
Ask HN: A startup runs at a loss for 6+ years, gets acquired. Was it a success? - nstart
I&#x27;ve mulled over this question for some time now. I&#x27;ve kept watching startups (both funded, and bootstrapped) that never generate a profit (not even close), don&#x27;t get much traction, and then get acquired by some bigger name company. The founders celebrate the success of their venture and add it to their successful entrepreneurial resume.<p>But does it really count as a success? Is there something about economics that I&#x27;m missing? Is it only about how much money you get back into your (or your investors) pockets? Does the term acquisition actually mean more than &quot;rescued from drowning&quot;?<p>I don&#x27;t want this to come off sounding negative. I just want to understand what I&#x27;m not getting. Thanks in advance.
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gizmo
A large corporation doesn't have the agility or culture to experiment with
risky projects. Nor do they want to, because when a bigcorp project publicly
fails the PR hit will shave billions off their market cap.

A startup on the other hand can take these risks freely. Startups are expected
to fail, so the fallout can be managed easily. Recognizing this advantage,
entrepreneurs start businesses with the express purpose to be sold to a large
company. That's the goal from day #1. So the product is really the company
itself: the people, the IP, the early-adopter customer base, the proof-of-
concept tech.

The large business has money and infrastructure necessary to turn something
small into something big. The startup can experiment freely and be risky and
irresponsible. It's a win-win. The large business doesn't care if the startup
makes $1M or -1$M, because both numbers round to zero.

Startups that focus on profitability at the expense of growth tend to turn
into lifestyle companies.

When companies without traction get acquired, it's typically a talent
acquisition. The tech gets discarded. Not much money is involved, but the
entrepreneurs get to claim a successful exit. This makes it much easier for
them to raise money for their next venture. When companies are forced to sell
because they've run out of money that's not a success, but a graceful failure.

~~~
bsbechtel
>>A large corporation doesn't have the agility or culture to experiment with
risky projects. Nor do they want to, because when a bigcorp project publicly
fails the PR hit will shave billions off their market cap.

In general I agree with you, but Apple, Google, and Amazon all have very
risky, very high profile internal projects in their portfolios. These are also
the main companies playing the acquisition game in SV.

~~~
wernercd
So they have some R&D... but how much can each company really do at any given
moment? For every research project Apple or Microsoft does, how many projects
are under work at $random_startup? For ever good thought Apple or MS has, how
many ideas does someone come up with that otherwise would have never been
considered?

~~~
dm2
It's advantageous to have both environments pumping out new technologies,
obviously.

The environment at Google and MS is that they have near unlimited resources
(legal, monetary, intelligence, computing, patents) to create a working
product that can be mass-produced quickly if it's a success.

A large company might have some red-tape to go through, but it will also
already have all of the HR and management systems setup so that project
managers can focus on creating the product.

The Project Tango device for example went from concept to thousands of 100%
working devices in developers hands in just 1.5 years. The low-level drivers
are integrated with Android in a way that no 3rd-party startup would be able
to do. The talent they acquired (former DARPA director, Kinect engineers)
would have not been possible without large company resources.

Ideas are not what is important, we all have brilliant ideas that millions of
other people have had. You have to be able to take those ideas and actually
create a product or service that people can use.

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wpietri
I think it depends on whose perspective.

For VCs, the answer is easy: it's calculated in terms of how it looks for
their fund. If the acquisition price tag was high enough, it's victory. If
not, meh. Lower than what they put in: definite failure.

For founders, I think it depends on what they set out to do. Some people build
to flip. Others look to be the next Zuckerberg.

For employees, it depends even more. If the payday's solid, many people call
it a success regardless. Others, there for the work, care much more about what
happens to the product after.

For me, I'd say the loss is a red herring. As gizmo explains, startups are
expected to run at a loss; any potential profit should be pumped back into
growth. It's only once they've captured a fair bit of territory that they
should use the money for something else.

Personally, what catches my I here is the "not much traction" bit. The
societal purpose of business is to create value for others. Low traction is a
sign of failing to do that. The question for me is whether the acquisition
changes that. Sometimes the acquirer's resources are the key to making great
progress. I'd happily call that a success. More often, either nothing changes
or the acquirer makes a hash of it, in which case I would call it a failure.

But yes, in the current game, people will happily claim that last sort of
failure as a success. I'm sure some of them believe it, and some are just
putting a brave face on it. I think you're correct to see that as somewhat
false.

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adventured
Here's the only thing you're not getting: success is a subjective term. It
begs the question: by whose standard?

It's really that simple.

Some people would count selling into an acquihire outcome a success. Maybe
because building the product was a fun adventure and they managed to actually
ship it. They got a little bit of money, and now have nice jobs with Google.
So to those people, based on their subjective view, it was a success.

Other people would take the opposite view, that it was a capitulation into the
acquihire outcome and a failure. It's all strictly based on an individual's
standard of what success means (which can also vary dramatically based on
context).

