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ArsDigita: From Startup to Bust-Up (2001) (waxy.org)
32 points by webmaven 2 days ago | hide | past | favorite | 11 comments

Why is there such a big difference in lingo between VC-funded startups and bootstrapped founders? Every time I read about a funded startup, I heard words like "VCs", "valuations", "pitch decks", "exit strategy".

I always see a lack of words like "growth channels", "getting users", and most importantly, "paying customers".

If you compare forums like IndieHackers vs. StartupGrind, you'd think they're in totally different industries. Although in reality the goal is same: Make the startup "successful".

Though it seems they define "success" differently, and the problem starts from there.

Would appreciate if anyone enlightens me on this issue.

Because certain businesses bleed oceans of cash before they turn a profit. That can be a sound investment because when they do turn a profit, it's torrential.

Take Facebook. How could anyone possibly bootstrap a social network circa-2006? You have no eyeballs, so you can't advertise (if the Social Network is anything to go by, they tried that unsuccessfully). You have no product, so you can't sell anything directly. At best, you could do software consulting work - but then someone who is well-funded overtakes you easily, and given the "winner takes all" nature of social networks, you're dead on the vine.

Likewise, even when they do take VC, the next stage isn't necessarily "profit". If you can spend $1 today to generate $1.50 in revenue tomorrow, versus spending $1 today to (maybe) generate $15 in 5 years' time, VCs will prefer the latter.

For all intents and purposes, VC-funded startups are in an different industry from your average IndieHackers project. The former are racing the VC clock, so a lot of their time is spent playing the valuation game. The latter has the luxury of focusing on customers and small, sustainable growth. But that also means you're unlikely to see the next search engine or social network on IndieHackers.

As I see it VC is about funding a company in advance, so you can afford to build your business, while bootstrapping is about funding the company operationally (“organically”), building it as you go. Not all companies can be bootstrapped because they can have high capital costs (eg building a new fab, hiring experts), timing pressure (eg first mover advantage) or other reasons. One bad reason for getting VC funding is that some people think VC funding is cool or necessary to start a business, which is not true - but that’s beside the point.

So VC is really like a layer above bootstrapping. In a bootstrapped company you’ve already sorted your seed capital (maybe you pitched in 10k for AWS hosting) and you’re not looking for more. So you focus on operational issues like growth channels and customer acquisition.

In a VC company you need to focus on funding issues first - this much investment will yield this much profit, the company is worth $Valuation, so investors putting in $Investment should get S% (=I/V) of shares. The phrases you’ve highlighted like “pitch deck” are just the ways that a company communicates the how the operational aspects of the business will lead to growth of $V over time (resulting in growth of $I since S% remains fixed). The pitch deck might include things like CAC - customer acquisition cost - but the VCs are looking for a financial return, which they get when they “exit” (ie, sell their shares). The exit strategy suggests who investors might sell to, in order to “liquidate” the increased value of S%.

So in effect the two kinds of startup do indeed define success differently. If you have a successful bootstrap business then you just end up doing all the same things later, if you want to sell your business. So it’s the order of things that’s different but you end up worrying about the same basic data.

I want to add that not all VC funded companies have “problems”. I mean most name brand companies that we use daily were backed by VCs. The problems start when your VCs are bad partners, or inexperienced, or you raise capital you don’t need, or you make promises you can’t deliver.

Plenty of organic non VC companies also have huge management problems. In fact I read the article and nodded my head to many things I’ve experienced in an organic company (I used to say that some people I worked with “would rather be right than rich” because they put ego above numbers)

VCs are one of several solitons to the problem of fundraising.


Edited for clarity

This was a surprisingly good read.

> What can we learn from this? Be clear about control. Don't assume that people with MBAs know a thing about business, let alone technology. Don't throw out your prime source of revenue before another one is in place. Fashionable programming languages don't equal useful software. Don't lie. And steer clear of General Atlantic Partners and Greylock

The last bit... What are some VC firms to steer clear of today? Asking for a friend.

Softbank? If they invest in you than you probably know you have a flawed business model

I don't think it's that you have a flawed business model. If you look at it, Softbank invests in monopoly-reliant businesses, usually at a later stage. For an investor, monopolies are good in the software space, but they turn sour once you go into the real world, where overheads and incumbent competition are much more significant.

"Who's right doesn't matter, who has the power does" --Thucydides (b. 400 BC)

I think the lesson here is:

1. Don't get involved with VC's unless you want to take on all the problems VC's bring as they force you to chase hypergrowth.

2. VC's frame success as hypergrowth and 10-100x multiplier exits.

3. Hypergrowth is not the pinnacle of success.

Thanks for sharing, I've watched a few ArsDigita University classes online but had no idea of the history behind it.

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