
Why Does Your Company Deserve More Money? - ryanmercer
https://blog.ycombinator.com/why-does-your-company-deserve-more-money/
======
tokai2
The top advice from all startups that ‘survived’ seems to be, ‘don’t hire, be
lean’, when almost all of them did hire and then lay off employees to get over
bad times. In my view ‘not hiring good people’ during rosy times is an
impossible thing to do.

Things like these are self evident only in retrospect.

~~~
LeftTurnSignal
The startup I was a part of in a previous life did that.

The two owners took too much money for personal stuff and couldn't pay the
employees. Several times we were told to not cash our paychecks for a few days
or were asked to take an unpaid day off, etc. That same year that they let 3
employees go and they each bought a new house, new vehicles, and one of them
bought a $75k trailer. So between the 2 of them, we figured that that year
they could barely afford to pay us they got around $800k worth of personal
stuff.

Then they pushed all the extra work onto the remaining employees. 4 more left
a few months after they let go of the first employees which caused them to
change their business model quite a bit to retain the remaining employees.

Now looking back, the 3 employees they let go were paid less than $80k between
them and were considered contractors (until the IRS was involved).

The lean stuff here burnt several of us out, and for those that remained, the
thanks they got was being told there wasn't enough money for a holiday party.

I keep in contact with several of the employees. They're a successful startup
in most aspects I assume, but only because they were forced to change stuff
that they didn't want to. If they didn't change the business model, they would
have bled more employees within a few months and probably would have went
under.

~~~
organsnyder
That sounds more like fraud than a legitimate startup.

------
OliverJones
A good way to think about this issue: As you prepare to sell preferred shares
to raise money, ask yourself "Is this product worth the next ten years of my
life?"

Come up with an answer that will satisfy your parents or spouse, not just your
co-founders and seed investors.

What can make it worth ten years?

1\. A product with the potential to delight paying customers and make them
talk to each other about how great it is. (If your revenue depends on ads,
your customers are advertisers, duh.)

2\. A big enough stake in your company (after you sell those shares) to give
you good choices when it's time to do the next thing.

~~~
ttul
I think this is a crucial question every entrepreneur should ask his or
herself before taking money with a liquidation preference - and that includes
long term debt (the ultimate liquidation preference).

Whenever you take on leverage, you have to deliver a return to investors (or
lenders). How long will that take? Do you really want to do this for another X
years? And ten years is not a bad guess for preferred equity.

------
jetsnoc
Hiring folks also increases the communication overhead. If you are a team of 3
and hire a 4th you now have a new person that needs trained, needs to learn
tribal knowledge, asks the other 3 people different things and keeps them busy
distracting them from what were doing - finding product market fit. Any more,
I prefer lean & scrappy teams. Small teams get more done. Only scale up the
other bullshit when you absolutely have to.

~~~
aphextron
>Only scale up the other bullshit when you absolutely have to.

Yet scaling becomes absolutely essential for a company doing anything
sufficiently complex. The question is how do you maintain that small team
efficiency across an enterprise. It seems that business and engineering are
very similar in this regard in that the ultimate baseline problem to be solved
is managing complexity. The answer seems to be in adhering to the Unix
philosophy of tiny, self contained, composable parts which can be easily
reasoned about and composed with.

~~~
smackay
As the parent comment states, the biggest killer of efficiency is
communication, particularly across disciplines and across domains. Reducing
the overhead of communication and reporting would seem to the the skill most
essential to management but generally it's the skill that is generally
lacking, or indeed, absent.

The unix philosophy of composable teams can only happen when the
communications are clear, concise and don't generate much, if any, overhead.
I'd love to see a company with a CCO - Chief Communications Officer - who has
a team responsible for making sure that the information passed among the
various parts of the organisation was effective and free of bullshit or
grandstanding.

------
Alex3917
It's easy to believe that letting go of employees before finding product
market fit was the right move, and maybe they never would have never been able
to build and grow Twitch under the existing structure. But given that at least
one of the products sold for a billion dollars, this seems like a textbook
example of a company that did deserve more money based on having built a good
platform but not yet having the required traction.

If investors knew the company was going to sell for over a billion dollars,
would they really not have invested? Maybe this is the case, but it doesn't
seem like it. Instead it seems like the investors didn't believe the company
would actually sell for a billion dollars based on the growth rate to date.

