You’re so right! It was an absolute disaster for us. Never do it!!!!!
Kidding aside, it is true that raising money from VCs puts you on a very defined path with really only three potential outcomes: 1) failure, 2) sell to acquirer, or 3) go public. There are a small handful of exceptions, mostly for companies that throw off massive amounts of cash, but, realistically, those are the outcomes.
If you don’t like any of those end states and what it realistically will take to get to them, don’t raise money from VCs.
But, having done so and been successful and taken a company public, I can say: it’s pretty great and I have zero regrets about anyone we raised money from. And I’m proud that everyone who invested in us prior to going public made at least a 10x return.
While there are plenty of VC horror stories, there are fairytales as well.
According to Statista there were 16,464 VC deals signed in 2022. There were 181 IPOs in that year. The most IPOs in a year ever is 1,035. Obviously the two aren't directly comparable, but the point I'm getting at is that an IPO exit for any company is really unusual. If you found a company and take on VC funding your exit event is much more likely to be getting acquired if you don't fail. It does happen, and deservedly so, but if you're at a point prior to raising 'what if we IPO?' probably isn't a very useful question.
Many startups raise multiple rounds, so I think you're double counting? Don't you need to either divide 16,464 by the typical number of funding rounds or only count, say, series As?
(An extreme example to prime your intuition: imagine that there are one IPO and 10 VC deals annually. If every startup raises money annually and there are 10 startups at any one time, then every funded startup eventually IPOs.)
Didn’t know this was even possible. Had to research.
It wouldn’t be called “IPO” anymore, but a company can offer subsequent market shares through a Follow-on Public Offering (FPO.) This occurs when a business raises capital in a second round of stock through either dilutive or non-dilutive options. Good to know.
> But no less unusual than building a successful company to begin with.
Statistically, companies that raise venture capital are vastly less likely to succeed than those that are bootstrapped.
Think about it this way: from the perspective of VCs, the most successful apps of the iOS era were Uber and AirBnB. But from the perspective of entrepreneurs, the most successful app of the iOS era was the Flashlight app.
You're right that in numbers of survivors there bootstrapped ones are going to outnumber the VC ones. But in terms of total # of employees, total $ of turnover and profits I would expect it to be the reverse.
But for any individual founder, if you want to aim for 'successful enough to be relatively wealthy and worry free' then 'bootstrapped' is the way to go. If you aim for an outsize success, wealth for the next N generations and massive impact on the world (for good or for bad) it's going to be very hard to avoid the VC track.
I wrote about this long ago, but it is still quite relevant:
I sort of don't doubt that VC-funded companies are less likely to succeed than bootstrapped companies, simply because bootstrapped companies can keep afloat with consulting and VC-funded companies can't. But vastly lower odds of product success sounds like something that'll need a citation.
It seems likely that VC-funded app store pure plays without a recurring revenue SAAS component are much less likely to succeed than indie app store pure plays, but that's because VC is obviously the wrong model for one-and-done app store transactions. If you have a good idea for an app, don't raise for it (you'll have a hard time raising for it anyways).
Every time you raise a round, the outcome you're shooting for is magnified. If you're raising an A round, you're not getting acquired after your seed; you're rolling the dice on getting a much better outcome. If you're raising a B round, you've got some facsimile of product-market fit, and you've decided to take the company to the point where the only "successful" outcomes are denominated in hundreds of millions of dollars, etc.
So it's not surprising that there's a stat somewhere that says "committing to a 500MM sale decreases your odds of success over satisficing with a 50MM sale", right? Very few software companies of any provenance end up going public, but by the time you're raising a C, that's essentially what you're saying you're going to do.
It gets even worse, because a proportion of those raising another round are doing it because they're failing to grow fast enough, and are grabbing more cash before it's too late.
So you get a mix on those rolling the dice one more time in the hope of that next 10x, and those unable to get an exit, and unable to earn enough, but able to convince investors one more time that this round will pay off, and who will rarely pay off well for founders or early investors, if at all.
I've both been in companies like that and worked for a VC analysing round data to avoid putting money in companies like that...
In a company like that, I once got 10k for my original 25% stake when the company was finally acquired... I left after the 4th round or so, and there were at least a few more after I left (I stopped.paying attention. The company was acquired for only 40% above the size of the A round.
Once you're in the VC cycle though not being able to raise another round when you need it is a 100% decrease in your chance of success. So I'm not sure if that follows for any but the first. Essentially you need to keep raising until you either reach profitability at scale, are acquired or IPO, and even the latter won't help you if you aren't eventually profitable.
>Statistically, companies that raise venture capital are vastly less likely to succeed than those that are bootstrapped.
I'd wonder if taking VC money five times, failing 4 times and building a large and growing company 1 time, isn't better than bootstrapping a small and profitable company just 1 time.
The article is specifically about this value judgement. If you do not value making a profit as a company you have to find value in something else. Which is fine, different things motivate different people and should, but at least be clear that it is fundamentally a values conversation.
Disagree, it’s often best to leverage the profit motive as a tool for achieving your values-based mission, and companies are usually the best way to do that.
Companies scale up more effectively than NGOs, attract investment much more easily, and can undertake a wider array of activities to achieve their mission. Then there’s C-corps etc if you want to make it explicit.
Maybe for some of them just getting the VC funding is success. Pay yourself enough, last long enough, make good contacts... And if it fails, start over with the extra experience and contacts, or join an existing startup at a high level. Failure doesn't seem to hurt the careers of executives that much.
The definition of "success" is different between a bootstrapping business & a VC funded business. A consultant can define success as "making enough money to live off of". A VC funded business has a different definition.
So how would a study be conducted? A survey asking if the business was "successful"?
Actually, that's not a bad idea. Surveying founders at 5, 10, and 15 years after founding whether they were happy with the outcome could be enlightening. A little bit like the 7-up documentary series. It would be very interesting to see which path tends to provide the best outcomes according to the founders.
What is the Flashlight app developer success? At best the app sales supported them for a year or two. By this metric a failed VC funded company also has supported its founder (plus employees) for a year or two.
Failure is definitely the commonality. The BLS reports typically that 1/2 of all new businesses (in the US) will formally fail within five years. One can safely guess that at least half of those remaining are something between zombies and hanging on by a thread. 1/4 or fewer will make it 15 years or more. And of course it varies by sector, restaurants notoriously have an exceptionally high failure rate. For all businesses the failure rate is around one in five in the first year [0]; for restaurants the failure rate is ~60% in the first year, and ~80% fail within five years.
[0] And again, don't forget to assume the figures are even higher because the figures will never fully account for zombie businesses or quasi-zombies and the equivalent.
Those figures also do not account for selling all of the company's property with some profit and closing it down; the equivalent of an acquihire for small and medium companies is counted as failure. Running it successfully for a couple of years and changing your mind is counted as a failure too.
I don't have a link on hand, but I've seen studies from people that counted how many business actually closed due to money problems. The actual rate of non-problem business after 5 years is close to 80%.
I would expect it to be close to 100%. The difference between the 80% and the 100% is the ones that grow in spite of and sometimes because of their problems. Every business will run into trouble, sooner or later. In fact I don't recall a year in the past decade without some kind of crisis that needed fixing. Some self inflicted, some just circumstance and some outside malice. Never a dull moment if you run a small company.
There is somewhat fuzzy on where you even draw the line. Does someone moonlighting on their Wordpress side hustle count as a company? There are many of those which seem unlikely go bankrupt - the most frequent end state is the sole proprietor quits due to lack of work or interest.
