Hell, ChatGPT, one of the most successful products in history at this stage, was the result of many years of work and research.
What you're saying isn't even just true of innovative startups - if I'm starting a restaurant, I'll often need lots of investment and multiple years to make back that investment before the restaurant makes sense, if it ever does.
I don't get how raising all of this money doesn't cause significant dilution. And doesn't it also subject your company to increasing terms and conditions that might be antithetical or orthogonal to your interests/mission? It just seems like this is CEO speak and the reality is probably more dicey..
> we sold very little in this round (1.4%, so there is minimal dilution to employees)
If they sell very little, then they're not as subject to dilution as well as control (since the shares they'd sell are also voting shares). It's the same way Facebook was able to grow while keeping Zuckerberg as the sole majority voting power on the board, he sold very little of the actual company while pumping the valuation.
I have a lot of thoughts on this, so please bear with me.
I think it's interesting that the model we use to evaluate ideas and fund companies is so terrible.
Starting a company is always dangerous and risky and that's extremely sad. Why is starting a business so hard in 2023?
I think we need an "explicit demand signal" and I think it can be technological one and a semantic one. Kickstarter is the nearest to this I can think of but kickstarter is only a primitive marketplace - for example, I don't see services listed. But I want to see vector semantic models used to capture the meaning of business processes and identify weaknesses and match problems to imaginary products and synthesise products. Think automatic market understanding and differentiation. It would be indexed per organisation and across society.
There's a carrying capacity for every market. An average city can only support a certain number of coffee shops or X of kind of venue. So we have competition. A lot of people grinding their gears competing needlessly. It's such a waste.
One of my ideas was "attention camping", which is waiting for something to match your idea of something you find interesting or want to pay attention to. If I had a commitment to buy from a large number of people, then my business would be a lot safer, except I'm an unknown quantity.
It is not possible to systemize the founding and funding of startups based on disruptive innovations. This can only work from human insight and there will never be explicit demand signals for innovations that don't exist yet. And there's nothing sad about it. It's totally fine for some companies to fail and investors to lose money.
Maybe if building a startup wasn't such a risky endeavor we wouldn't need venture capital and a lot more people could do work they feel is meaningful and are passionate about.
Lots of people bootstrap just fine to some tens of thousands of dollars with no VC, ie those on https://IndieHackers.com. It's not really risky if you don't quit your job until you're making enough money to quit. Then if you want to grow faster, you can take VC, which you're much more likely to be offered and receive due to having derisked the business both for yourself and also the VC, since you're making money. This isn't strictly necessary either since you can grow more slowly and still become big, like Mailchimp did for over 20 years before selling for $12 billion.
One interesting implication of AI is the potential decapitalizing of business. I.e, businesses will become more modular and not require things like as much dedicated admin to scale. This will not increase the likelihood of product market fit, (as many point out, that is impossible to model given supply constraints and inability to understand demand side revealed preference without some MVP). - however this may decreased the amount of capital needing to be placed at risk, allow fast failing etc.
I am working on this problem exactly. The way I describe it is that I am making unmet market needs transparent.
It involves modelling jobs to be done, importance and satisfaction at scale and then measuring areas that represent bumps in the market.
I think to appreciate this being possible one must understand that people are capable of describing their own wants, even if they can't imagine a novel solution that could satisfy them.
samsquire, I see you come up with a lot of ideas. How do you decide which ones to work on? Do you also enjoy building/executing? How important is this problem/idea to you?
I was involved in a Business Process Modelling research and I am sure the SAP world models business processes pretty intricately.
I like your idea of modelling the "work" that needs to be done.
I think it's partly an allocation problem, farming has automated food production that we have a lot of people that need to cover their costs. Recruitment is expensive and tedious and there's a lot of unsolved problems there.
Internet advertisements guarantees attention to something for a cost, I am sure businesses would like to guarantee capital and runway.
I think your use of the word "wants" is the key word here. If pushed to it, people could probably try work out what they want and someone else could try fulfill what they truly want. Software requirements are not always great, but there is a want behind every product or marketplace.
Allocating resources to ideas seems to be something that could transform the world. Identifying the good, profitable ideas is the hard part.
One of my ideas is a "Want app" which is that I can insert a demand for a doctor in my local area, or want for a fast food restaurant in this area, or I want a job that uses X, Y, Z technologies.
One of my ideas is "wantsfiles" [1] which is a machine readable file you put at the root of your domain and and then people automatically match orders with you based on what you want, as a form of automated business. For example, you could put an order on your wantsfile that you will buy "milk" at this price or you want someone to host "mirror.tgz" for you and you'll give them $X a month for it. There is also the idea of a generic purpose "wants app" where you specify what you want. [2] I wrote about that idea here [3]. It's a machine automatable order matching system.
This problem is very important to me. I spend my time on programming language implementation technical projects but I am also thinking of an idea that shall make the world better for everyone and sharing it openly. If you want to talk about ideas, I'll listen.
We already have a shortage of physicians. Stating that there is market demand for another doctor in a particular area will accomplish nothing. This is not a free market where supply and prices can adjust to meet demand. If you actually want to do something productive in that field then find a way to fund more residency slots at teaching hospitals.
Restauranteurs and franchisors are already quite sophisticated when it comes to location decisions and real estate operations. The notion that they are somehow unaware of latent demand for fast food in a particular area is quite naive.
Milk buyers can already trade commodities futures to signal their willingness to buy at a particular price.
Data is valuable. There is a market for the data of revealed demand Google searches, Google keywords, instagram tags, TikTok and web histories.
If it could be used to actually give people what they want, wouldn't that guarantee revenue? (That's the goal of all my ideas)
My idea regarding the milk was automatic fulfilment and automatability of it, not via a public commodities exchange for 100000 litres but through an app, that a regular person could use to automate their groceries.
Uber, Uber Eats, Just Eat, Door Dash, Amazon are all separate incompatible applications.
The idea is for people to register their wants and get what they want (through others deciding differently). Who doesn't want what they want?
Either people need to have more money, or costs need to come down. Generally, this comes from figuring out ways to do something that is already being done, but in a more efficient, cheaper way.
I'm definitely open to more models for funding, but it didn't seem like Kickstarter really worked even for what should have been its sweet spot. Definitely tell me if I'm wrong, but the fact that they had to put out this blog post suggested that the dynamics of its usage never really fit:
Crowdinvesting is a form of Crowdfunding in Germany that is very successful. The only problem is that the ECSP license is onerous enough that nobody bothers to apply for it. This means that the crowdinvesting platforms merely act as sales people for conditionally repayable loans. These loans are considered equity and therefore pay higher interest like 8% which in turn makes this form of financing less attractive.
I mean specialized venture funds exist, which is somewhat close to what you are describing.
