

Sell product, not equity. - gordonmorris
http://www.thisisgoingtobebig.com/blog/2013/9/9/path-to-profit.html

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ChuckMcM
This is the key point: _" This is all how you probably should be running this
business anyway--with a sense of urgency about cash, that is, until you start
making enough of it to pay for your overhead."_

And it is exactly spot on. Raising an equity round is tough, and its very
"expensive" money in that it gives so much of your future success away to
someone else. So when you go into your business thinking "This is the product,
these are the customers, this is the market, and this is how I make money."
Your need for funding is limited to getting you to cash-flow break even. Then
when you have traction you may find that you want to grow quickly to
capitalize on that rather than let someone else get in on the market.

So your two times you ask for money? To get to the point where you've proved
the product and to get the company into self sustaining growth. And in the
ideal world your seed round gets you to the first one, and your series A gets
you to the second. Of course there are almost as many paths to success or
failure as there are grains of sand on a beach, so there are no hard and fast
"rules" about these things.

There is a great set of books for new parents, one called "What to expect when
expecting" and the other "what to expect your first year" which have general
sorts of guidelines about how kids develop and grow. We don't have those two
equivalents for startups but they would be best sellers if we did. These books
approach the problem of providing solid advice for an infinitely variable set
of possibilities.

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philbarr
Having never founded a startup myself, I always find advice like this to be
slightly surreal. Surely everyone who starts a startup is intent on selling
product? It kind of sounds obvious, and yet it comes up on HN again and again.

I'm sure these are intelligent people doing this, with all the correct
entrepenurial traits, so can someone explain how people get to a state where
they aren't worried that "amount of money spent" > "amount of money earnt"?

On a seperate note - I've always wondered how you work out how much to pay
yourself if you've not actually made any money yet and you are only using your
investor's cash.

~~~
Pxtl
There's a comment in the article that describes it as "land-grab mode". How
long did Facebook operate with _zero_ revenue? Twitter? For some businesses,
their top priority is to grow the userbase as huge as possible so that when
they start trying to generate revenue they have enough users that the tiny
numbers they get from each user payout in huge quantities in total.

Would Facebook have taken over social networking if it had been slathered with
ads during its growth phase? I don't know. Zuckerberg didn't think so.

~~~
philbarr
I always thought that the percentage of "land-grab" companies was very small,
and that most companies would need a better business plan than that. Wouldn't
it be a warning to any potential VC that a company's intent was "we're going
to get big and then we'll work out how to make money".

~~~
drd
I think VCs and Angels work based on a set of rules similar to Wall street.
They take risks most of the time blindly to gain more. Who can test every
aspect of the idea? Who can analyze and predict all the outcomes? They make
money like middlemen. They don’t make money because of production. Here are
the rules:

\- If one of many ideas works, it makes big and it compensates for all those
failed

\- Create hype through journalism, this is performed by using big numbers,
which are not necessarily always correct numbers. Who can prove the numbers
are not correct?

\- Ideas funded by previously successful investors are more likely to get
higher valuations and then being sold. That is why on the front end of every
new company you would see the name of investors. Does the consumer care about
the investor’s name? Obviously no.

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mildtrepidation
Posts like this, which are very common leave me with the impression of a false
dichotomy based on a very narrow point of view based on the author's limited
experience in a small part of a large field.

I don't mean this as an attack or insult. It just seems to me that people in
this sort of situation are very prone to knee-jerk reactions and
generalizations that certainly sound good based on their accounts -- and often
have some merit -- but that don't quite cover what ought to be the underlying
lessons, or take into account larger views that might not fit their argument.

Is it wrong to sell equity? Is it unsustainable, is it fundamentally flawed,
is it stupid? No, it's none of these things. It's a specific choice made in
specific circumstances that can be good, bad, or (more usually and over the
course of time) some combination of degrees between those two virtually
worthless extremes.

Is it right to sell products/services? Is it superior, morally, ethically,
financially? No. It depends on your business model, your goals, your
resources, and a million other things that even themselves vary from situation
to situation.

The article isn't bad or wrong. It's just taking a very small view of a very
large topic.

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soundlab
Shoot for a bank loan! <\-- what you'll never hear from startup advisors but
is exactly the type of mental framework you should adopt if you're
bootstrapping or working on limited seed round funds.

But banks don't lend to startups! <\-- they sure don't

But you know who they do consider lending to? Companies with minimum 3 years
of tax returns, breakeven cashflow and realistic projections and payback
window.

This is of course difficult to do and the dreaded chasm where most startups
die. In the process you may even be categorized as _gasp_ a small business-
but some of the most successful people I know started small businesses,
retained ownership, methodically grew sales to medium to large business scale,
and along the way established long standing non-dilutive lending sources aka
banks.

~~~
not_that_noob
Look for Venture Debt (not Venture Capital), which is a cross between a bank
loan and a VC. The main advantage is that it is a loan that is paid back over
time, albeit at high interest rates, but it doesn't eat equity. If you have
the cash flow, and wish to retain control, venture debt is the way to go.

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gjmulhol
VC money should be for scaling, not initial build. This is where the lean
startup is a great philosophy (I have other issues with it) but making sure
that people want -- and are willing to pay for -- what you are making is the
way to build a company.