Beyond the issues surrounding the failure rate, it's worth thinking about the extra work to keep satisfying investors, the likelihood that you'll lose at least some measure of control, and fundamentally the ethics of extraction that VC models necessitate, meaning you will need growth even if it's not good for the company or the customers in the long term, and that kind of growth often also means that there's an impetus to ignore the negative impacts on environments, communities, and economies.
This very much applies to Cloudflare, otherwise it wouldn’t tolerate hate groups hosted in the name of “freedom of speech” and all that PR bs. Ethics not only takes the back seat, it disappears without a trace.
And let’s not forget the ethics of continually selling a large chunk of their shares in the company they publicly believe will continue growing and is profitable.
There are plenty of other ways to exit that don't involve an IPO. Acquisition, selling shares on secondary markets or privately etc...
Doing VC the wrong way can make your life hell, but taking all the risk yourself and bootstrapping is in its own right a special kind of hell if you're not careful.
IMHO, it's all about time horizon. Working on a startup for 3-4 years without a clear product market fit or some kind of exit is a waste of time unless you're a Jensen (which most of us aren't anyways).
And is worse to fail losing your own time and money than to fail losing VC money. In the second case, you can get up and try it again easier than in the first case.
According to the same source, 2022 was the second-most VC deals since 2006, and ca the 4th worst for IPOs according to stockanalysis.com. There's clearly a massive upward trend in VC deals, while IPOs are much more stationary. Eyeballing those charts, the average number of VC deals, especially in the relevant period for today's IPOs (10+ years ago), is probably closer to 5-6k, and the average number of IPOs to 250, ie ~5%. Combining this with the folk wisdom that 90% of all startups fail, this seems to suggest that half of the successful startups go public, actually. Lots of things that we'd need to account for (not all IPOs are probably startups, # VC deals != # of startups,...), but speaking about tendencies, the data doesn't seem to support such a strong statement.
You’d want to compare this with the base rate of failure for a business venture (ideally across the economy and specifically bootstrapped tech companies).
Spoiler: most businesses fail.
I’d also believe that VC funded companies are more likely to fail as they are making all-or-nothing swing for the fences plays. But you need to compare to the correct baseline to avoid confusion.
My intuition is that rate of failure in software, where its much more winner take all, would be higher than brick and motor businesses, which constantly fail.
I think it's entering a winner take all market that's strongly correlated with VC money. There's plenty of software companies that outlive restaurants and startup cycles, doing pretty common B2B work, but they are unlikely to accidentally get a valuation based on a probability of winning a winner take all market.
Thank you for posting. We could never have built Cloudflare without Lee. His disease is incredibly tragic and in many ways literally unimaginable. Today he is still alive but has continued to cognitively decline. I am happy that Cloudflare’s success has ensured he has the support he needs. I miss having him as a cofounder and friend every day.
I bawled my eyes out the first time I read it, and it's not any easier this time. I'm happy the success of Cloudflare has allowed him the best available care, even if all his money can't cure him within his own lifetime.
I wish we could stay away from generalities. There is no one size fits all answer to questions like "should I take funding?". The answer depends on your goals and where you are competing.
If what you are trying to do is capital intensive, has tons of competition and generally will need the scale in order to compete/turn a profit, you should probably take VC funding.
If you want full control over your product or are operating in a niche and think the explosive growth necessary will hinder you, you have different priorities. You might not be trying to make the next "big thing" and in this case probably don't take funding. In fact, you probably don't want VC funding because your goals don't align with theirs.
Like most difficult questions, the answer is: it depends.
Last quarter they had negative operating margins of over 20%. That’s not really marginal. Considering they already do over $500mln in revenues and are growing mid 30s it’s very possible they never make a profit.
A big chunk of software VC success over the past 20 years has been public markets accepting loss making companies and giving them a lot of credit for potential future margins.
It's still indicative of VC culture that the CEO calls the company a success after IPO. Rather than, say, after the company is profitable. (I have a couple shares of NET, so I'm optimistic they'll be profitable eventually. But sometimes their path to getting there seems lackadaisical.)
I don’t think IPO was success. It was just another fundraising event. Another step in the journey. And, per this discussion, the end of our VC journey and beginning of our public company journey.
“Profitability” is a funny term on Hacker News. Think most people here aren’t accountants so they think of profitability as: do you have more cash in the bank at the end of the period than you did at the beginning. That’s “free cash flow profitable.” By that measure, we’ve been profitable the last ~12 months and have said we expect to be so every year going forward. We’ve had non-GAAP operating profits even longer. So next up is GAAP profitability, which I am confident we’re on a path to. We want to emulate Microsoft’s accounting financials, not Salesforce’s.
Even that won’t be “success.” Just another step in the journey. Success to me is living up to our mission of helping build a better Internet. Don’t get me wrong, financing and accounting milestones are all critical to us doing that. If we were burning through cash it would be hard for us to fulfill our mission. But I show up to work every day because I see the positive impact our team is making toward a more secure, more reliable, faster, more private, and more efficient Internet for everyone. Only steps toward that represent success to me.
> “Profitability” is a funny term on Hacker News. Think most people here aren’t accountants so they think of profitability as: do you have more cash in the bank at the end of the period than you did at the beginning. That’s “free cash flow profitable.”
no, I look at your financial statements and look for Net Income
(more or less the only number that can't be manipulated by clever tricks)
Would any business leader say anything like, "we have no idea if we'll ever be profitable, or what we would need to do to get there?". Everyone made fun of Softbank's presentation on Wework[0], but it just looked to me like a simplified outline of nearly every over-confident business presentation I've seen in my life.
It is my understanding that VCs only stay afloat because the payoff in case of success is huge enough to offset many failures. And I guess many VCs also don't stay afloat forever.
This is correct. For small and medium funds, a single successful portfolio company can return their entire fund with some multiple on top of this. The reason you invest in 30-40 companies instead of one is because you don't know which one it'll be.
I've seen this from the inside, I liked the company a lot but I'd never suspect it'd become the most obvious success for us.
In my experience, around 5% of VCs I've met in real life are truly decent human beings, even in cases where they don't have to be. The rest have been pure capitalistic sharks (which is understandable, given the entire sector filters for this).
Why are you meeting VCs? In what context? What else are they supposed to be in that context? It's a sales + finance job. If you're meeting them in a working context, and you're not transactional and don't have a really clear idea of what you're trying to accomplish, it'll be a alienating experience, except in the rare cases where they're going out of their way to be nice to you because you're out of your depth.
I had a lot of animosity towards VCs from several bad experiences (with a company of mine that got funded, and then with another that didn't). But I've come to realize the commonality of those bad experiences was that I was naive about what was going on. I don't go to my bank hoping for camaraderie and sage advice. VC is tricky because of the "sales" layer it adds to the bank. The best parallel (this is probably really offensive to investors but it's more about me than about them) is real estate agents --- who I also had very bad experiences with, until I learned what was actually going on.
Great points and perspective, thanks for sharing! Totally agree.
Having grown up in a family that runs a real estate firm, I can say the ratio is about the same - about 1 in 20 real estate agents are decent human beings who desire both to help others and make a living, and the rest are highly self-interested.
What I find interesting is the VC stories along the lines of "X VC really worked with and helped/saved us!". I haven't encountered such stories about any bank.
What tripped me up with real estate agents is how socially skillful they are. It's a survival skill, so as a cohort they're all anomalously good at building rapport and, from there, trust. If you don't know what you're doing, and what they're doing, and you rely on them as the domain experts, there's a pretty decent chance you're not going to be happy with the outcome. Their incentives aren't perfectly aligned with yours, and if you're not providing a structure to engagement, they are, and that structure will serve them.