I think the way you understand startup formation is wrong though. Most startups are not formed as ways to directly address existing desires or pain points. Most startups are, fundamentally, iterations on existing business models trying to unseat their predecessors through more subtle innovations, riding technology trends, or simply a large war-chest of capital and talent.
This isn't a completely accurate view either. You could cite things like biotech which have their own weird dynamics when it comes to startups. Fundamentally, however, I don't think the "market for ideas to solve problems" model works when thinking about startups. Many people have made some variant of this point, and probably argued for other things being the critical factor (e.g "investing in a founder is the most import important thing"). Ultimately, I don't believe there is one single way to think about how to fund companies that will be successful startups. Mostly, I think investors rely on intuition, which is often wrong, but perhaps better than anything else.
Explicit demand signal? The only way you can do that today is through gift cards. In principle the company could issue gift cards at a discount and if they were tradeable, then "investors" into the gift cards would hold onto them until the gift cards are worth more than they originally paid for.
There are also Genussrechte in Germany which are commonly used to pay interest not as money but as gift cards which can only be used at the company you invested in. This is done to fund local bakeries where the future customers essentially pay upfront for their consumption in exchange for receiving a return.
How would you stop people from gaming the system? At some point, don't you need an actual human trained in business/markets to make a decision. I wouldn't want capital allocated by something like the YouTube algo or the Facebook feed algo.
Honestly, I don't think it's any harder now than it has been before (in my adult life, anyway). It's always been very hard. Same with running a business post-startup.
Besides the reasons people have already stated on why recent start-ups failed, it seems to me that the world recently has at the same time become more complex AND also simpler: the complexity that each individual company/employee needs to handle has increased, while everyone seems to be engaging in the same types of complexity (every company uses a Slack, GSuite, driving online ads somehow, etc).
The economy is tight, requirements from customers are high and there are fewer niches. Any worthwhile product in these conditions (at least in tech) needs a lot of baking time, which actually only a company with pre-existing cash-flow can afford.
Unless VC actually develop some patience on returns, I can't see much innovation happening in the next few years.
> the complexity that each individual company/employee needs to handle has increased
Also regulation has massively increased. There are tons of laws you might accidentally break as an early startup without even knowing it, and there are tons of laws that restrict entry into the marketplace through a high legal compliance burden.
Imagine trying to create Facebook today. With 3 employees and a few hundred users, what's your anti-CSAM strategy? What are the laws about who is responsible if some ends up on your platform, and how you need to handle it? Ask your $500 per hour lawyer. I'll wait.
Imagine trying to create Paypal today. Oh, wait, you need something like a million or more dollars to even operate.
And what are the consequences if something goes wrong? Does the executive team go to prison? Usually doesn't happen to the well-connected, but what if you're not well-connected?
Personally, I wish the laws were rational, and scaled according to the size of a business, rather than relying on the whims of prosecutorial discretion.
Random theory: if the law creates many risks even for people who are trying to be moral, risk-averse people will be less likely to start businesses. More businesses will then be started by people who disregard risk, and also selects for a disproportionate number of people with serious psychological issues (although still a small percentage, but higher than the general population). What kind of filter do you have, when people starting certain businesses need to be comfortable rolling the dice on a 1% or 5% chance of going to prison for no intentional reason, and a chance at a pile of cash if that doesn't happen? It sounds like it selects for the same psychology as criminals.
> launch on unregulated market first
There are fewer and fewer of those all the time, and the ones that remain are in smaller and smaller, less profitable niches. So that technically opportunities exist, but as a practical matter fewer and fewer people are able to ascend the success ladder.
> And what are the consequences if something goes wrong?
If some rule is broken it is not a big deal if there is no harm to anyone. Nobody is 100% compliant with all regulations, but the companies which approach this matter pragmatically, following the spirit rather than the letter of the law, usually do not have problems. E.g. if you are health-tech startup, you must avoid any health-related risks and prevent data leaks, but you may not serve GDPR requests perfectly. At worst regulator will warn you and then you will invest your resources in fixing the issue. And preventing data leaks is also easier for an obscure early stage startup: you simply get less attention from malicious actors and will likely encounter automated attacks rather than being specifically targeted.
> At worst regulator will warn you and then you will invest your resources in fixing the issue.
But there's no guarantee of this right? According to the law, if they wanted to destroy your company over some tiny accidental rule breakage, they could. It just depends on if you're on someone's list or they're having a bad day. Unpredictable application of the law is not great.
Facebook ignored compliance at the time, but the way they mitigated the risks was by targeting a smaller, exclusive market (smaller colleges in the US) that's less risky compliance-wise (no minors for instance, domestic market).
It seems to me like PayPal specifically would be much easier to create today. Financial stuff was heavily regulated back then too but companies you’d need to integrate with would be a lot easier to integrate with today, I think. Also I think the PayPal guys had quite a bit of money to work with?
I’m not trying to nitpick you, I would just like you to point out if my understanding is wrong!
I think you're onto it... its an AR fart app, lets you put on a $3500 Apple iHead or whatever its called, open the app and point to someone and hear fart noises and see gas clouds appear around them. You get more points if you can hold your laughter in with the cameras watching your face. Eye roll to post your score on social media with clips of all the victims. Multi-player: you and a friend walk around in public wearing your iHead playing together trying to get each other to laugh.
A spatial game where you can drop virtual turds on sidewalks and spread your virtual feces on walls. These are persistent and shared, so you can see the art that other people have wrought.
Call me cynical, but I didn't find this recent wave of startups to be innovative. It was defined by a systemic deployment of playbook tactics, copying what worked elsewhere. Nothing new, just trying to capture industries/value. Perhaps with the deterioration of venture capital infrastructure we will see more innovation – that is wholly new solutions and paradigms.
I also think it is worth pointing out that historically (not recently) a lot of startups began not in order to make money but to provide real value to humans/society. I like to remind people that it is easier to make money when you first build something that people value than to build something that people value once you've made money.
I think a lot of startups were just trying to be 'rent-seekers'. Placing themselves between customer and product/service suppliers and trying to make money by providing a small service. Or sometimes just trying to grab all the inventory and auction it off at higher prices.
This may work when interest rates are close to zero, but when they creep up, it becomes easier to make money holding t-bills.
I agree with the first half. Having a plan is not really what matters, you can have a bad plan (and arguably, if the competition is for funding, there will be a lot of polished, bad plans). We're finding out who actually has a good idea/insight.
I think that was a function of the VC model of "throw 15 baseballs, hope one gets hit out of the park".
Hit it out of the park is usually meant somehow jamming yourself into a pre-existing economic relationship (taxis, food delivery, apartment rentals) and extracting rents.
Hopefully high interest rates will cause those "startups" to die a grisly death.
