As someone who bootstrapped, every now and then I'm happy I wasn't smart/convincing/well-networked/on-to-something-hot enough to raise a round (lord knows I tried).
Because I had no money, I had to make money and then hire slowly. 10 years in and 10 employees later, I know this venture would have been over long ago if I landed that lead investor.
Right, but the article claims that you'll be pressured into VC-fueled hypergrowth because, if you don't take the VC cash, they will throw boatloads of money at a wannabe competitor who will then start... if not successfully competing against you, at least annoying you.
I think that was the least-accurate part of a mostly decent answer. VCs, like most people, are trend chasers who live in a fairly constrained bubble, no matter how much they want to portray themselves as enlightened Renaissance thinkers who span across human experience and thus can offer useful insight anywhere. Sure, if you're in a trendy space (and in the Valley or one of a handful of other locations) and you refuse investment, they might throw that money at a competitor. But there's a tremendous amount of money sloshing around the world in so many more un-trendy industries and un-trendy places than anyone really realizes, and it's honestly not that hard to tap into those money flows and make an extremely comfortable life for yourself. It's just that most of the people doing that don't talk about it constantly, and they're living comfortably well, rather than making a billion dollars and buying islands.
I guess that OP's comment about not being onto-something-hot means that VC's didn't see the market as being something worth throwing money at to smash the bootstrappers.
Truly a useful question and a great answer. A nit I’d pick with the respondent regards the so-called force-multiplier of the five-or-so founders. Productive founders are a typical feature of funded startups but their productivity can be attributed not just to their hustle but, crucially, to the nature of greenfield development. It’s way faster for anyone, regardless of how many “x’s” they have, to grind out an MVP from scratch than it is to ship features while maintaining a product that is used by real customers in production. Series A+ startups must necessarily slow down their pace-per-person, it’s an eventuality. This need not have anything to do with hiring “bozos” (eyeroll) or some of the other dismissively-mentioned roles.
While I get and agree with the spirit of the answer, there's one major piece I take issue with:
> Well, what kinds of people work for 1% of a post-A startup? Average people (and below).
The people hired in the A round have no doubt been selected, _and_ self-selected a startup, for their ability to work at the mentioned 20x force multiplier. A 100-person company (let's call that late series B) is running, using the article's own numbers, at a 2-4x force multiplier, and a C-or-later startup with 200 or more people is running at perhaps even a 1.5x force multiplier.
Yes, there will be individuals who bring the force multiplier up, and individuals who bring the force multiplier down, but ultimately, the people in the organization are _above_ average if the organization's force multiplier is greater than one.
Also considering that founding engineers are sometimes some of the first to leave (especially as non-startup culture becomes entrenched), we can't as easily argue that the original 20x engineers are carrying the (0<n<1)x engineers.
I was speaking to a VC a few weeks ago about a start-up which is always pointing to how many employees they have, and I was asking "why is this a number they promote?" Why is it so important to them.
His response was that the number of employees they have is used to show government how much support they are putting into the ecosystem, how much the government earns in income tax from the employee base, how much money gets pumped into the local economy due to the thousands of employees they have. Demand for housing, transport, how it supports the local coffee shops and restaurants, etc etc. These figures are then used to get government grants. So in many ways, it's a form of free capital.
At the same time, it isn't like the company just hires anybody they can, and throws the money away, but I had a friend who worked there, and he said the work was kinda interesting, but they had sucked up so many amazing engineers, everyone felt like they were working under the level at which they'd be challenged.
VCs optimize for high risk/high growth startups. However for a person investing his time it may be worth to keep more control of the business and greater share of the profits in the future.
Would you rather own 1% of 100M business and thus be a minority shareholder, or 50% of 2M business and be in control. Financially you may fare better in the smaller business. And after a certain amount of money in the bank, health, time and controlling your day to day life gets more important than "selling to Google" or "managing the board" (an euphemism for my new boss is the board).
I find something about unsourced numbers in this answer and many blog posts uncomfortable. Maybe they are right, but maybe they are just made up to be convincing, but ultimately wrong.
For a while blog posts would include an unsourced hand drawn curve that looked like data to prove their point, but was completely made up
Without data it could be completely false. And the same applies to everything I am saying!
What seems to happen is small companies do not have the same requirements as big companies (and in these companies that aspire to be big fast). I18N, Scaling, Accessibility, Security, the list goes on and on. So they "appear" more productive by feature, but some of that would be dead in the water with the same team with a big customer base or regulatory concerns.
A team of one could write twitter in a weekend (how productive is that!), and it will be fail whales as far as the eyes can see under the same load requirements.