But the flip side of this is that what feels like mercenary behavior is also useful for the actual job of making real estate transactions happen, so if you optimize for the most trustworthy, least self-interested real estate agents, you're also not going to get the best outcome (and you're going to bounce off of lots of non-altruistic real estate agents in the process). It's going to leave you with grim feelings about the entire business about real estate. Which: fair enough! There's lots not to like about it. But you, personally, as a consumer of real estate services, will feel better and have a better experience if you learn to understand and adapt to how real estate actually works.
And a lot of mercenary real estate agents are perfectly lovely people, just doing what it takes to do a job well.
As with real estate, so with investing, I suspect. Great example: every VC you meet is going to tell you they're interested in investing and that they want to move the process forward, and they'll keep giving you hoops to jump through as long as you let them without ever intending to invest. That's incredibly aggravating, until you know what's going on and learn to read the room.
I'm not good at any of this stuff and would get gutted like a fish trying to raise a round myself, but I've had the benefit of seeing it done well firsthand now, and talking to others who've done it well, and it makes a lot more sense to me now.
For real-estate, assuming you are the seller: Let's say you bought a house with $500K and now looking to sell it. The real-estate agent finds a buyer for $550K. That's a $50K profit for you. The real-estate agent could work a little bit harder and find you are $600K buyer. That's a 100% gain for you. However, the agent is getting paid a fixed percentage of the total sale. For him, it's only a 9% increase; and that does not justify the extra-work.
The incentives are highly not aligned.
If you do not understand that, you'd be disappointed. If you do understand that, you'll see where your agent is coming from.
I just mean, a real estate agent wants the transaction to happen and shifts in price that make a big difference to you make almost no difference to them, and a VC partner is going to fund one company in a whole year, is mostly concerned about missing out on the one company that 15x's, and will take as much optionality as is on offer.
The best VC I ever interacted with was retiring and treated us more like a fun project than a VC investment. Kelts is going longer than he should have and exited with a small return eventually.
Indeed! And an honorable failure — where you learned a ton, tried your best to succeed, but it just didn’t work — is a terrific outcome. We acquihire “failed” startups quite regularly. The founders of those companies have often turned into some of our best senior engineering and product leaders. And some of them go on to then leave after learning from us to give a startup a go again.
Success or failure aren’t the bad startup outcomes. The worst startup outcome is The Slog. The Slog sucks. I have several friends stuck in The Slog. Symptoms: you’re growing just barely enough to hold things together (call it 10–20% YoY on <$200k in revenue per employee). You keep thinking the next big thing is just over the horizon. You have a handful of customers who say they love you but won’t buy any more from you. Every once in a while you get some press or show up on HN saying you’re cool.
THAT is the recipe for disaster. You can wake up and realize 10 years have passed and you have nothing (economically, educationally, or emotionally) to show for it. It’s possible both with bootstrapped and VC-backed startups. The Slog is the worst startup outcome.
Bad VCs can definitely make The Slog worse. There’s so much money in the system there’s almost always someone who will put more in, even if on worse and worse terms. Good VCs, on the other hand, can help get you out of The Slog. They can counsel you when it’s time to give up. They can introduce you to potential acquirers. And while it may not be a huge financial win for you or them, it’s a much better outcome than slogging on indefinitely.
Isn't what you described as The Slog essentially just SMEs? That's not so bad. Perpetual meteoric growth for everyone is not healthy on a macro level. Couple of friends of mine are in what you describe as the worst outcome, yet they can buy houses and put their kids through schools (outside the US).
There's a middle layer of B2B that props up the economy in a more fragmented manner, and I don't think they should be dunked on.
It’s fine if that’s your expectation. It’s fine if you’re bootstrapping and comfortable with your level of success. It’s hard if you thought you were building a rocket ship, raised money selling the vision of the rocket ship, and benchmark your success versus others who built rocket ships.
It could be a pretty good SME for the founders, but there are a few possible issues.
1. You have investors who expect returns and don't want (or can't have) dividends.
2. You have employees with stock options that want them to become something.
3. Your company could be set up as a C-Corp, if your intention is to have a stable business and earn dividends you'd rather have it as an LLC with founders as members.
Basically, issues happen when you take VC money but don't end up going the growth startup path. Buffer had the same problem, but they managed to earn enough money to buy their investors out.
One perspective that's missing here is that of the users that are presumably benefitting from the company's product(s). The users would probably prefer that the company keep slogging than that it get acquihired and the "failed" product get killed. I recently read _The One Device_ by Brian Merchant, and I'm reminded of the story, told in that book, about how FingerWorks sold out to Apple. The FingerWorks users got screwed when Apple discontinued FingerWorks product development and put the team to work on developing multitouch for the iPhone instead. Now, the iPhone has several assistive technologies of its own (FingerWorks developed products for people with RSI), but the death of the FingerWorks products was still definitely a loss.
So in my own company, as long as I have the power to do so (I have a cofounder, so it's not entirely my decision), I'll keep slogging rather than shut down a product that is benefitting users.
Yup, that’s one big reason people keep up The Slog. It’s even an honorable one. But, knowing people who are 10+ years into that journey, it can be extremely painful.
The cog can be an outcome that is almost as bad the slog. You are overestimating the amount and range of learning that is possible under the vc path outside of the slog (eg the cog).
Indeed, you may feel like you are learning quite a bit. But that will generally be lessons that the vc investors want you to learn.
Your statements imply that there are lessons to be learned that can only be facilitated by the kind of money that vc investors offer. But your own company (Cloudflare) makes cloud technology more affordable and partially weakens the rationale for getting vc investments.
When you have a soft money bed to land on, you will be less incentivized to search for a broad range of knowledge. Arguably, you will be learning less as a result of this money safety net.
You will be operating under the vc cog thinking that you are learning significantly both quantitatively and qualitatively. As the vc cog wheel continues to churn, you have the illusion of epistemic progress.
What a depressingly nihilistic world view. Certainly if you believe you are beholden to some entity’s rules you must follow then all you can ever learn is what the entity you follow is willing to teach. We took a different path.
We talked to our investors generally four times a year at Board meetings. We had a rule that no sentence we said in those meetings could end with a question mark. We recognized that we were the experts in our business. We used those checkins as opportunities to confirm ourselves that we were making progress. We focused on building great products for our customers and chose the KPIs to report based on measuring that. And we leveraged our success to meet thousands of people we’d never have had access to and try and learn from them all.
One thing that I think is natural if you have professional investors but is important to find way to create even if you’re bootstrapped: the regularly scheduled check-in. The most valuable part of a Board meeting isn’t the meeting itself. It’s the preparation for that meeting which forces you to assess how things are going.
Our trick was to pick 5 KPIs that indicated the true health of the business and track them relentlessly. The first 12 pages of our Board meeting presentation was exactly the same every time other than the numbers being updated. We picked the the metrics. We didn’t ask for our VCs input. But then we relentlessly stuck with them, quarter after quarter. It made preparing for Board meetings easy: just update the stats and prepare to talk about whatever is anomalous (good or bad). And the consistency built confidence from our investors. I remember one saying: “Cloudflare Board meetings are great: I know exactly how things are going by slide 4 of the presentation.”
No VC taught us that. We learned it by being curious, talking to other entrepreneurs, and experimenting ourselves. You can do the same if you’re bootstrapped, you just have to be more self-directed to create some cadence to check in with your business and keep yourself honest.