> I think a lot of startups were just trying to be 'rent-seekers'. Placing themselves between customer and product/service suppliers and trying to make money by providing a small service. Or sometimes just trying to grab all the inventory and auction it off at higher prices.
Being around the VC funding ecosystem, I can confidently say you’re not cynical. Some of the most frivolous startups got their funding in the zero interest rate era because no one was doing their due diligence. Sky high unicorn valuations allowed VCs to basically just fund everything. You didn’t have to have much beyond a pitch with made up projections and execution plan to get money, especially if you knew someone in the VC circles.
But now that most of those bubbles have burst, VCs are back doing what they were always supposed to do: due diligence. You’d be hard pressed to find funding unless you have a name or have a business that’s already doing great. And on the flip side, startups themselves are noticing this. My buddy’s startup has been approached by a bunch of different VCs encouraging him to pitch for funding and he’s refused. He’s realized that he’s already making money and has a solid business execution. He’s not willing to give up the gains for some extra cash. He’s taking the slow growth route.
I think we saw this in some Hollywood studios - they find a movie that worked and treat it as a 'playbook' to just rinse-and-repeat it in all variations.
Eventually, audiences just become fatigued and the 'business creatives' lose to some other genuinely creative theme that takes hold. Then they return to exploit it :-(
"Hello moneybags, I have this idea for an app, it's super niche and wastes almost as much time as doing the task without the app except we get to charge them for it! Our costs are really cheap because we mostly pay in equity and we're exploiting the generosity of other startups to keep our 3rd party service costs down!" <- feels like 70%~ of ideas.
By managing risks, do you mean "move fast and break things" or "get a way too small team for way too big project" or "put the demo in production" and "skip the documentation, we'll do it later" because first mover advantage?
Adyen was a B2B fintech startup that made profits as it hit scaleup, and hasn’t looked back. Wise is a B2C play, listed too and seems sustainably profitable. I think the people behind both of these are connected, so my bet is that there are clusters of well-run, second-time-around (or more) founders building very solid businesses in all sorts of sectors.
Tech companies that have gone public since Facebook. Name a few besides AirBnb that are consistently GAAP profitable not by their own made up metrics like Uber
If you're profitable at a unit economics level, and your CaC stays relativly stable as you scale marketing efforts, it's fairly logical to sink your would be profits into that CaC and associated costs ( i.e. you might have engineering costs to scale a platform ).
Now obviously if you're bootstrapped, you're managing cashflow, and you might keep a bit for a rainy day, but if you have several years runway of someone elses money, you want to grow the entity. You don't give away equity to end up with less money. You need to grow the pie.
Of course, there's still a lot of faulty logic and bs. CEOs be like, I'll just get rid of dev and be profitable. Alright mate.
And startups and money losing recently public companies make the same usually false argument. They are false for three reasons.
1. The lifetime value is calculated out to far.
2. Earlier cohorts are usually less costly to acquire and have a higher lifetime value as the true fans. They are going to be your most loyal customers. Look at what happen to all of the prepackaged food delivery companies and whatever the company that was delivering trunks of clothes.
3. They never expected interest rates to rise and easy money to disappear.
An example would be that if Apple thought it would be just as easy to acquire the second million customers of its headset as it would be to acquire the first million at $3800.
So I was CTO of a bootrapped startup (10s of millions ARR ) growing approx 70% YOY, likely a unicorn but never discussed on HN.
What I would say is the argument isn't false, but the assumptions often are.
You will for example have diminishing returns on the CaC. Spending more will make the number go up usually.
This explains why you wouldn't just spend it all year 1 and refinance.
Finance is indeed more expensive, and black swan events can cause mass churn, this why pulling out costs might sound good on paper, but in reality could potentially screw yourself over.
Indeed the payback of the customer needs to be short enough to validate profit. The longer it is, the more likely one of those black swan events will distrupt lifetime.
But I suspect there's more businesses out there doing this that are discussed here.
Startups are a special kind of company I’d say. I’m kinda curious myself… I guess openai, tho technically I doubt they’re profitable. I’m probably just forgetting a ton of obvious ones!
Very true but I think it should be considered successful nonetheless, in a way that the rest of the “”pre-profit”” startups aren’t. I mean, being the final spark for an event the size of the Industrial Revolution is pretty good! But I’m probably just biased.
The metric for success for a for profit company is profit anyone can sell dollar bills for 95 cents. OpenAI is particularly a bad example since they have negative marginal costs. Which means the bigger they get, the more money they lose.
> The whole point of a business is to capture value full stop.
That is certainly one school of thought. But businesses that are about something more than just "capturing value "are more likely to actually become valuable. Creating value is almost always better than just capturing value.
Yes, when I've heard businesspeople say "capturing value", they've meant it in a manner analogous to extracting a natural resource. The value is already there, and they want to capitalize on it. That's not necessarily a bad thing.
But I think it's better to create value where none existed before.
As a long-time serial entrepreneur who has done startups in four different decades, some of which were quite successful: my opinion is that the large quantities of relatively easy money of the previous cycle wasn't generally a good thing.
Personally, I believe that for -most- software idea cases if I won't bootstrap it, then I don't believe in it enough, and/or can't get others to believe in it enough. I've been on the VC side and the boot side, spending your own money just hits different.
I'm exactly like this. I would never take VC (or similar) money for a couple of reasons, but this is the primary one.
If the idea is great enough for me to devote my life to, it's great enough to be able to do it without involving VCs.
That said, there are certain types of ventures (that I don't happen to be interested in) that require enormous sums of initial investment. That's where VCs can be genuinely useful.
But it isn't how most companies that take VC money are.
I think the issue is, for a lot of these people they don't have enough capital to bootstrap it.
Let's look at a large number of YC launches we see on here. Often they're 1-2 years after they joined YC. They took 1-2 years to get to launch with a team of employees. Sure, they had customers before the launch but really at that point it was still lets see what works and experiement and change ideas and whatnot.
I'm currently trying to bootstrap a source-available SaaS Subscription and Billing software. I've taken 3-months to work on the MVP by myself and still not got a MVP ready. (Almost there, working on final stuff like documentation and whatnot) Not many people can commit to that long before seeing if the idea is going anywhere. There are quite a few people who can't afford to work full time on their bootstrap idea for 3-6 months without an income.
When I'm starting a business, I view it as an exercise in delayed gratification. I'm not expecting to make any money in the early stages. Instead, I'm expecting to make up for it in what I make in the later stages. It's an investment in that sense.
Seeing growth, and seeing the company (not necessarily me personally) developing an income are important things through the whole deal, from the beginning through maturity.
Absolutely - when me and my team spend $50k to experiment (which is chump change for a funded company) and it fails, that hurts. It's coming out of my pockets. And because of that, I remember it and my team remembers it.