(Not modern twitter, the more basic first versions)
It could also be my own bias, but I have never been at a company where the founding team was great technically, maybe that is because I am in the midwest, so it is not ex-googlers with deep technical knowledge. But it has always been a guy who could get barely get the job done or a friend of a friend who could code, but had a great idea/niche.
In my experience, which has mostly been with startups outside of the US, is that US startups tend to want to scale up more quickly, and have a tendency to hire for roles that are not currently essential before they are needed, and generally hire more staff. It seems to be a more ‘US’ centric approach
Capital is incredibly cheap. Better to ship and crash fast than linger around. Also timing is everything. Hiring a few extra devs to get to market sooner is almost always the correct bet (at least here in America).
So the TL;DR is: because the founders and investors are too cheap to hire a small number of additional very good people instead?
The real question is why. Surely it is obvious that if you expect employee #1 to work for well below market salary and maybe 1% equity, you will never be hiring the kind of 20x individuals described in the piece here. But in the entire software industry, has no-one considered diluting the founders' equity and offering 5% or even 10% to bring on someone else of the same calibre (assuming the founders are both that good and open-minded)?
You would be approximating a cooperative. You just have a lot of founders.
I'm trying to go in a similar direction with my company. The idea is to consult under the same brand and create small passive revenue streams together (apps, websites, books, streaming).
Earning are split based on the people working on it.
The brand may help sell the individual consulting.
We help and support each other and share costs.
I've seen startups with a lot of founders and generally all the problems started once they had VCs, funding and pressure to grow faster than it's reasonable.
You would be approximating a cooperative. You just have a lot of founders.
That is essentially what I was suggesting, yes. This kind of arrangement doesn't seem unusual in many other industries, yet in software it seems very rare, even though the potential for 5 or 10 top class people to outperform 50 or 100 mediocre contributors or basically any number of juniors is higher than many other fields. It has always puzzled me that we don't see it more often.
There is a very loose correlation between software quality and success. Well written, useful software doesn't guarantee success, nor is it even necessary in many cases. Combine that with highly talented software makers earning some of the highest salaries in the world, and you get your answer. As far as I can tell Quibi had incredible infrastructure and programming, and god knows it had the funding. But a 100% uptime and the ability to stream to millions on launch day didn't mean anything because the product was not wanted by consumers.
In some other industries the competence of the contributors is much more closely tied to the success of the company. Software is not like this. That's why you might see docs, lawyers and stock-brokers entering in partnership; those professions have the quality of work tied directly to outcome.
Of course there are other factors. You need to be building something people want and you need those people to find and pay you. I doubt anyone on HN would dispute that.
But other things being equal, a team of 10 excellent developers will annihilate a team of 50 or maybe even 100 mediocre ones in terms of sustained productivity and quality, so if you do have the market and the business strategy, why wouldn't you want the dev team as well?
I have been in a similar situation and it made for questions of control when we did need funding. Some of the founders ended up giving back equity - not a feel good moment for the team
Surely if you're taking substantial funding you would expect the existing shareholders to give up part of their stake in the company though? The investors will want some equity and it has to come from somewhere. I don't quite understand what was different in the situation you described. Can you clarify?
Started with a split close to 25% per founder. VCs all wanted to see one founder with clear control, so the equity was rearranged closer to 70-10-10-10
That just seems strange. I can understand wanting to have one person who is the ultimate decision-maker for company policy and I can understand wanting to avoid a possibility of deadlock if founders disagree, but neither of those requires anything close to the extreme change you described. What founder in any startup that was established enough to be seeking VC funding would ever accept that kind of change?
Where I saw it was in the Healthcare field where several million of funding was required for series A and most of the founders were senior MDs and engineers having worked years on early development . When faced with choice between being highly unattractive for investment or being able to develop, they made the hard choice to put product over profit.
My point was mostly to shed light on the fact that most VCs want few founders and diffuse ownership can cause investment challenges.
OK, the economics will inevitably be different if you're not doing pure software work and also have some physical element or high regulatory barriers to entry. Maybe in those cases taking investment is the most likely way for most new businesses to become established.
But for pure software businesses my answer to your final paragraph would be "OK, so maybe you just bootstrap the business with a few good people and skip the VC part". If you aren't hiring hundreds of staff or buying up expensive cloud resources like they're about to run out regardless of how inefficient your product is, how many software startups could get by just fine with a real business model that actually makes money and some steady growth? Who says you have to have a pitch deck, a huge cash injection based on hope and high variance VC investment models, and one hand tied behind your back with investors holding the strings until the Big Exit(TM) or, more likely, the funding runs out before you have actually built a sustainable business and everything just gets shut down?
Because I had no money, I had to make money and then hire slowly. 10 years in and 10 employees later, I know this venture would have been over long ago if I landed that lead investor.