PS - sadly, there’s no Illuminati running the world either. “Sadly” because it’d certainly be comforting to think someone was in control and it’s scary to meet the people who supposedly are and realize they’re just making it up as they go along too.
A sincere thanks for sharing your experience and insights. Curiosity and a flexible mindset with a fast learning rate and a willingness to challenge even closely held assumptions can result in innovative knowledge under any context, including a vc investment one.
But curiosity is not limitless. It is a function of time. And it would be disingenuous to completely refute the fact that a vc frame of reference will affect curiosity - perhaps even in an adverse manner that can reduce innovation.
Let's get practical and technical with a Cloudflare example. Arguably, there would be no Cloudflare without the ability to change nameservers from domain registrars. You spotted some network slack with the ability of people to easily move to Cloudflare with a relatively simple nameserver change.
That was innovative and surely a result of your curiosity. That allowed you to then build upon that traction and offer a wider range of cloud services.
However, Cloudflare itself eventually became a domain registrar. In the terms of service, Cloudflare blocks all nameserver changes for domains registered with Cloudflare - the very option that allowed Cloudflare to emerge in the first place.
There is no justifiable technical reason for this. It is essentially a political decision borne out of a vc frame of reference. Perhaps the political justification is : Let's lock in people that registered domains with us on Cloudflare. So, they will will be forced to use Cloudflare services.
Arguably, this is a violation of ICANN guidelines that allowed you to obtain your domain registrar license. The block is essentially pointless. Most people interested in nameserver changes for Cloudflare registered domains just want to coordinate across multiple Cloudflare accounts. Multiple questions have been posted in Cloudflare community forums for years. Yet, nothing gets done about it.[1]
The fundamental point is that curiosity led you to use nameserver changes to get some traction. As the vc frame of reference gained more importance over the years, it blocked your curiosity by nudging you to block nameserver changes.
You are undoubtedly still curious. But that curiosity time is spent on board meeting formats and and how to optimise slide presentations - instead of realizing that some curiosity doors that allowed the existence of Cloudflare in the first place are getting closed. Ramifications of that attitude and mindset going forward are overlooked.
So yes, curiosity is good. But, there is no inherent primacy of curiosity under vc versus outside vc. Highly curious people tend to be self directed in any context. If anything, the direction provided by vc can limit curiosity and be ultimately self defeating.
We give domain registration away at cost. The only reason that makes sense for us is if some of the people who register use our services. Key to using our services is using our name servers. So someone who uses our registrar but not our name servers is a complete loss to us — we literally lose money on the payment processing and anticipated support fees. There are lots of other registrars and we make it easy to transfer away if you need to use other name servers for some reason. But if our registrar business weren’t lead generation for our other services then it wouldn’t make sense for us to have a registrar business at all.
The mission of Cloudflare is to build a better internet. In what ways does blocking nameserver changes help build a better internet?
It actually builds a worse internet. One that is closed to the exchange of information and services. One in which Cloudflare, an entity that allegedly helps build a better internet, would not even exist.
You know full well, that if all domain registrars had prevented nameserver changes to Cloudflare, that Cloudflare would not exist. In this context, you could forgive a skeptic for suggesting that "building a better internet" is just empty corporate speak.
Let's now consider the business case for domain registration. You mention that it is at cost as far as ICANN fees and registry fees are concerned. But you incur payment processing fees and customer support fees that would place an undue business burden that would generate a loss.
For payment processing fees, let's assume one to two percent. Cloudflare domain registration for the dot com registry including ICANN fee currently stands at $9.15.
One percent is $0.0915 or let's just say a dime. Two percent is $0.183 or let's just say a quarter. Registrants would surely not mind paying an extra dime or quarter to cover payment processing costs. Heck, you could just round it up to an even $10.
If your intention is indeed lead generation for your other services, it would actually make even more business sense to have this slightly higher price as a lead qualifier. Do you think a potential customer that is price sensitive for a few cents on domain registration is likely to purchase your other services?
As for customer support, if the user changes the nameservers to another provider, by definition, that user will have to get support for dns records and all other issues from that provider. In other words, there would not be much custom to support.
So, if payment processing and customer support are your key arguments against blocking nameserver changes, respectfully, they are tangential and inconsequential. If there are some more relevant and consequential arguments for blocking nameserver changes, out of curiosity, please share those with us. Thanks.
If you are inclined to share your VC experience, you might want to reach out to the founder of Dioxus. As a recent YC 23 “winner” and recent (ex)employee of CloudFlare, I’m sure the founder would love to get your personal take on VC funding. I also understand they’re working on a product that CloudFlare could possibly use…
If I give up on this, I'm not sure I'd want to do it again. I don't know what I'd do differently. Building an app and all the non-programming junk that goes into running a business is just a lot. I could rise the corporate ladder. I'd be fine but never rich.
Working at a corporation and making a reasonable engineer's salary will make you basically rich. Not like rule-the-world rich, but rich enough to do anything you ever wanted, which I think is pretty much as rich as anybody needs to be.
I'm experiencing this now since I've been doing both for awhile now. It's enough to not worry whether or not I should buy that $10 beer with my dinner but not enough that I don't have to debate with myself if I should be ordering 2 or 3 of those $18 cocktails every day on my first ever euro trip. Not a bad life for sure but there's quite a few things that still feel out of reach. Like private jets or even just first class
Engineering at a much more mature company. It won’t make me rich (especially considering the stock’s dreary trajectory since 2021) but it’s a lot less depressing nevertheless.
With all due respect, your company is probably one of the biggest and most successful mass surveillance operations on earth. I wouldnt lose sleep over these things too if I knew my company would be scooped up by a 3 letter agency if anything were to happen that threatens this flow of data.
I don't understand this logic. The US has the Powerball lottery.
So far it has been won 403 times[1] what seems around 20 year time span. With a US population of around 360 million. So not sure why 25 winners would require a population of 1 billion.
I was using some state odds. Ok so 1 in 1m for Powerball, yet HN is ~3m, so we have 1 in 100k on HN. Already an order of magnitude difference. Then, of course, not even 1 in 100 here are actually giving a startup a serious go. So comparing successful startups to the lottery is easily 1000x off.
You still eventually need to return money to your private market investors at some point. So that just pushes the outcomes out later. Or, again, in the super rare case that you’re generating so much case that you can pay investors back at a rate of return they’re happy with with dividended cash flows.
The first time I saw how customizable a PE deal was, and how you could limit how much of a company you give away with how little of the PE you end up drawing by becoming profitable, I was surprised why it isn't more common in tech.
I had drafted a reply but would be interested to know what you're looking after - is a story/experience of PE from a technologist on the business side what you're seeking?
This is a nice wrinkle to the story, but as a reply points out, your story (3) is a hell of an exception, a fairytale if you will. It would be nice if people realise that and have realistic expectations. You shouldn't set people on chasing fairytales without them being aware that's what they are doing.
I think it is mostly based on one's POV. From the founders perspective starting a company, raising capitol and eventually taking it public might be taken as a wildly successful path. To an employee all it means it more and more dehumanization, destroying the company as a work place.
I'd add a caveat here: you guys were a Harvard founding team w prior experience and connections though...
Just like everything else, the real approach to this is nuanced. It's important to highlight that as many fundraisers are operating under misguided thinking on this topic.
Customers of VC-funded companies take note: none of these outcomes are good for you.
When you have a choice between being a long-term customer of a VC-funded company vs a self-funded business, think about long-term incentives and don't follow the rich and shiny.