But it's also allowed us to focus solely on the problems our customers actually have and will spend money for. It forces service/product-market fit before attempts to scale.
We are a services business so it is different than SaaS, but same principles apply.
There are benefits to bootstrap and benefits to funded. I feel as if bootstrapping first is a great way to learn the lessons needed to be successful when you do something funded later on.
I agree. I also want to add that this isn't me saying VC doesn't have a role, it's more that I view VC as more useful when it comes to a proven product that must now scale workforce/infra.
> software idea cases if I won't bootstrap it, then I don't believe in it enough, and/or can't get others to believe in it enough.
On the flip side, if you can't convince someone whose job it is to give out money to give you money, do you feel confident you can convince someone else to pay for your product? For me, getting VC buy in is proof that someone else thinks that there is money in the idea.
> if you can't convince someone whose job it is to give out money to give you money, do you feel confident you can convince someone else to pay for your product?
You should be able to bootstrap to at least several thousand dollars in MRR, which derisks the business enough for VCs to fund you. If you're pitching purely on an idea, it's no surprise VCs won't fund that, they're taking more risk.
Bootstrapping refers to not taking outside capital; you can bootstrap and grow simultaneously and indeed, that's what you should be trying to do anyway.
Is the problem really that there's no money, or that what money exists is busy chasing only a few product areas (like third-tier AI startups)? AFAICT funding for anything that wasn't the VCs' obsession du jour has been hard to find for quite a while. If it's also drying up for "target area" startups that have both questionable vision and questionable leadership (and many are worse in both dimensions) then that almost seems like a good thing.
LPs are the real decision-makers on capital allocation and almost all of them are pension funds. Pension funds have almost zero chance of staying solvent unless they can drive above market returns.
Right now that can be done on interest rates alone.
Zero interest rates meant they had to deploy capital, so many VCs were able to raise.
But most VCs will never get a chance to raise another fund.
Like you pointed out: don’t be fooled by all the info out there about how VCs’ think. Watch what they do.
Like everyone, when it’s not clear how to deliver an expected outcome they flock to “what everyone else is doing.”
Today that’s generative AI. It’s a lottery, a few VCs will get lucky.
But the volume of future capital available to raise has collapsed & there’s no indication it will recover.
Worse, incumbents have captured almost all the advantage of AI’s current capabilities.
So VCs are going to return to funding startups in their social network, for the “hot topic” they must have an allocation in to stay relevant, and put all their eggs in the safest (perceived) basket.
Most will be out of a job as soon when the money runs out.
> LPs are the real decision-makers on capital allocation
is this true? afaik they hand over their money and trust the partners to allocate
> and almost all of them are pension funds.
pension funds can go to taxpayers for a bailout and CalPERs has done so before
this is why it is not a great idea for pension funds to play in venture capital...it isn't fair for taxpayers who have to pay out the losses to keep the pensions running
While in theory LPs are “hands off,” in reality you don’t get to raise another fund if you aren’t giving them annual updates that they like. It’s similar to the level of influence VCs have on startups - much more impactful than you’d expect till you are sitting on a board as a founder & realizing you are constantly having to lobby for the direction you are taking the company in.
There’s not a taxpayer-base on earth that can bailout all of their pensions. That’s some clever financial engineering & debt transfer to money printing, but as we are all now aware those global limits have been hit.
I'd been working as a founding engineer with a startup for the past couple of years. It was my first experience actually trying to raise money, and I had no idea how hard it actually was. I hear stories about other companies with literally nothing more than a mockup get millions of dollars, and we had a full tech stack and couldn't get more than $20K. Crazy.
Business is still a personality game. Some people just have that magnetism and can talk millions out of investors.
People like Trump or Steve Jobs are special like that.
Early on, I learned that there were broadly two types of people. "Inside people" and "outside people". Inside people are the ones who are at their best developing the product, outside people are at their best marketing the product, getting investor interest, etc.
It's very rare that a single person can perform well in both roles.
For this reason, I would never start a business by myself. At a minimum, I need a partner who can be the outside person. Another significant thing founders need to do is to be really honest about the limits of their abilities and to find other ways of doing the things they're bad at.
The crux of my comment is that I genuinely don't understand why we weren't able to secure funding. I mention the mockups only to point out that they didn't have a working product, whereas we did/do.
If I had to guess, I'd say they were able to "tell the money story" better than we were. That is, being able to say to investors "you give us [x] amount of money and we're shooting for [y] amount of revenue in [z] number of years". I felt like we had a compelling pitch, but for some reason investors just never committed.
I mean, the value probably wasn't in its potential to make pizza. Any more than Boston Dynamics' value is in its potential to make robot dogs play fetch. Pre-IPO valuation is almost always about what else you could hypothetically pivot into doing, given the tech (and competencies) you've built up.
One step further: startups know this, and VCs know that startups know this. So when you see a startup "making a pizza robot", they're probably not actually "making a pizza robot." That "business model" is really just an early proof-of-concept milestone to aim for while building up tech (and competencies) that can address much more interesting markets. And if you're a VC, they'll tell you as much in their pitch deck. Though they won't ever mention that in any of their marketing. Since, what if the pizza-robot thing does take off? May as well keep it around as a vertical for their tech, in that case.
Standard VC play, right? Especially if you are trying to pump some grift, blow it up to the paper $1B valuation so WSJ will write a breathless article on the new unicorn and fake it until they exit it.
Oh wow, that's rich. The Zume co-founder talking about their robot making terrible pizzas "with love" is truly peak Silicon Valley hype. Chef's kiss. But she seems to have failed upward with VC funding for a new food startup so it's all good I guess.
It’s myopic to reduce the startup extinction event to a loss of VC.
The point of VC is that some businesses (like LinkedIn, Google, Apple, etc.) require multiple rounds of capital to get to a sustainable business model.
But just stating that isn’t instructive.
What’s more important, esp. for founders, is why that is the case:
It’s because providing a better way isn’t a sustainable business practice.
Markets lock in the familiar vs. the effective.
So you quite literally have to create new markets to deliver new & better ways of creating value.
There are many ways to fail at that with honest effort, including due to factors outside your control.
Beloved products, that deliver real value & better social impact, die all the time.
I know it can seem from the outside that whipping up hype & raising money is a founder’s job.
But very few founders have or ever will win on such a narrow approach.
It’s smart to raise on the latest trend because it maximizes capital. But it won’t save you from the fact that buyer’s are not rational - B2B or otherwise - and markets reward incubants.
I would argue it's primarily psychological, rather than financial (interest rates) or economic (value creation).
IPOs, like shitcoins, have become simple pyramid schemes. Eventually, the mass bagholders get wise to as what's going on, and demand for such schemes falter. In a decade or so, amnesia will allow for the cycle to repeat.
