It’s really astounding how much money is chasing so little return right now.
The VC interest in these smaller companies is predicated on the revenue and valuation multiple predictability that comes alongside recurring revenue SaaS. Much lower risk for an investor. The margin structure of these types of companies is a nice bonus. If you're a founder trying to get access to this reduced-target capital you need to have 10%+ monthly recurring revenue growth, gross margins above 70%, and ideally a clear acquirer.
Not affiliated with this group, but this article explains in more detail: https://leadedge.com/why-we-like-saas-businesses/
Agreed. I know almost a dozen actually cashflow-positive companies that want to take some investment in order to expand and can't get anyone to call them back.
The reason why there seems to be a "shortage of good companies" is because the VCs are all chasing the exact same very narrow niche formula.
It's perfectly fine to start a company that's only going to grow 10x or 20x best-case. VCs won't be interested in you, but that's fine, you don't necessarily need investment.
I'm not saying this is your fault and I get where you're coming from. But saying 'only' 10x-20x growth is 'fine' as if that's something to be embarrassed about... Yeesh, talk about messed up perspective...
By my reckoning, if you're generating value, have a sustainable business and are giving people gainful employment that in and of itself should be reward enough.
Start a company: You + enough business not to go under in X months = covering living expenses for one person or family = $50k / year starting negative of working up to profitable
10x = $500k / year, by the previous measure = competing with the top end of a big tech salary.
So there are people reasonably "unhappy" at 10x because of opportunity costs.
Being able to create an honest, profitable business pulling in 'only' 500k$/annum. Must suck to be that guy.
It's real easy to play the 'grass is always greener' game. Everyone has their own aims in life. Some want money, some want to live a life they're proud of and pretty much everyone is some combination of the two. But trying to frame someone establishing a business with 10x-20x growth as a failure, assuming they're able to support themselves and believe in the value of their venture, is absurd.
That is decent, but considering all those factors, far from a huge win. If they had put similar work (with the same skill set) into a normal job, they would likely have similar returns with less risk.
Especially since there is large ongoing risk of market shifts or the like making it fail with no warning in the future, and at least working in someone else’s enterprise they wouldn’t have their capital at risk.
For some of us there's a lot more to life than whether or not the wealth we accumulate squares up with the amount of risk that we take on compared to others. Being able to contribute to something you believe in while being able to avoid Taleb's silent graveyard doing it is enough.
There are many others who make different bargains of course, and for their own legitimate reasons.
It’s very, very high risk even getting here though, and not just money.
Robber: “that’s where the money is. What, do you want me to rob libraries?”
VC have money. Spending other people’s money is a frequent pastime. If SoftBank is willing to give you $100m to expand the reach of your IRC replacement, why wouldn’t you take it? Combine this with companies that are built to be sold to one of FAANG (ones that try to solve an actual customer’s problem but mostly just enough to catch the eye of a giant and sell to them) and you have SV.
One reason is because of what you're giving up in exchange. Obviously equity, for one. Quite possibly also control, if the investors also get board seats as part of the deal. If they have a different vision for the company's future (not to mention your personal future) than you do, that could create problems.
It is a real, and sometimes very undesirable tradeoff. Go big or go home, vs wealthy but not obscenely so through steady effort?
Now, most VCs don’t want to be in the business of management. Each partner oversees 5-10 companies, they do not intend to be managing each. Most intervention comes when the founder is running the company into the ground. I can find many more cases of scandalous compliance by VCs than active intervention.
The first thing VCs look at is the quality of its founding team, it’s not for wanting to kick them out.
Except that their definition of running a company into the ground is more about whether or not the company is track to be the their 1000x return or not. They push for high-risk, high-return moves, which are not the same thing as striving for a sustainable business. I've seen founders building companies that are stable and growing, and still getting booted by the VCs because they wanted to push for higher returns.
That said, I haven’t seen VCs pushing a founder out for this offense first hand, even in companies approaching somewhat of a zombie status. Usually VCs will just divest their attention.
I have seen companies run into the ground with the VCs pushing the throttles forward though.
There's no inherently better model. Someone might prefer flexibility over ambition. Others ambition over flexibility.
I did both bootstrap and VC paths. You can get it wrong in each, but I know that my previous insistence on not taking external money was somewhat rooted in arrogance.
I thank the heavens everyday that I didn't go the VC route. I can pretty much do whatever I want without this constant growth at all costs pressure. It also gives us a massive advantage against VC backed competitors. We can make decisions that reap benefits 2-5 years out.
This has created a situation were every competitor follows the same trajectory where it eventually leads to an over-complicated, bloated product that users hate. They come to us and it's like a breath of fresh air.
A 10 million dollar company, lets say at a conservative 5x earnings multiple means 2mil annual profits. At 80% margin that's 2.5mil ARR. For a B2B SaaS product you should be able to get at least $1,000 / customer annually, which means you need to find 2500 customers to own 100% of a 10 million dollar company, which in the age of email and Facebook marketing is very much within reach.
And these are conservative numbers. A strategic buyer might very well pay 10x if you're showing nice growth, margins of 90% are not unrealistic in SaaS, and you could possibly raise prices depending on the value you are providing and who you're selling to.
Now ask how many stars have to align to reach a billion dollar valuation, assuming you haven't been screwed over by your investors by the time you reach that point.
Because it removes the possibility of exiting for tens or hundreds of millions--the preference stack will eat up all the equity.
Most VC backed companies that exit do so for far less than a B; if the startup has been responsible about fundraising then a 50M, 100M, etc exit can be life-changing for the founders. Raising too much makes this impossible and turns the whole venture into much more of an all-or-nothing affair.
Of course, the VCs don't care: they make money from the big winners, so they could care less about a 50M exit, but the founders should not.