Disclaimer: I run a self-funded SaaS business and sometimes explain why I never wanted VC funding and why a LARGE BUSINESS is not necessarily better for customers.
The lottery is not a very good analogy. Let’s look at worst cases. In the lottery you put in cash and usually get nothing back. You literally learn nothing because every draw is random. At a VC-backed startup someone else gives you money. With that money you’re expected to pay yourself a salary. You get to learn at an incredibly fast rate on someone else’s dime. And you get that salary and learning even if your investors are awful and push you to do terrible things and you agree to do those terrible things and they tank the company. In the worst case, it’s a free education with room and board included. And, if it works, there’s a helluva upside.
So, lottery expected worst case: you lose all your money. VC-backed startup expected worst case: you learn a ton and end up no worse financially than you started.
As an aside, whether venture-backed or bootstrapped, having gotten to know a lot of successful founders the characteristic that seems to set them apart is their rate of learning. The best are relentlessly curious, always assume there’s something they don’t know, and seek to learn from as many people as possible.
You get almost no money in salary, and you spend something way more valuable than money: time, during your most energetic and precious years of life typically. I think it’s really dangerous to put rose tinted glasses on the whole thing.
For anyone not upper class, if you spend 6 or so years chasing a startup and fail, and you’re a good software developer.. once you factor in savings and interest, your total opportunity cost is something like 2-4 million dollars. That’s making a good software dev salary for 6 years and saving some of it. That’s life changing for someone not already rich. And you’d still be learning a lot, plus working a much more relaxing job with time for side projects.
Agree that’s the right analysis for many people. Wasn’t arguing whether you should start a startup or not. Just that if you do bootstrapping isn’t inherently better than raising venture capital.
Your broader point is important too: startups are unfortunately too often a luxury of the upper class. It is extremely scary to take a risk when you don’t have a safety net. I was personally broke when we started Cloudflare and had to borrow money from my mom to pay my rent. But I could borrow money from my mom. And I had a mom and a family that if I failed would make sure I didn’t go hungry. My family wasn’t anything close to what I now see really rich looks like, but we weren’t scraping by. Had I not had that safety net I don’t think I’d have had the confidence to start Cloudflare. And I think that’s a real issue with entrepreneurship we don’t talk enough about.
I think we also focus and celebrate too much the route of college drop out start up founders. For these cases yes some family wealth is definitely beneficial as a safety net.
But there are also plenty of people that have worked for a while, provided themselves a safety net and go on the startup journey in their 30s and 40s. Eg. Eric Yuan, who was a eng VP already before zoom.
But I guess those don’t grab the same headline attention.
I was 34 when I started Cloudflare and had had every random job from bartender to LSAT test prep instructor to adjunct law professor. Eric, incidentally, is one of the kindest, most curious people I’ve had a pleasure to get to know on this journey. Feel lucky to call him a friend. Truly great guy.
> And you get that salary and learning even if your investors are awful and push you to do terrible things and you agree to do those terrible things and they tank the company. In the worst case, it’s a free education with room and board included.
If you’re learning as much at terrible companies as at good ones, then you’ve had rotten luck. A lot of what I’ve learned at rotten companies is how not to do things, and how important mental health is to physical health. There’s much more negative space than positive space, so you have to learn hundreds of ways not to do something for every handful of ways that actually are sustainable.
This seems to assume that the only reason to start a product company is because you want to gamble on the slim chance that you'll get rich. But what about starting a product company because there's a problem you believe really ought to be solved, and developing a commercial product is the best way to solve it? In that case, wouldn't it be prudent to avoid unnecessary risk?
You'll still most likely fail! This is a really important part of why the VC math works the way it does. You can de-risk a product company by not trying to shoot for the moon, but it's an incremental derisking.
The article has a lot of interesting points, but seems to miss out on one of the main reasons (IMO) that startups take funding, which is to grow faster than (or as fast as) their competition.
Unless you're lucky enough to be in a market segment without competition, you need to keep an eye on what your competitors are up to. If they can expand faster, add features faster and get more customers than you, it damages your chance of success in that market segment.
Taking VC money could provide that velosity.
That said ofc I do agree that, if your goal is to run a profitable business for a long time, taking VC cash is quite possibly a bad idea, depends on what the founders goals are.
OR (as you say, but many miss) you do not care about being the market leader. I just want to have a nice company with nice people, no stress and making millions for all to live. I don’t need vc money, stress, be the market leader or ‘be faster than the competition’. A LOT of services or products you can make a long term (decades) money with like this. I don’t need more than 10m euros in my life, nor do my colleagues and our clients are happy. No idea why I want all this misery of competing, stress, exposure, running all the time etc etc.
- Million startups - put loads of cash into thousands of startups globally and play a huge vegas lottery - there is a lot of work there for the BC companies but played well it will have influence at the levels seen by newspapers or major consultancies used to
- the current much maligned approach that is going to creep further up the series A B C tree supplying capital to companies that have developed the model to just churn
- your one. The one I and half of HN is looking for :-) Honestly this confuses me - there is a large chunk of people on this very site that you could have convinced to leave what they are doing and set up a company with the risk of doing so mitigated by "nice VC" cash.
And since everyone in the industry claims they invest in people not ideas then they are turning away people because they won't raise their price to meet a new point on the risk threshold curve.
So yeah something like VCs that fund profitable non IPO businesses seems a good idea. I mean if you stop asking people to make moon shots maybe more of them will just make 20% per year ROI
The biggest obstacle I see to using VC money is that it has a good opportunity to distort incentives.
If a company has a vision fulfilling every request outside of the vision could be considered a distraction. The VC has legitimate concerns outside of the scope of the company vision.
Apple is one of the few modern companies that I can think of where the VC money was useful.
If anyone can remember google before going public and after going public might mourn the old google.
Imagine if google wasn't romanced by Wall Street but followed their own path like craigslist.org. I believe that google would have been much more collaborative. I can't see where going public helped google be good at internet search.
Yeah I remember discussing this with friends back in 2004 and concluding that Don't be Evil was dead. Took a little longer than I expected but they got there in the end.
As someone who's worked for tons of startups, it's not that binary. For loads of industries, there is simply no viable path without significant outside funding (whether from a VC or very rich founder), and even if you look at some of the most famous outliers (like Atlassian), I don't believe the path they took is even viable these days anymore.
For example, if you're selling any sort of business SaaS product these days, the regulatory regime has changed greatly from 20+ years ago. The cost of just something like SOC 2 or ISO 27001 certification, which most enterprises will require to even talk to you, often prohibitively prohibits bootstrap-like funding models. Couple that with the fact that software engineering salaries are comparatively way higher than they were 20 years ago.
The short of it is that a lot of people take VC funding not because they want the "misery of competing, stress, exposure, running all the time etc etc", but because, in many industries, there is simply no other option if you're not already rich.
(1) SOC2 is somewhere between $10,000 and $20,000 if you do it cheap.
(2) That's a dollar amount that most bootstrappers can swing.
(3) Critically, you don't do SOC2 until you have a critical mass of purchases requiring it.
(4) Many (most?) of your customers, especially your early customers, won't require it, and/or will have alternate paths for companies without a SOC2 attestation.
(5) When you finally do hit the big deal that absolutely demands an attestation, you can often cut a contingent PO: you sign the deal, deliver the stuff, but you don't get paid (or you don't get the last tranche) until you get the SOC2 attestation.
(6) You can get a SOC2 attestation real, real quick.