The market was frothy and some bad ideas that should have failed earlier didn't because of cheap money that has dried up. Startups that can make it right now are more likely to succeed long term. This is the natural cycle that weeds out the weak companies.
It's been my experience that starting a company is best done when the market looks unfavorable to starting a company. It's counterintuitive, but works for me.
I've also experienced this (not in terms of starting companies tho). I've had most success doing things that were generally considered 'a bad idea', whereas when I've followed common sense I've found stiff competition, crowded spaces, noisy environments (in many different senses), etc.
Juicero raised $118.5m, the other shoe was bound to drop.
I don't think the current landscape of VC funds actually knows how to spot value even if it sat on their face and called them daddy. They're throwing darts at a board, basically.
The cold fact is that nobody is good at this. Predicting the future is inherently a fool's game.
VCs mitigate this by dealing in multiple ventures at the same time. Aggregate movements are easier to predict and, as VCs themselves often state, it doesn't matter if 90% of their investments don't pan out, because the 10% that do more than make up for the loss.
I founded a design subscription service for startups [1]. Many founders are increasingly tapping into subscription based services, whether that’s for design, development, sales etc. to help them reach a certain level of scalability.
Historically we’d have a harder time getting clients, but for many startups having these plug & play teams makes the startup much more lean. You don’t have to provide a gazillion employee benefits or other cash draining things.
its nuts how so many startups just burn through their VC money buying things that do not directly impact their product and business.
A startup should do nothing except build something people love. To do so find more economic and effecient ways to get to product market fit asap. You can do all of the fun stuff later.
[1] http://fairpixels.pro
An old mentor of mine taught me this, and my personal observations over the years have backed him up on it.
Having too much money is a greater danger to your venture than having too little money. If you have too much, you're just going to spend it on things that not only don't matter, but are likely to incur greater costs down the road.
I'm a believer that startups should be cash hungry (but not starved). It helps keep the focus.
Co-founder and I recently went through a round of VC interviews with at least 5-6 VCs.
Question I posed to him is "If we got $2.5 million tomorrow, what would you do differently than what you're doing today?" My point to him is that there's really nothing that we could do with $2.5m that we couldn't do today at a smaller scale/longer timeline.
It would be nice for other reasons like having a higher profile, accelerate some of our roadmap, etc.
Both of us walked away from the experience a little jaded, TBH. He's close to a circle of folks in YC and was perplexed by some of the folks that made the last batch.
I'm not saying it's easy (or possible) in all cases, but an extra $2.5 million before you have product-market fit doesn't sound like something that is impossible to utilize in an effective manner.
End goal is the same: grow the userbase, get that revenue flowing.
I'd start with DO or Hetzner, https://www.hetzner.com/cloud
And then move to own hardware in a colo.
https://www.supermicro.com/en/products/aplus
At the same time, I'd probably keep each project as I went. From day-0 you should have some form of cloud presence in all the providers, at least a root of trust landing zone you can work from to build out infra should you need to.
Not to mention that you need quite a lot of money and engineering resources to get it all up and running. And it's never one half rack because you also need to have a secondary site for disaster recovery and backup...
Running your own hardware makes sense once your cloud bill starts hitting five figures and your hardware needs have become predictable. Until you reach that point, you can save yourself a lot of headaches by just using managed cloud resources.
I am not saying to not use Cloud. Use Cloud. But have your own hardware.
is the quote I was replying to. The parent doesn't mention startups, they say the word company so of course I'd have taken it as all companies as a whole. There is no hard and fast rule that every company must have "half a rack of hardware in a colo" or otherwise they're not a "real company." This is basically the No True Scotsman fallacy in action.
If you're trying to scale, fast, into the global stage "half a rack of colo" isn't going to cut it. You're going to need presence everywhere and that can be impossible to deploy fast.
If you're targeting say a single market, say North America, with fewer larger clients you're likely to be able to manage it from two DCs and can realistically manage it yourself.
It's just "right solution for the right situation". Cloud is absolutely not always the right solution.
I didn't say only, and I did say you should have footprint in every cloud for when you need to scale or deploy in a region.
If there was an "App Template" for a company, I think have your own hardware in a place you control is super important. Cloud providers literally don't give a shit about you. It is about agency.
But more broadly, the value is IP, essentially know-how and lock-in with customers, relationships etc..
Things like 'egress data' can be a problem, but for the most part, even if AWS is more expensive than self hoste - the 'total cost of ownership' is much cheaper in the cloud - usually.
I will only address TC comments with supporting numbers. Just math, no boogeymen.
Automated rollouts and rollbacks, Storage orchestration, Secret and configuration management, Service discovery and load balancing, Self-healing, Horizontal scaling, Automatic bin packing (on vms)
k8's gives you this if you want BUT you don't even have to use those things.
I've seen and experienced this too many times already. And AWS knows how to play that game better than startups. By the time credits run out the startup is so locked in to AWS there is no way out and then the big invoices start coming in.
Even if you build something people love, that doesn't necessarily mean you can monetize it.
Often VC is also for signaling to the market for valuation, as the Retool founder says:
> We actually didn't need the money (we're cashflow-positive). In fact, we haven't touched the money from our Series B (in 2020) nor our Series C (in 2021). But raising money is helpful because a) it gets prospective customers interested in the product (oh, X company raised, let me check out what their product does), b) it gets prospective employees interested, c) it allows people externally to see that the company is making progress rapidly (I wish we could post revenue metrics here, but I... think that's a bad idea?), and d) we sold very little in this round (1.4%, so there is minimal dilution to employees), for those advantages.
> TBH, fundraising is kind of like charades: it's a way to signal you are doing well, without telling people your private company metrics. I wish we never needed to fundraise, and could just focus on building great products and working with customers instead. :)
https://news.ycombinator.com/item?id=32264454#32264969
A few successful companies, they encourage or allow the creation of laws that govern behavior in this space, at the cost of much larger overheads and barriers to entry.
The only way to break into those markets is with a war chest. You aren't going to start by selling a handmade product to a bunch of locals because one phone call and you'll be shut down.
Interesting. I tend to think that every round of financing that happens indicates the opposite of that.
That's ridiculous. Some products need lots of development before they are ready to make money. You can (and probably should) still do smaller iterations to check market fit, but it's entirely possible to create products that take a lot of investment before they are able to make sense on a unit economic level.
Hell, ChatGPT, one of the most successful products in history at this stage, was the result of many years of work and research.
What you're saying isn't even just true of innovative startups - if I'm starting a restaurant, I'll often need lots of investment and multiple years to make back that investment before the restaurant makes sense, if it ever does.
ChatGPT has a lot of users. Has it made a lot of money?
If they sell very little, then they're not as subject to dilution as well as control (since the shares they'd sell are also voting shares). It's the same way Facebook was able to grow while keeping Zuckerberg as the sole majority voting power on the board, he sold very little of the actual company while pumping the valuation.