~~~
ndesaulniers
Unrelated, but you don't list contact info in your profile:

I love this quote of yours:
[https://news.ycombinator.com/item?id=9339307](https://news.ycombinator.com/item?id=9339307)

I've added it to this page (a github project about awesome comments from HN):
[https://github.com/thomshutt/infinite-
monkeys/pull/5](https://github.com/thomshutt/infinite-monkeys/pull/5)

I also gave it to a reporter recently who asked why I hadn't started a
business yet:
[http://www.democratandchronicle.com/story/money/business/201...](http://www.democratandchronicle.com/story/money/business/2015/05/01/rit-
imagine-startups-graduates-strongarm/26712523/)

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gorbachev
That depends on which dimension of success you look at it.

As an investment, it probably wasn't successful.

As a 6-year education program in entrepreneurship, it was probably very
successful. If the people running that company take those learnings and apply
it in their next venture, or within the company that acquired them, it could
lead to great outcomes later.

If the company paid salaries to employees, then it employed people for six
years. That is success.

If the company contributed to open source or otherwise gave back to the
community in whatever form they could, that's positive. Depending on how their
contributions were used by others, it could've been very successful.

I'm sure there are other dimensions you could consider.

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sgc
I think what you are looking for is MIRR: Modified internal rate of return.

What were the initial and later cash investments? What was the opportunity
cost to the founders? When was that money and time spent? When were they payed
and how much? Compare this to what they could have done otherwise with the
same investment money and time used otherwise and deployed during the same
period, and you have your answer. In this case that time is valued on one's
capacities, so it is a qualitative and highly subjective answer once you are
comparing to anything more than "industry standard pay".

Because of business structure, a success to a founder may not be as successful
for an initial investor, etc. The key in all this is to factor in when things
are done and when rewards are received, along with viable alternatives. 5
million 5 years later is not worth anywhere near as much as 5 million in the
first year.

See
[https://en.wikipedia.org/wiki/Modified_internal_rate_of_retu...](https://en.wikipedia.org/wiki/Modified_internal_rate_of_return)

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amolgupta
Japaneese firms plan for north of 100 years strategy. Some of the oldest
companies are japaneese[1] and that is success in itself. A 6+ years of loss
is for capturing the market and getting a userbase which would raise the entry
barrier for compititors. Considering initial 1 year is spent on validating the
idea and coming up with a MVP, 6 years is a decent time span. That said many
companies these days are running after high valuations and not actual revenue.
The world runs on debt.

[1][http://www.theatlantic.com/business/archive/2015/02/japans-o...](http://www.theatlantic.com/business/archive/2015/02/japans-
oldest-businesses-have-lasted-more-than-a-thousand-years/385396/)

~~~
oldmanjay
is planning for 100 years of business a virtue? or even feasible? all I can
imagine you mean by that is they try to be fiscally responsible and keep money
for the future, and Japan has no monopoly on that practice.

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Varkiil
In the end, the goal of a startup is to either generate profit or be sold.
Your startup got aquired by a company ? great job ! Your startup is a success.

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mgmtconsultant
From a financial standpoint, there is a simple way to look at this. Did the
acquisition price:

(a) Return the investors money? (b) Compensate the founders for the
opportunity cost of their time?

If so, then the acquiring company valued the startup as being worth more than
the resources that went into it, so the startup created value.

With most acquihires, I think the answer to both (a) and (b) is "no", so it's
not fair to call the startup a success.

There are other considerations - the value the startup created for customers,
the enjoyment of the founders, the treatment of the startup employees, and so
forth. But if you burnt investor money and / or didn't make back the cost of
your time, it's hard to call it a success.