~~~
mwseibel
We didn’t deserve more money when things weren’t working. It’s the investors
who decide who deserves more money and if you are setup to need their money
you better learn their rules and figure out how to convince them to give it to
you.

~~~
mijamo
I think here deserve is the wrong term, semantically speaking.

Investors do not decide who "deserves" more money, they decide who GETS it.

Deserving is more a moral term and makes things confusing: a company could
deserve the money but not get it because they are not good enough at
fundraising, or they need the money at a time when money is very hard to get
etc. And many companies get money without deserving it because some investors
are stupid, or because they are way too good at looking shiny.

------
jacquesm
Well, at least they _had_ a plan 'B'. Quite a few companies have none and if
their current investors don't pony up then it's end-of-story really quick.
It's one thing to go raising money when things are looking good, quite another
when you've lost momentum.

B2B or B2C can make a huge difference here, in B2C there are some options that
are much harder to come by than in B2B (see: youtube), but B2B is easier to
land softly because it is far easier to monetize.

------
mwseibel
Happy to answer questions about the post here for the next couple of hours.

~~~
zminjie
How do you reconcile this advice and position yourself if the seed round is
only enough to prove out whether the product can be built at all?

As an analogy, say I had the idea for a car when everyone is still using
horses. I raised a seed round to build my car but the funding is only enough
to build a car prototype that goes 10mph. At 10mph, there is obviously no
product/market fit since horses are still faster and cheaper. However, the
prototype proved out the technical challenges, so I know with more capital I'd
be able to make a car that can go 80mph, making the horses obsolete. How would
your post apply in this case?

~~~
mwseibel
I think there are certain companies with significant upfront capital
requirements that first time founders will find it almost impossible to get
funded. This is unfortunate and probably reducing overall innovation but I
think the revolution that has caused first time founders to get funding has
been software. Software has significantly reduced the upfront capital required
to get a business off the ground. I think we Founder venture further and
further away from pure software companies they are going to find fundraising
much more challenging.

~~~
numbsafari
A company that comes to my mind is Kestrel Aviation. They had a great plan up
front, founder pedigree, and experience. But they got distracted by hubris and
stopped executing.

Launching a new general aviation company is massively capital intensive. They
raised a bunch but failed to do anything that resembled shipping. They could
have made individual parts, they could have sold kits. Any number of things.

Sometimes you have to start with the small pieces, or do services engagements.
These things generate revenue, attract staff, and enable you to build the kind
of organization necessary to do something capital intensive.

Trying to go to Mars as step one won’t typically work. Try to find business
models for the components and assemble over time. My guess is that Elon Musk’s
portfolio follows this model.

------
staticautomatic
Why do you deserve to invest in my company?

~~~
trcollinson
That’s a fine question to ask if the investor comes to you. If you are coming
to the investor asking for money, you are not profitable and spending way more
than your income, then I’d suggest not asking this stupid question.

I consult for VCs on a technical side and I sit in on many series A pitches.
It’s funny how often when you ask a struggling startup why you, as a VC should
invest millions into their business, they give the question like this back.
“Why do you deserve to invest in my company?” “What are you as a VC bringing
to the table?” “What kind of acceleration will you bring to my startup?”

The answer is “Millions of dollars in cash you just asked for” and in our
minds we say “you stuck up asshole, you came to us.” At that point we often
look for different investments. And we never go looking for companies to
invest in. They always come to us.

~~~
staticautomatic
The point I was trying to make is actually entirely unrelated to the issues
you've raised. My goal was not to turn the tables so much as to illustrate
that the use of the word "deserve" in this context makes the question inane
because it's moralistic.

In any event, the fact that beggars can't be choosers does not obviate the
importance or utility of posing some form of the question to the prospective
investor.

~~~
trcollinson
That makes sense and those are good points. I think it’s about tone all the
way around. It’s entirely fine and beneficial to both parties for the startup
to ask questions. But there are some distinct differences in how people ask
these questions. Some really are stuck up. It’s shocking how deeply people can
believe the stories they’ve made themselves about how good they really are
when in fact they failing miserably.

Some of the better questions I’ve heard are prefaced with comments like “we’re
aware we’re having troubles in this operational area, would you be able to
offer guidance and advice to get us out of this sticky situation?” Self
awareness seems to be a sign of a great and investable company.

------
CiPHPerCoder
> We let a lot of good people go and doubled down on generating the
> advertising dollars we needed to stay alive.

And then

> We even took all of our employees to Hawaii to celebrate

This is an interesting juxtaposition within the same paragraph. I hope I'm not
out of line for reading this as, "Let's celebrate our thriftiness that led to
people becoming suddenly unemployed by splurging on an extravagant vacation!"