I think it's interesting that the model we use to evaluate ideas and fund companies is so terrible.
Starting a company is always dangerous and risky and that's extremely sad. Why is starting a business so hard in 2023?
I think we need an "explicit demand signal" and I think it can be technological one and a semantic one. Kickstarter is the nearest to this I can think of but kickstarter is only a primitive marketplace - for example, I don't see services listed. But I want to see vector semantic models used to capture the meaning of business processes and identify weaknesses and match problems to imaginary products and synthesise products. Think automatic market understanding and differentiation. It would be indexed per organisation and across society.
There's a carrying capacity for every market. An average city can only support a certain number of coffee shops or X of kind of venue. So we have competition. A lot of people grinding their gears competing needlessly. It's such a waste.
One of my ideas was "attention camping", which is waiting for something to match your idea of something you find interesting or want to pay attention to. If I had a commitment to buy from a large number of people, then my business would be a lot safer, except I'm an unknown quantity.
Lots of people can do work that isn't part of a startup. I'm fairly certain startup employment of e.g. SEs is nowhere near general employment of same.
It involves modelling jobs to be done, importance and satisfaction at scale and then measuring areas that represent bumps in the market.
I think to appreciate this being possible one must understand that people are capable of describing their own wants, even if they can't imagine a novel solution that could satisfy them.
samsquire, I see you come up with a lot of ideas. How do you decide which ones to work on? Do you also enjoy building/executing? How important is this problem/idea to you?
I was involved in a Business Process Modelling research and I am sure the SAP world models business processes pretty intricately.
I like your idea of modelling the "work" that needs to be done.
I think it's partly an allocation problem, farming has automated food production that we have a lot of people that need to cover their costs. Recruitment is expensive and tedious and there's a lot of unsolved problems there.
Internet advertisements guarantees attention to something for a cost, I am sure businesses would like to guarantee capital and runway.
I think your use of the word "wants" is the key word here. If pushed to it, people could probably try work out what they want and someone else could try fulfill what they truly want. Software requirements are not always great, but there is a want behind every product or marketplace.
Allocating resources to ideas seems to be something that could transform the world. Identifying the good, profitable ideas is the hard part.
One of my ideas is a "Want app" which is that I can insert a demand for a doctor in my local area, or want for a fast food restaurant in this area, or I want a job that uses X, Y, Z technologies.
One of my ideas is "wantsfiles" [1] which is a machine readable file you put at the root of your domain and and then people automatically match orders with you based on what you want, as a form of automated business. For example, you could put an order on your wantsfile that you will buy "milk" at this price or you want someone to host "mirror.tgz" for you and you'll give them $X a month for it. There is also the idea of a generic purpose "wants app" where you specify what you want. [2] I wrote about that idea here [3]. It's a machine automatable order matching system.
This problem is very important to me. I spend my time on programming language implementation technical projects but I am also thinking of an idea that shall make the world better for everyone and sharing it openly. If you want to talk about ideas, I'll listen.
[1]: https://www.halfbakery.com/idea/Wantsfiles#1598878006
[2]: https://www.halfbakery.com/idea/Wants_20app#1578226067
[3]: https://github.com/samsquire/ideas2#5-open-demand-mapping-an...
Restauranteurs and franchisors are already quite sophisticated when it comes to location decisions and real estate operations. The notion that they are somehow unaware of latent demand for fast food in a particular area is quite naive.
Milk buyers can already trade commodities futures to signal their willingness to buy at a particular price.
If it could be used to actually give people what they want, wouldn't that guarantee revenue? (That's the goal of all my ideas)
My idea regarding the milk was automatic fulfilment and automatability of it, not via a public commodities exchange for 100000 litres but through an app, that a regular person could use to automate their groceries.
Uber, Uber Eats, Just Eat, Door Dash, Amazon are all separate incompatible applications.
The idea is for people to register their wants and get what they want (through others deciding differently). Who doesn't want what they want?
A more pertinent statement is:
How can people afford to have what they want?
Either people need to have more money, or costs need to come down. Generally, this comes from figuring out ways to do something that is already being done, but in a more efficient, cheaper way.
I'm just scouting out people who are passionate about this problem and who could be a good fit for when it scales.
https://www.kickstarter.com/blog/kickstarter-is-not-a-store
I think the way you understand startup formation is wrong though. Most startups are not formed as ways to directly address existing desires or pain points. Most startups are, fundamentally, iterations on existing business models trying to unseat their predecessors through more subtle innovations, riding technology trends, or simply a large war-chest of capital and talent.
This isn't a completely accurate view either. You could cite things like biotech which have their own weird dynamics when it comes to startups. Fundamentally, however, I don't think the "market for ideas to solve problems" model works when thinking about startups. Many people have made some variant of this point, and probably argued for other things being the critical factor (e.g "investing in a founder is the most import important thing"). Ultimately, I don't believe there is one single way to think about how to fund companies that will be successful startups. Mostly, I think investors rely on intuition, which is often wrong, but perhaps better than anything else.
There are also Genussrechte in Germany which are commonly used to pay interest not as money but as gift cards which can only be used at the company you invested in. This is done to fund local bakeries where the future customers essentially pay upfront for their consumption in exchange for receiving a return.
Honestly, I don't think it's any harder now than it has been before (in my adult life, anyway). It's always been very hard. Same with running a business post-startup.
The economy is tight, requirements from customers are high and there are fewer niches. Any worthwhile product in these conditions (at least in tech) needs a lot of baking time, which actually only a company with pre-existing cash-flow can afford.
Unless VC actually develop some patience on returns, I can't see much innovation happening in the next few years.
Also regulation has massively increased. There are tons of laws you might accidentally break as an early startup without even knowing it, and there are tons of laws that restrict entry into the marketplace through a high legal compliance burden.
Imagine trying to create Facebook today. With 3 employees and a few hundred users, what's your anti-CSAM strategy? What are the laws about who is responsible if some ends up on your platform, and how you need to handle it? Ask your $500 per hour lawyer. I'll wait.
Imagine trying to create Paypal today. Oh, wait, you need something like a million or more dollars to even operate.
https://www.amazon.com/Captured-Economy-Powerful-Themselves-...
Two options: launch on unregulated market first or just ignore* compliance until risks for customers are high enough.
*do not mention it in written form, just have some paperwork that work is in progress.
And what are the consequences if something goes wrong? Does the executive team go to prison? Usually doesn't happen to the well-connected, but what if you're not well-connected?
Personally, I wish the laws were rational, and scaled according to the size of a business, rather than relying on the whims of prosecutorial discretion.