Disruption is glamorous but small is foundational.
1000x is an anomaly and would make one fund round do exceptionally well compared to all others but most funds don’t ever get that kind of investment return.
But is that a startup at that point or just a small business ?
(In fairness, I'd probably roll my eyes if someone called their McDonald's franchise or arts & crafts retail store a "startup" but plenty of today's big businesses got to where they are without VC funding or really looking much like what people think of as a startup today.)
Obviously there are still other businesses that aren't inherently self-limiting but that aren't really constructed for go big or go home either.
Now there's the issue of starting a company that is trying something new and lacks product-market fit, thus is higher risk and we don't have good tools to evaluate those risks, but is also looking to grow conservatively thus isn't able to get the interest of those looking to give out high-risk funding, ie VCs.
The parameters are narrower than in the case of some totally novel software or hardware product but just because "people buy and drink coffee" is not remotely a guarantee that your particular coffeeshop will be sufficiently successful to stay in business.
"I am especially against co-working spaces but if you must join one, first walk in and just listen. If it is quiet maybe people are actually working. But if it is loud, run for dear life!"
What would be some examples of companies that did and did not do this?
We are currently building the features that will automate more of the manual processing to free up time. But everyday I feel bad as I see the order count going up knowing the CEO is miserable. The CEO wants to do fundraising but is helping to process orders (the orders are complex) so doesnt have time.
I wonder if there are any counterexamples, where we can say that there is strong product-market fit without an immediate tsunami of demand.
What about the case where purchases tend to be large but infrequent or consist of long-term contracts? In that case, wouldn't you be able to say that you've identified product-market fit at some point earlier than when the actual purchases are made?
The other end of the spectrum is enterprise software. In between you have self-service SaaS, premium consumer, and freemium consumer products. Each of these has very different requirements for what traction look like, all of it significantly less a pure ad-driven monetization like Twitch.
The other dimension is how big you need to be to be considered successful. VCs need massive scale, and the bigger you grow the harder it is to maintain momentum, so it's gotta look really juicy at early stage to justify the growth. YC is not a VC, but as the premier incubator that feeds into the SV VC ecosystem they definitely have that lens.
That does not mean a successful business requires product-market fit. Weak market demand can still provide a great business and strong market demand is not a guarantee of business success.
One can always play the game of semantics, of course.
On the flip side, as a farmer, I have found what is essentially perfect market fit. Nearly every person on earth wants what I produce. The problem for my business is that the supply is also huge, so I can't charge much. Often I lose money. It's a living for me, but not the greatest business or something investors are going to be throwing money at.
Farmers have great product market fit. They sell a commodity and have little/no pricing power and thus earn pretty low returns on capital.
Product market fit is one thing. Market size is another. Frequency of purchase is another. Competitive advantage is another. Building a big successful business requires getting many things right, not just getting product market fit. The reason folks at YC (and others) harp on about product market fit is that they seem to see a lot of companies trying to grow before they have it - which is crazy. It doesn't mean product market fit is the only thing.
Not by the formal definition of having strong demand. The demand for Ferraris is weak, but the equally restricted supply allows Ferrari profitability anyway.
The demand for food is exceptionally strong, but the vast supply makes profitability very difficult.
> Product market fit is one thing. Market size is another. Frequency of purchase is another. Competitive advantage is another.
They are separate things, but all come together to make up what we call demand. Product market fit hinges on demand, not those variables alone.
The microeconomics definition would state that the "quantity demanded" at price X is Y. Again, "weak" doesn't mean anything in that field.
Nope, they don't all come together to make up "demand", and there is no "we" because your definition isn't what's used by the business or economics community. Those things come together to decide the size and profitability of a business. Demand is just one part. Competitive positioning is almost strictly a supply side issue. For example, there is more demand for corn than there is for coca cola, yet Coke makes a fortune and corn farmers do not. Coke has built a brand and large distribution channels - both which have large fixed cost components and hence require enormous scale. The result is a small number of soda suppliers and only 2 cola suppliers in most markets. Supply side issue.
Me neither since I didn't.
> In microeconomics...
I can find no evidence that product-market fit came out of microeconomics, so I am not entirely clear on the relevance of that. Context is relevant. This seems like us having a conversation about how a pointer on a computer (you know, the arrow thing) interacts with a UI with someone chiming in to say, "In computer science a pointer stores a location in memory."
> Again, "weak" doesn't mean anything in that field.
I'm inclined to agree within the new context you have provided, but that does not mean "weak demand" is without meaning. In fact, it is a term used relatively frequently, including in respected publications.
"Not by the formal definition of having strong demand" - didn't you say that? I see it there, under your name.
I am not sure how that relates to a formal definition of demand?
I thought you were saying there is a formal definition of strong demand. Ie, there is a formal definition of demand, and a definition of "strong" in that context and thus a formal definition of strong demand. What you were saying is the definition of product market fit is having strong demand.
The obviously it varies by sector and type of product but say for a typical SaaS.
I’ve seen a lot, just curious about what people here think.
The “drowning” description is apt because living through that is stressful and uncomfortable, even though it can also be exciting and have fun moments. Especially great are the moments you discover a 1-hour hack that can unblock something you and your team thought was going to take 2-3 weeks to accomplish, and what a relief that is to “fast forward” in time.
The problem with SaaS growth is that it's a function of customer acquisition, marketing etc..
But once you account for that, if customers are sticking around (low churn) and the acquisition/revenue works out, then if you contemplate what 'compound interest' means - and the necessity of a 'large market' - then it's probably a good investment, it just depends on the terms.
signups you get per day > signups you can process per day
I see it all the time, these services definitely have a product market fit. It's just very small.
A: Another pie.