~~~
ender341341
I took it as after laying people off they were able to actually make money and
a year later they were making enough to do extravagant events. With the
limited context it doesn't sound the best. With different framing it's more
reasonable but I probably wouldn't have included it in the article.

~~~
CiPHPerCoder
> and a year later

I'm not sure I see where this "year later" is derived from in the article.

This is what the relevant section of the article says as I read it now:

    
    
      After 4 months of failed pitches (in a process we organized poorly) the only option we had left was to cut expenses and break
      even (here is how to organize a good process). We let a lot of good people go and doubled down on generating the advertising
      dollars we needed to stay alive. Within 2 months we went from burning $250k a month to making $100k a month and we ended the
      year at $8m in revenue and $1m in profit (Suhail, co-founder of Mixpanel, describes that tactic in a great tweet). We even 
      took all of our employees to Hawaii to celebrate 
    

Starting at some point in time, they spent 4 months failing then 2 months in
correction, then ended the year profitable and celebrated.

If t0 was in late June, the delta between the 6-month ordeal and the
celebration would have been zero. If t0 was in early January, it would've been
six months. (Plus/minus a month depending on calendar/fiscal year.)

~~~
pdpi
given the phrasing I’m working on the assumption that they didn’t end up
>$250k net income/profit (not clear what the $100k number refers to) soon
after getting in the black. Given that they were in the red before, they still
had some losses to work through before they could start building towards that
$1M profit. The one year timeline sounds about right

~~~
CiPHPerCoder
Okay, I think your analysis is reasonable.

I still wish the article was more clear about the timeline.

------
mbesto
> Do you have product market fit or not? If not, save as much money as you
> can, spend more time with your customers, and build a product they need.

I'm still waiting for the tech VC world to unilaterally agree on what "product
market fit" is.

~~~
zminjie
It is defined in the linked blog post and I believe it's a pretty good
definition.

“The customers are buying the product just as fast as you can make it — or
usage is growing just as fast as you can add more servers. Money from
customers is piling up in your company checking account. You’re hiring sales
and customer support staff as fast as you can.”

~~~
mwseibel
I’m pretty sure Marc invented the phrase so he gets to define it:
[https://pmarchive.com/guide_to_startups_part4.html](https://pmarchive.com/guide_to_startups_part4.html)

------
yc-kraln
What would be the equivalent gate from Series A to Series B?

------
rhizome
"because we're not spending n*10e06 per month on hosting."

------
slap_shot
>The hardest conversation I have to have with a founder is when they’ve spent
their 1-2 million dollar angel round but haven’t found product market fit.

As someone who has bootstrapped a company that found a product market fit and
is profitable, I can't even explain how foreign it is to think that people
raise and exhaust millions of dollars without finding product market fit.

I constantly have anxiety about all of the facets of running the business. I
cringe even thinking about the pressure an entrepreneur must while being in
this predicament. I couldn't handle it.

~~~
mockingbirdy
> I can't even explain how foreign it is to think that people raise and
> exhaust millions of dollars without finding product market fit.

I agree. It feels strange. Whatever people say, it was pretty uncommon for
most of the time in human history that some people with a vague idea were
given some million dollars to build something. Most people had to argue _a
lot_ to get this kind of money.

I think it's because money is cheap. Book money can be easily printed by banks
and our currency is worth nothing and investors know that. If the price
correction happens, the system could blow off and leave many people in poverty
because all their wealth was based on debt. Investors are smart enough that
they know that all those dollar bills are worth nothing and that the only
currency for startups is attention and massive usage (talking about B2C here).

~~~
CPLX
> it was pretty uncommon for most of the time in human history that some
> people with a vague idea were given some million dollars to build something

I feel like that might not be true. Seems like anecdotally there's been a long
history of people being funded for speculative adventures, going back
centuries. The one that "discovered" the Americas being an archetypal example,
but surely there were many more examples of patronage and underwriting of
ideas, it's a core part of society.

~~~
eloff
That it happened is without doubt, that it happened as often or as easily as
in Silicon Valley? Never even close in the history of the human race.

~~~
s73v3r_
One has to wonder how expensive those expeditions were, comparatively
speaking, to the average Angel or Series A.

------
ben509
> Why Does Your Company Deserve More Money?

It's a business, it makes no sense to talk about it "deserving" anything.
Either you think your investment will pay off or you don't.

(And try to avoid taking VC cash or you'll wind up doing all the work while
they walk off with the profits.)

------
profalseidol
Why do you deserve the privilege to control our lives?

~~~
ddingus
We are accountable to those people who we need stuff from, are we not?

~~~
robertAngst
This is literally profit.

If you do not create enough value you dont get paid.

~~~
ddingus
Indeed

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typomatic
> Unfortunately, I have to ask them a very unforgiving question: why does your
> company deserve more money?

This is so stupid--do VCs ever ask this question in the first place? No. By
the time your board is asking this question, they've already decided you don't
deserve more money. Any random justifications they make up about "deserving"
is a complete distraction from the fact that these choices never have a
logical basis.