~~~
robocat
Risk needs to be included.

If the chances of total failure ($0 return) are 9/10, then anything less than
a 10x return is a failure in my opinion.

Also as an individual, there is a cost to "volatility" so the payoff needs to
be even higher to account for that too.

~~~
neltnerb
I don't think this is the right way to look at it after you exit. At that
point there is no more risk, so that should be compared directly to the
opportunity cost (if you're the entrepreneur at least). If you're the VC,
making exactly the expectation value (risk*reward) isn't a success, but it's
hardly a failure as long as it's beating market rates...

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nstart
Thanks a lot for all the comments so far people. I try to keep myself open to
change and I've already changed how I look at acquisitions and success.
gizmo's and adventured's answers really helped. Thanks!

As a by the by, I used to look at acquisitions with a lot of awe. But a lot of
conversations with my father (who's run his own software biz for 29 years)
made me look at the other side of a bunch of companies burning money. I didn't
have an answer for how the economics could possibly work. So my awe was just
from a perspective of "wow this sounds cool on Tech Crunch". I'll have a
better base to discuss during my next chat with dad :).

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danieltillett
I may be a romantic, but success is more than financial. I would rather have
built a company that built something worthwhile and helped people and sold for
$1 than one that produced nothing of value and sold for $50 million.

~~~
rl3
I agree, but think about how many people you could help with your share of the
$50 million, though (assuming of course that you didn't get screwed and your
share amounted to significantly more than $0).

~~~
danieltillett
I was of course assuming here that I would get none of the $50 million :)

More seriously I have given up in the past on substantial financial rewards
because I felt it was not a path I was wanted to pursue. It is rare you will
ever get to choose between $50 million and $1, but you will be faced with
smaller versions of this every day. While you may die poorer, my belief is
that you should always choose integrity and substance over money and hype.

~~~
rl3
> _While you may die poorer, my belief is that you should always choose
> integrity and substance over money and hype._

Well said.

However, the two choices aren't always mutually exclusive. Ideally: make money
via a path that has a high amount of integrity and substance. :)

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ericb
The game is to chase growth. If you are "profitable" you by-definition have
money that you left sitting and didn't use for acquiring more customers.

Once a company is on a vc-funded path, they need to target hyper-growth, or
the next round of funding won't be close-able. And when that's your goal, you
spend it all trying to get the growth you'll need--so there's no "profit" and
you NEED that next round of funding.

Additionally, it may be difficult to transition from a fast-growth orientation
to a profitability orientation because the board has been weighted with
investors whose interests lie solely in this company maximizing it's chances
of becoming a unicorn--anything else to a VC is essentially irrelevant. The
company has a duty to those investors.

For the entrepreneur playing this game, if they want to continue playing The
Game of Unicorns in their future startups, success is largely about keeping
investors happy by approaching "success" with the same definition the
investors use (unicorn or bust). If they prove they can do this, they have a
shot at getting their next startup funded.

The net result is that startups rarely "make a profit" and the acquisitions
are soft-landings for the entrepreneur and VC.

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solve
You have it completely backward. Market value / Valuation / Acquisition price
== approximately, a prediction of total cumulative FUTURE profits, NOT PAST
profits.

Past profits, directly speaking are totally irrelevant, as hard as that is to
believe. In fact, taking profits can in some cases mean that the startup was
extracting value that could have been saved for the future. That means that
increasing revenue can actually directly drop the company's value!

Dumb example, imagine that instead of users, the startup possessed literal
bars of gold. Now imagine they start selling those at 1% of what gold is
worth. The startup is increasing their revenue, they must be worth more! Nope.
Their revenue now is preventing the future acquirer from selling those bars at
near 100% gold value later post acquisition.

More revenue == lower company value, as you can see, in some cases.