Random theory: if the law creates many risks even for people who are trying to be moral, risk-averse people will be less likely to start businesses. More businesses will then be started by people who disregard risk, and also selects for a disproportionate number of people with serious psychological issues (although still a small percentage, but higher than the general population). What kind of filter do you have, when people starting certain businesses need to be comfortable rolling the dice on a 1% or 5% chance of going to prison for no intentional reason, and a chance at a pile of cash if that doesn't happen? It sounds like it selects for the same psychology as criminals.
> launch on unregulated market first
There are fewer and fewer of those all the time, and the ones that remain are in smaller and smaller, less profitable niches. So that technically opportunities exist, but as a practical matter fewer and fewer people are able to ascend the success ladder.
If some rule is broken it is not a big deal if there is no harm to anyone. Nobody is 100% compliant with all regulations, but the companies which approach this matter pragmatically, following the spirit rather than the letter of the law, usually do not have problems. E.g. if you are health-tech startup, you must avoid any health-related risks and prevent data leaks, but you may not serve GDPR requests perfectly. At worst regulator will warn you and then you will invest your resources in fixing the issue. And preventing data leaks is also easier for an obscure early stage startup: you simply get less attention from malicious actors and will likely encounter automated attacks rather than being specifically targeted.
But there's no guarantee of this right? According to the law, if they wanted to destroy your company over some tiny accidental rule breakage, they could. It just depends on if you're on someone's list or they're having a bad day. Unpredictable application of the law is not great.
A five-person startup shouldn’t leak my data just because they share passwords and it were not mandatory to have a GDPR person at that size.
I’m not trying to nitpick you, I would just like you to point out if my understanding is wrong!
I also think it is worth pointing out that historically (not recently) a lot of startups began not in order to make money but to provide real value to humans/society. I like to remind people that it is easier to make money when you first build something that people value than to build something that people value once you've made money.
This may work when interest rates are close to zero, but when they creep up, it becomes easier to make money holding t-bills.
And thus, those startups go kaput.
It’s only when there’s an opportunity cost of capital that you find out who actually had a business plan.
Hit it out of the park is usually meant somehow jamming yourself into a pre-existing economic relationship (taxis, food delivery, apartment rentals) and extracting rents.
Hopefully high interest rates will cause those "startups" to die a grisly death.
Bringing GPS/mobile broadband/mapping apps/smartphones together to create a better experience is obviously worthy of something.
That's the whole "drop-shipping" industry.
I’ll stick my neck out and say that the vast majority of startups never were innovative, it’s just that money was essentially free for a decade.
But now that most of those bubbles have burst, VCs are back doing what they were always supposed to do: due diligence. You’d be hard pressed to find funding unless you have a name or have a business that’s already doing great. And on the flip side, startups themselves are noticing this. My buddy’s startup has been approached by a bunch of different VCs encouraging him to pitch for funding and he’s refused. He’s realized that he’s already making money and has a solid business execution. He’s not willing to give up the gains for some extra cash. He’s taking the slow growth route.
Eventually, audiences just become fatigued and the 'business creatives' lose to some other genuinely creative theme that takes hold. Then they return to exploit it :-(
Nothing but bipedals and pizza guys. They can’t start an orgy with a delivery of healthy foods for once? Geez.
Startups are about increasing risk and that means good startups are about managing that risk.
There's different strategies for doing it. The current one en vogue attacks the ambition of the ideas
Stripe would have been there if they actually didn’t blow their IPO window.
This is not a good argument because a lot more would be profitable if interest rate was higher, they just didn’t need to
If you're profitable at a unit economics level, and your CaC stays relativly stable as you scale marketing efforts, it's fairly logical to sink your would be profits into that CaC and associated costs ( i.e. you might have engineering costs to scale a platform ).
Now obviously if you're bootstrapped, you're managing cashflow, and you might keep a bit for a rainy day, but if you have several years runway of someone elses money, you want to grow the entity. You don't give away equity to end up with less money. You need to grow the pie.
Of course, there's still a lot of faulty logic and bs. CEOs be like, I'll just get rid of dev and be profitable. Alright mate.
1. The lifetime value is calculated out to far.
2. Earlier cohorts are usually less costly to acquire and have a higher lifetime value as the true fans. They are going to be your most loyal customers. Look at what happen to all of the prepackaged food delivery companies and whatever the company that was delivering trunks of clothes.
3. They never expected interest rates to rise and easy money to disappear.
An example would be that if Apple thought it would be just as easy to acquire the second million customers of its headset as it would be to acquire the first million at $3800.
What I would say is the argument isn't false, but the assumptions often are.
You will for example have diminishing returns on the CaC. Spending more will make the number go up usually.
This explains why you wouldn't just spend it all year 1 and refinance.
Finance is indeed more expensive, and black swan events can cause mass churn, this why pulling out costs might sound good on paper, but in reality could potentially screw yourself over.
Indeed the payback of the customer needs to be short enough to validate profit. The longer it is, the more likely one of those black swan events will distrupt lifetime.
But I suspect there's more businesses out there doing this that are discussed here.
Who cares about shifting paradigms / something brand new? Not every business has to change the world. Most shouldn't.
The whole point of a business is to capture value full stop. Not to play around with lofty surreal visions of grandeur.
That is certainly one school of thought. But businesses that are about something more than just "capturing value "are more likely to actually become valuable. Creating value is almost always better than just capturing value.
I interpreted "capturing value" as meaning "capturing potential value" i.e. some untapped resource, or in other words generating value.
So it sounds like we're talking about the same thing then just in different ways.
Yes, when I've heard businesspeople say "capturing value", they've meant it in a manner analogous to extracting a natural resource. The value is already there, and they want to capitalize on it. That's not necessarily a bad thing.
But I think it's better to create value where none existed before.
If the idea is great enough for me to devote my life to, it's great enough to be able to do it without involving VCs.
That said, there are certain types of ventures (that I don't happen to be interested in) that require enormous sums of initial investment. That's where VCs can be genuinely useful.
But it isn't how most companies that take VC money are.
Let's look at a large number of YC launches we see on here. Often they're 1-2 years after they joined YC. They took 1-2 years to get to launch with a team of employees. Sure, they had customers before the launch but really at that point it was still lets see what works and experiement and change ideas and whatnot.
I'm currently trying to bootstrap a source-available SaaS Subscription and Billing software. I've taken 3-months to work on the MVP by myself and still not got a MVP ready. (Almost there, working on final stuff like documentation and whatnot) Not many people can commit to that long before seeing if the idea is going anywhere. There are quite a few people who can't afford to work full time on their bootstrap idea for 3-6 months without an income.
3-6 months?
In my ventures, the quickest I've seen meaningful personal income from them has been 2 years!
Typically, I have either saved up a "warchest" to get me through that time, or I've had a second job, or (most typically) both.
To be fair, seeing some income feels way better than seeing none. And if you're seeing growth it's another thing too.