There may be other things keeping people from bootstrapping SAAS businesses, but this isn't one of them.
SOC2 is also waaaay less expensive on the development side if you do just a little upfront development in dev tooling: logging, backups, encryption in transit and at rest, tagging data with sensitivity levels, IAM policies, and CI. I've seen a few founders who invested a few weekends pre-funding into this sort of tooling get to SOC2 and have almost no development costs (still have to document those processes though).
You don't even need to bother with the encryption and sensitivity levels (your data classification policy can be just that, a policy). The ace move is to roll a set of SOC2 policies that just captures what modern dev teams do anyways; that was the idea behind https://latacora.micro.blog/2020/03/12/the-soc-starting.html.
The right way to think about SOC2 is that it's a ~$15k outlay that will come up when a major customer proposes a P.O. that justifies it, and little else.
> No idea why I want all this misery of competing, stress, exposure, running all the time etc etc.
Have you ever run a business before? The belief that you can build a business without dealing with competition is a myth. Having a successful company requires picking your poison.
Non-VC is a different poison than VC, and I do agree that it is a much better approach for far more many businesses. But make no mistake, having a company with "no stress and making millions for all to live" is not a realistic goal. There is no free lunch in the world of business. Competition is everywhere. You can either ignore it or embrace it.
Only 30 years. You? Not mean to be as snarky, but this US all or nothing stuff is getting on my nerves just a bit. I came from a simple background, but in a country with free education, so I got a degree in uni, opened a company in high school, all without too much risk. Didn’t need to work myself to death, didn’t have much stress, didn’t need VCs and make more than most here who seem to be dying of stress, lack of proper healthcare, free education etc etc. My clients like I have no funding and that I have enough money yet want to keep working as I like it.
I've been building startups successfully for a decade, but they are US based. So you got me there.
There are many self proclaimed dropshipping millionaires on the the internet selling courses while living the good life in Bali, overleveraged to the gills, living off of credit card debt, desperately hoping the courses they sell as a grift somehow can be ponzied to the next fool before the whole thing collapses. So that's always my assumption when people discuss something in business that seems too good to be true. But maybe you are correct. Perhaps my US all or nothing priors have closed my mind.
What kind of business do you run that can be done without too much risk, how does it make money, and what country do you operate out of? I am genuinely curious and I would like to be prove my priors wrong, if possible. They're not particularly pleasant priors, as you might imagine.
I agree with you completely. Due to the whole business media world spreading these lies, people think business is all us vs them and competition is for losers.
You can make very good income ($4 million profits / annum) in my case while coexisting with competition and having lots of fun.
But I am in the EU and we all do better money than what I hear here what most American devs make. But sure; my colleagues just will never leave here so it would have to be better paid, many vacations, no stress, wfh and more money.
My takeaway is: you either raise (and spend) more than all the competitors in your field, or you spend very little. In terms of funding, be the 1st or the 100th. Don't be the 3rd.
> which is to grow faster than (or as fast as) their competition
But I also work for a privately held company and there has been a whole series of companies pop up outgrow us … then fold … It’s like a parade of VC failures. They weren't bad people or bad ideas, they just had so little time and sometimes were so focused on their one cool trick, that was it.
Velocity also means velocity to failure, and arguably less time to learn from mistakes or just make money. I've seen a few who didn't even have time to learn.
That might work for some ventures, much less for others. Just gotta know what you're signing up for.
I recognize there must be good VCs around, but so much of what you see looks really like a kid's game to me. So many douchy people with the same cliche advice acting like they're visionaries. And a certain kind of "lifestyle" "founder" fawning all over them. Starting a company has been commoditized and turned into an internship for smart kids. I know it's not all like this but for anyone seriously interested in doing something different, the whole scene comes off as very unappealing.
It's an availability bias. You're noticing the worst founders and VCs, because the worst of them work to be noticed (some good ones, too, but all the worst ones). But as long as you understand the modality, it's also fallacious to write off a whole financing model just because its douchiest practitioners rub you the wrong way. Remember Sturgeon's Law!
I remember when "silicon valley" came out, and after watching a few episodes I thought it was so stupid and unrealistic... This isn't how startups operated.
Then I talked with other people in the startup world who said it was a perfect match.
That's when I realized that I just worked at competent places.
Absolutely. The successful sleepers that are founders and VCs are sleepers very deliberately. They don't want the notoriety. They're already well-known enough by the people that matter, the outcomes they've generated. They are already freed by the wealth they've generated. What does notoriety do but subtract from that?
I think it falls into a few categories: and you can _feel_ the difference. There is type one: the company just going through the motions because they're just the NPC that feels "oh I now its time to 'do' VC because that's what everyone does"
Then another type: some of the deep tech startups full of super smart people, even publishing papers, and are usually backed by one or more major institutions (universities, companies, etc.) you can literally feel the passion pouring out of their employees
Then even still there is a third but very rare type: that startup that bootstrapped itself to profitability without any VC at all! (IMO most impressive and difficult)
VCs want to feel good about investing in innovative and exciting startups that will give them massive returns, and the free market responds with founders who meet their emotional needs by selling personalities that are quirked up and coked out with just a hint of sociopathy. Truly a virtuous cycle.
On the other hand, my first self-funded startup got destroyed by a VC funded venture. They had a worse product but far better marketing and they used every dirty trick in book to tarnish my company’s reputation.
There is no way I’ll start another startup unless I receive backing from a huge VC company.
Current economic paradigm is more similar to centralised/controlled economies of USSR. Thus if you want to succeed, you will need friends with connections to central banks.
I self-funded my startup to the tune of half a million dollars.
I've had what I can only assume to be a VC-funded competitor study my endpoints for high latency / expensive queries, then saturate them with millions of requests a second across thousands of simultaneous IP addresses.
Business is survival of the fittest. Pressures and growth gradients come in all shapes and sizes.
- Moved DNS to Cloudflare, which handled the brunt of it.
- IP and CIDR blocks
- A few trivial heuristics to catch certain behaviors they were using
- In-app query caching for read-only endpoints that serve the same data to all users
- Redis TTL caching for read-only endpoints that take view arguments. A means to manually expire on writes.
- Runtime control plane additions to dynamically block IPs/CIDRs, user accounts, and endpoints (if they find another hole to exploit, we can just block a few endpoints rather than the whole service)
- A tool to inject bad responses (we found another, probably different actor consuming and reselling our service)
> On the other hand, my first self-funded startup got destroyed by a VC funded venture. They had a worse product but far better marketing and they used every dirty trick in book to tarnish my company’s reputation.
Would you be willing to give a few more details about what happened? I'm not interested in the identities of the companies or people, just interested in a high level overview of what happened. We don't hear these stories often.
- Hired a journalist on some mid-size news company to tarnish the company’s reputation. I never imagined they would bother to do this, but I was wrong.
- Used an APT for hire but I don’t believe they did succeed , still it is quite insane. I was lucky enough to catch a targeted rootkit but issue was quickly remediated. I’ll eventually find a consultant to analyse the Win 11 rootkit. They were definitely not script kiddies.
- Some black hat SEO and shills for hire, but that is expected.
I’m really surprised by hired journalist / APT aspect. Something I never imagined would happen, but apparently it does happen.
You missed a step, it goes from the central banks to the LPs to the VCs. The big hedge funds that get all of that low/zero interest money are certainly active in private equity AND forcing their behaviors/policies on companies far and wide.
You're saying this as if the central bank is forcing money into the economy when it really is a pull based system. The commercial banks ultimately decide how much money they want to issue and if they think you have a viable business they won't hesitate to give you a loan.