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mpermar
I think there is awesome explanations here, but put in very simple terms there
is many startups that experiment, create some nice product but can't really
market it. They might have good numbers but they don't have the muscle to
raise fast enough.

e.g. a startup that converts an outstanding 10% of their user base into paid
customers might look excellent on paper but if only has 1000 users and only
grows 10% yearly it is dammed to failure. But that same startup for a
corporation that has 10000000 similar users will definitely look like an
amazing investment.

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seahorse
It's not about economics. It's about foresight.

If you are working on something that will grow big 10 years in the future
(like AI), and it takes you only 6 to get there, why can't that be a success?

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logfromblammo
That depends in large part on what happens post-acquisition. If the purchasing
company makes the concept profitable by applying economies of scale and cross-
brand marketing, the startup was a success.

If the acquired employees are laid off, and the purchased company shelved, it
was a failure.

The founders are but a handful of people in the company they started, so if
they are the only ones that get a happy ending, then they are personally
successful even if the company they created was a failure.

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mukundmr
There should be some perceived value for acquisition to happen. As long as the
start up was able to build that value and hence get acquired, it was
definitely a success.

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gwbas1c
Depends on the context. I joined a startup, and then a year later, we were
acquired even though we weren't profitable.

It was the best thing that happened to us! The credibility allowed us to
target larger deals; the HR department improved our hiring; our founders
didn't need to go office shopping because there were offices for us to move
into.

Granted, every situation is different.

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cyberpanther
Its all about the future. If the startup has great potential it doesn't matter
how much money or traction it made. The acquiring company only has to want
something about that startup that it thinks will help in the future.

Also pretty sure Amazon went 6+ years at a loss. That was a no brainer for
investing in them even though they weren't making a profit.

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gesman
In lots of these cases public won't see the whole picture. There likely hidden
connections, dependencies and relationships that often drive these deals above
publicly available profit/loss numbers.

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ksherlock
It's a failure, but let the baby have his bottle.

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geldedus
Yes, it is definitely a success (if the acquisition price exceeds the total
expenses)

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austenallred
Not all acquisitions are created equal. It's really very situational.

To answer the larger question you seem to be asking, a company or technology
needn't generate a profit to be valuable. This seems counter-intuitive, but
it's true.

To a certain extent large companies outsource risk-taking and innovation to
startups. That kind of thing is just incredibly difficult to produce within a
large corporation. If a company solves a problem a big company has it may be
acquired; regardless of its revenue the founders have created something of
value in this scenario. The acquiring company will pay a premium for something
that's successful, because that means they don't have to spend time and effort
constantly building things that fail. Think of it as anti-portfolio theory.
VCs invest in 10 companies knowing that the majority will fail, because one or
two successes will make up for all of the failures. Big companies buy the one
or two successes because that means they can avoid the eight or nine failed
projects.

It's entirely possible that the companies being acquired never generated any
revenue, but are very valuable to BigCo, and BigCo pays a corresponding price.
That is a success.

However, acquisitions aren't all good (nor are they binary). There's a
spectrum. On the low end is a terrible acquihire, in which the acquiring
company basically buys the startup as a hiring bonus for the people it wants.
When this happens, the numbers aren't great; usually investors will lose money
or make little enough that it's negligible. Remember that VCs really need huge
returns on a few companies (ideally one company returns the whole fund), so
even a company that returns what the investors put in plus or minus 100k
basically go into the same "failure" bucket in the mind of a VC. The founders
become employees with a biggish signing bonus (selling the company), and the
acquiring company basically calls the acquisition price recruiter fees. That,
in my opinion, is a failure with a soft landing.

On the other end of the spectrum is an Instagram-type acquisition in which the
company is extremely valuable but it makes more sense to team up. Of course,
this doesn't have to be a consumer product, but Instagram is a great example.
Instagram never made a dollar, but in retrospect it looks like $1B was a great
price, because Facebook will be able to generate way more than that utilizing
Instagram's users and platform.

There's an entire spectrum between these two. Without knowing the details of
each deal it's difficult to say, and everyone will pretend like it was a huge
success regardless of what's happening. So to answer the question: Yes, a
startup can run at a loss, be acquired and be a success. It can also run at a
loss, be acquired, and be a failure.

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somberi
If I learnt, only moderately, that moderation is the key to success, did I
succeed?