When I'm starting a business, I view it as an exercise in delayed gratification. I'm not expecting to make any money in the early stages. Instead, I'm expecting to make up for it in what I make in the later stages. It's an investment in that sense.
Seeing growth, and seeing the company (not necessarily me personally) developing an income are important things through the whole deal, from the beginning through maturity.
But it's also allowed us to focus solely on the problems our customers actually have and will spend money for. It forces service/product-market fit before attempts to scale.
We are a services business so it is different than SaaS, but same principles apply.
There are benefits to bootstrap and benefits to funded. I feel as if bootstrapping first is a great way to learn the lessons needed to be successful when you do something funded later on.
Because funded companies have more chumps per dollar.
On the flip side, if you can't convince someone whose job it is to give out money to give you money, do you feel confident you can convince someone else to pay for your product? For me, getting VC buy in is proof that someone else thinks that there is money in the idea.
Why not? Those two things seem unrelated to me.
LPs are the real decision-makers on capital allocation and almost all of them are pension funds. Pension funds have almost zero chance of staying solvent unless they can drive above market returns.
Right now that can be done on interest rates alone.
Zero interest rates meant they had to deploy capital, so many VCs were able to raise.
But most VCs will never get a chance to raise another fund.
Like you pointed out: don’t be fooled by all the info out there about how VCs’ think. Watch what they do.
Like everyone, when it’s not clear how to deliver an expected outcome they flock to “what everyone else is doing.”
Today that’s generative AI. It’s a lottery, a few VCs will get lucky.
But the volume of future capital available to raise has collapsed & there’s no indication it will recover.
Worse, incumbents have captured almost all the advantage of AI’s current capabilities.
So VCs are going to return to funding startups in their social network, for the “hot topic” they must have an allocation in to stay relevant, and put all their eggs in the safest (perceived) basket.
Most will be out of a job as soon when the money runs out.
is this true? afaik they hand over their money and trust the partners to allocate
> and almost all of them are pension funds.
pension funds can go to taxpayers for a bailout and CalPERs has done so before
this is why it is not a great idea for pension funds to play in venture capital...it isn't fair for taxpayers who have to pay out the losses to keep the pensions running
The top 100 pension funds have $17T (trillion) in assets: https://www.visualcapitalist.com/worlds-100-biggest-pension-....
The total money supply is estimated at $48T: https://www.gobankingrates.com/money/economy/how-much-money-...
While in theory LPs are “hands off,” in reality you don’t get to raise another fund if you aren’t giving them annual updates that they like. It’s similar to the level of influence VCs have on startups - much more impactful than you’d expect till you are sitting on a board as a founder & realizing you are constantly having to lobby for the direction you are taking the company in.
There’s not a taxpayer-base on earth that can bailout all of their pensions. That’s some clever financial engineering & debt transfer to money printing, but as we are all now aware those global limits have been hit.
Everyone answers to someone.
Can somebody correct my wrong assumptions here...
They have a ton of funds that need to be deployed in an approx 4-5 year period.
If they don't deploy the funds, they don't get their carry, they also won't be able to raise another fund.
Will they end up throwing a large amount of money at a smaller number of start-ups?
More VCs will chase the best deals, raising the price of those start-ups. Then the 2nd tier companies will probably follow.
Or will VCs return funds to LPs? Give up on the being VCs and say "I always loved being an operator, so now I'm returning to that".
I think this is good for the tech industry long-term.
The SaaS companies that have been raising huge $$ don't need the dollars, and many weren't offering real value.
I think we're seeing more money flow into deep-tech, particularly energy, environment, and health.
Those sectors rarely make sense for the VC funded model where money has to be returned in ~10 years.
Will they end up throwing a large amount of money at a smaller number of start-ups?
> More VCs will chase the best deals, raising the price of those start-ups. Then the 2nd tier companies will probably follow.
> Will VCs return funds to LPs? Give up on the being VCs and say "I always loved being an operator, so now I'm returning to that"
Both of those are likely outcomes. You'll likely see more late stage deals, competing with the likes of Fidelity.
Early on, I learned that there were broadly two types of people. "Inside people" and "outside people". Inside people are the ones who are at their best developing the product, outside people are at their best marketing the product, getting investor interest, etc.
It's very rare that a single person can perform well in both roles.
For this reason, I would never start a business by myself. At a minimum, I need a partner who can be the outside person. Another significant thing founders need to do is to be really honest about the limits of their abilities and to find other ways of doing the things they're bad at.
If I had to guess, I'd say they were able to "tell the money story" better than we were. That is, being able to say to investors "you give us [x] amount of money and we're shooting for [y] amount of revenue in [z] number of years". I felt like we had a compelling pitch, but for some reason investors just never committed.
One step further: startups know this, and VCs know that startups know this. So when you see a startup "making a pizza robot", they're probably not actually "making a pizza robot." That "business model" is really just an early proof-of-concept milestone to aim for while building up tech (and competencies) that can address much more interesting markets. And if you're a VC, they'll tell you as much in their pitch deck. Though they won't ever mention that in any of their marketing. Since, what if the pizza-robot thing does take off? May as well keep it around as a vertical for their tech, in that case.
Zume: https://youtu.be/TkhWonFm-Lw
Costco: https://www.youtube.com/watch?v=c-E2Cz59_5A
The point of VC is that some businesses (like LinkedIn, Google, Apple, etc.) require multiple rounds of capital to get to a sustainable business model.
But just stating that isn’t instructive.
What’s more important, esp. for founders, is why that is the case:
It’s because providing a better way isn’t a sustainable business practice.
Markets lock in the familiar vs. the effective.
So you quite literally have to create new markets to deliver new & better ways of creating value.
There are many ways to fail at that with honest effort, including due to factors outside your control.
Beloved products, that deliver real value & better social impact, die all the time.
I know it can seem from the outside that whipping up hype & raising money is a founder’s job.
But very few founders have or ever will win on such a narrow approach.
It’s smart to raise on the latest trend because it maximizes capital. But it won’t save you from the fact that buyer’s are not rational - B2B or otherwise - and markets reward incubants.
IPOs, like shitcoins, have become simple pyramid schemes. Eventually, the mass bagholders get wise to as what's going on, and demand for such schemes falter. In a decade or so, amnesia will allow for the cycle to repeat.
- Making pizzas with an off the shelf industrial robot. (It's been done.)
- Auto loans. ("But our auto loans are different!")
I don't think the current landscape of VC funds actually knows how to spot value even if it sat on their face and called them daddy. They're throwing darts at a board, basically.
VCs mitigate this by dealing in multiple ventures at the same time. Aggregate movements are easier to predict and, as VCs themselves often state, it doesn't matter if 90% of their investments don't pan out, because the 10% that do more than make up for the loss.