Want to explain? I doubt bank loans were that much easier for startups in times of low interest and if anything the inflation hurts bootstrappers worse.
The Fed selected BlackRock to run a groundbreaking program to buy hundreds of billions of dollars in debt from large companies slammed by the coronavirus crisis.
> I doubt bank loans were that much easier for startups in times of low interest
Low interest rates doesn't mean loans are “easier” (this is going to depend on the risk policy of the specific bank, and is mostly unrelated to the interest rate), but it lowered the interest rate you'd pay for every loan no matter who you are (I personally bought a house with a .7% interest fixed mortgage in 2019, I didn't have to personally know Christine Lagarde for that).
> if anything the inflation hurts bootstrappers worse.
Low interest don't drive inflation up (we've had anemic inflation for a decade of low interest), if anything, inflation leads to interest rates hikes.
Inflation rises when the Federal Reserve sets too low of an interest rate or when the growth of money supply increases too rapidly – as we are seeing now, says Stanford economist John Taylor.
I never said you needed central bank connections to get a home loan. To get infinite runway on unsecured risk is a very different area of privilege than secured home loans.
No, I'm arguing against die-hard monetarists who still buy Friedman's bullshit 25 years after the Asian financial crisis and 15 years after the subprimes crisis. Japan has had more than two decade of low interests with no inflation, and the rest of the world had one decade with the same result, but as these people are cultists, they don't care about facts and they never did.
Inflation isn't a money problem, it's a supply problem coupled with a market power one. (Nor is inflation a “diminution of the value of money” either).
> To get infinite runway on unsecured risk is a very different area of privilege than secured home loans
I appreciate the context and will research the differences you shared; this topic interests me.
> This is goalpost moving.
My comments have been under the context of the post, VC funding. With VCs, you often find companies spring from nowhere with a marketing blitz or infinite runway in an exclusive access phase. This is not accessible to the common person, and in my opinion stems from a modernly masked form of nepotism. This is also not accessible in a world that requires near-term profitability, so maybe more of this will be broken in the years to come by economic realities.
I am personally of the opinion that the central bank is irrelevant. The only factor relating to central banks that has any relevance is that they issue cash with a price control aka the zero lower bound on interest. This results in the usual problems with minimum price controls. There will be an oversupply of the "product" in question. Because the ZLB applies to the short term interest ratethere will be an oversupply of liquid and immediately accessible deposits or account balances. People will be hesitant to commit their money long term and they instead just wait for the next opportunity. This then leads to a slow down of money circulation, which in turn forces the entire economy to adapt to this artificially created situation. This behaviour creates an opportunity to plug the gap with newly created money by commercial banks by keeping less than 100% of the deposits in reserve. The problem is that the newly created money will end up stuck in the same accounts as before which means that the bandaid solution has to be repeated endlessly. The obvious solution is to eliminate the zero lower bound and let the market determine both positive and negative interest on liquid account balances. Then the central bank won't have to do anything at all except prevent commercial banks from creating too much money by having reserve requirements at 50% or higher. You will get most of the neoclassical predictions like full employment even if the economy is no longer growing or the last world war has been eighty years ago.
But the reverse is also true. If you keep the ZLB enjoy living in an imperfect world that needs constant government intervention to deal with the constant dysfunction that such a price control generates.
I understood how one-sided discovery is problematic in paper-asset markets. I think this is a big reason we are seeing efforts to shut down decentralized exchange. Decentralized exchange prohibits censored price discovery. Orders must execute in public by nature of the systems. Now from what I understand, if the order is big enough to cause major market impact it goes to dark pools, or other frontrunning/delay measures are executed in private via contractual negotiations. Interesting that this is also similar in borrowing markets, thanks for that context.
> I am personally of the opinion that the central bank is irrelevant
The economic history of the US (which was one of the last industrial power to addopt a central bank) is against you on this one, especially the period between ACW and the creation of the Fed in 1913.
The purpose of central bank isn't to set up price control on money (which it doesn't, btw) it's to make sure that commercial bank don't have liquidity issues.
I'm not defending VCs in any way (and I kind of agree with your sentiment here), it's just that you don't need to have any relationship with the central bank to do that: the central bank sets the interest rate, it affects the entire money market all at once so anyone with access to this market will benefit from cheap credit.
Japan did absurd amounts of QE and low interest and all they got was less inflation than the rest of the world.
Your referenced article is also ignoring the obvious elephant in the room which is the opposite of monetary policy. The US government and governments in Europe did a lot of fiscal policy. The stimulus checks and loans were a far more effective way of increasing inflation than monetary policy can ever be, because monetary policy can be reversed by the private sector and therefore make it ineffective at achieving any outcome. QE for example, is a meaningless operation. It has no reason to exist.
Yeah and what gets funded will change. Ultimately higher interest rates mean that time to profitability should decrease in order to make it an attractive investment.
Honestly though, VC is such a tiny, tiny percentage of the investment world that maybe this won't happen (but the vast majority of funds are gonna fail to return their capital as they were funded in a ZIRP world and need to invest in a world with higher interest rates).
Having co-founded multiple companies and been an early or the first employee at several more, several of which have taken VC funding, this feel unnuanced. Of the VC funded companies I've been involved with I think only one would've happened at all without VC funding because they'd have been too capital intensive. For the one that we could've done without a VC, I do somewhat regret taking VC money, as we ended up pushed by investors into selling off a part of the business that could've been a nice lifestyle business, but it's not at all a given it'd have grown enough without taking investment to be worth it.
I've bootstrapped businesses too, and it's an arduous process and often far slower. If you're successful you're then lucky enough to be fully in the drivers seat, and that's great. If you're not, chances are you've wasted far more time.
Overall it boils down to what do you want? VC accelerates the the whole process, and multiplies outcomes - both risks and rewards. If you feel comfortable with taking a higher risk for a chance at either making it big fast or failing fast, then VC investment can be great. If your idea is your baby or your life's mission and it's what you want to keep doing whether or not it's a runaway success, VC might be a poor fit for you unless you happen to strike it lucky very quickly and can dictate terms - control can slip away very fast if things go in the wrong direction or too slow.
I'm far less likely to take VC money if I were to start something today largely because I've got enough money that it'd take far better terms to make it feel worth it, but I don't regret taking investment in the past other than maybe that single one I mentioned.
Only take rocket fuel (VC funding) if you've got a rocket (PMF in a massive TAM with net revenue retention)
If you don't have a rocket, the rocket fuel will be wasted and disappointing in any other vehicle. Ideally you bootstrap until it's clear. But if you start the company with VC funding, you should know the expectation.
If you truly have a rocket the economics of VC funding is favorable for everyone.
How do you know if you have a Rocket? Many (most?) VC funded companies are just appearance, no substance and it’s all very apparent. All the new AI ‘products’ for instance. So those are clearly not rockets, just blah and hype. Maybe we had rockets before, but I don’t want to lie and cheat like some of our vc invested companies did (most are gone). Never were rockets, just hype, Twitter presence and faking all around.
To be honest, startups play on another level than most SMBs. With a SMB, you can double your growth every year for 5-10 years straight, and do very well, but not be interesting for VCs. To be interesting and relevant for VC money, you need a business that can scale to millions of users.
If you can show that you're able to double growth every month (or similar short-window metrics) with an idea that could scale to a billion dollar company, you'll get the interviews all right. Hype is a big part of growth.
The problem, so to speak, is that you'll be competing against other startups - and if you they have the VC money, but you don't, there's a good chance they'll outpace/outgrow you.
I think it's very noble to grow as much as you can organically - but realistically speaking, it's difficult to compete against those that are funded.
And you don't really need to use the money you get - being funded also comes with a signaling effect. You get lots of publicity, and get to signal that serious investors are willing to back you.
Actually you would be interesting for VCs if you started compounded from a reasonable start like $1m/year. Doubling for five years would get you to $32m/year, and 10 years to 1b/year, leading to a $10b valuation.
One common benchmark for startups at the $1m/year stage is T2D3 (triple, triple, double, double, double).
I believe it’s a pretty well-understood statistic that most VC-funded businesses are not successful, and the VCs are only successful because a small number of investments are massively profitable.
Neither VCs nor companies know for sure if they _will_ rocket. VCs are looking for businesses and founders who _could_ rocket.
That's indeed what I understand. And in that case, if you believe in your business, statistically, it's a much larger chance your dream will tank when going for a VC. Which does convince me, as I said, that people going for VCs, don't see this as something too important in their life, just something they try and see what happens. Can say whatever bad about Musk (and I do these days) be he seems to be (used to be?) different in that regard. Most would've just given up after a few years and few 100m$. And most do. The world changers won't hang their dream on a practical 15/1 VC.
It's not necessarily better to be one or the other, I just don't like people who work solely for the money. And people scamming VCs (who want to be scammed) are not people I choose to hang with, even though I met quite a few.
You know you have a rocket if you're leaving money/customers on the table because your cashflow doesn't support rate of fulfillment of potential growth.
How many rockets are there really though? Most VC funded ventures are pretty underwhelming concepts in my opinion. (Well maybe that will change in this current economic climate).
And the corollary is that if you do have a rocket but no fuel, a dozen others are going to copy your business and add fuel, leaving you with no chance to succeed.
> Remember when I wrote earlier that the VC dudes definition of “making everyone happy” after investing in your company doesn’t mean making it profitable? So now you might ask: Okay, so what do my VC investors want? ... They want to make a lot more money.
> ...
> Now, all of this might be none of your business, you might think. But it is! Because now the inevitable consequence, once you’ve taken VC funding, is that the objective of your company has changed: You’re no longer building your company the way you like it. You’re building your and the VCs company so that they can sell it, for a price higher than the one they paid. There are no alternatives. The course is set. You’re building to sell.
Why? Why do you have to respect the VCs' desires? Why can't you take VC funding, then use it to build a company that yields modest returns and live a comfortable life running it (and paying modest dividends to the VCs that over a few years return their investment)? Doing so would (I presume) not constitute any kind of breach of fiduciary duty, so what right can the VCs possibly have to enforce their preference for a more aggressive strategy?
People commenting on startups often imply - like in the quote above - that VC investors ultimately control any business they invest in, and not the founding CEO, even when that founding CEO holds the majority of the voting stock. This strikes me as bullshit. At least, nobody ever spells out the mechanism of control, and their inability to do so makes me think they don't know what they're talking about.
If I'm right that the narrative of VC control is bullshit, then what's the alternative explanation for why CEOs so often choose to pursue aggressive growth and sell their "babies"? Simple: the CEOs themselves want big money. It's not that the evil VCs are forcing the CEOs to do something they'd rather not do. It's that the VCs and CEOs are aligned in their objectives in the first place.
Because as part of the VC investment, they are also taking positions on the board of your company. Maybe enough of a position that they can oust you if you don't do as they "suggest". Also, one round of funding is rarely the end of it, and if you are demonstrating that you are not playing their game and trying to become a Unicorn, then you will not get a second round of funding.
That makes sense to me that in these two particular situations they have leverage. But what if they don't have enough board seats and you also aren't looking to raise a subsequent round? It sounds like then they don't really have leverage, right? If so, it seems easy enough to guard against the risk that VCs end up with too much leverage over you.
> then you will not get a second round of funding.
A couple of years ago when the VCs were throwing money around like crazy, I had this bright idea that perhaps all I'm ever going to need is a single round of funding. Use the money to put the company on a modestly profitable track, cut the head count, cut the cloud costs, eliminate the office, and cruise along indefinitely. Just like passive income, but on a corporate scale.
The reason this doesn't work is that the market changes very, very quickly in our industry. You can't just put your app on cruise control and expect a consistent ARR forever. As soon as some other VC finds out that you aren't making an "optimal" use of your money, they'll invest in a competitor who will eat you alive for breakfast.
Hmm. I can believe this happens, but definitely not all VC investors take board seats. In fact I'm not aware of this having happened at any of the 5 startups I've worked for in my career, despite having at least partial knowledge of who made up the board of 3 of them (for at least 1 of whom I know the entire board membership and can say with certainty there were no VC plants on it).
Would be interested in stats on how normal this is or information about VCs' policies on it.
The control is the desire to hold open the option for future funding rounds. If you gain a reputation for not caring what the VCs think then they won't want to invest in future rounds.
I know nothing on this topic so perhaps a naive question but: what about the employees? I imagine part of their TC was in stock, so if I was a CEO I'd feel pretty motivated to reward my employees, who quite literally bet their family's income on me (and indirectly, their retirement and kids' college funds and inheritance etc.)
Lots of people say they would do the right thing when a situation arises that requires it. But the greedy part of the human brain is very good at rationalizing why the altruistic path isn't the best path. Imagine an inner dialogue, "Why should I settle for 10 million dollars instead of 50 million? I own the company, I made the most sacrifices, everyone else just road my coattails to success. They'll still get something but I deserve the most."
This is why we should never trust anything that isn't in writing. No matter how many times someone promises to "do good by you" there will be a moment where that promise won't mean a thing or will be interpreted to have meant something different.
VC bubble was a side effect of 0% rates and free money for 15+ years, no? High interest rates are making that impossible for the foreseeable future. I think nntaleb puts it right about this new era where "it doesn't rain money anymore" for revenue-less companies and real estate
I think the biggest stain that was left from this era is that it mixed the millionaires made from cash flow with the millionaires made from empty valuations, and now the two are inseparable
This article is technically correct about a lot of things, but it also feels like it’s over-thinking things. Yes if you take big VC investments, the purpose is to grow a big company and sell it later, and at that point the deal really is “rocket ship or bust.” But there are also a lot of VCs who are happy to invest small amounts very early, don’t get control of the company, and would be happy to see you get profitable without taking any more investment — often these smallest investors are called “angels” but there are also firms that specialize in these kinds of investment.
It’s fine for the author to be all high and mighty about looking down on taking funding, but for most people bootstrapping isn’t practical or even possible, the business they want to run requires full-time focus and attention, and they don’t have the means to work for 2+ years without a paycheck. VC funding gives people like that a chance to try!
I didn't like most of this post but did feel like the "Second Order Effects", for the most part, ring true.
The only thing I can comment on here with any authority is the consult-to-product model, which I've attempted a bunch of times. It is drastically harder than this post makes it seem to pivot from a viable consulting business to a product; it's notoriously difficult, consultancies are constantly trying to do it (it's the dream!), and very few of them succeed.
That's not to say you shouldn't do a consulting company! They can be great. If you are comfortable with the idea of settling into a long-term consultancy if the product doesn't work out, it's a good way to hedge. Most products fail too! But consultancies (as opposed to products bootstrapped by consultancies) are probably a lot safer to build.
> You confess that you as a founder were still not able to make the company profitable with the resources you currently had. You’re bleeding money, and you need more.
For a lot of companies this is true, but tons of business models require economies of scale to be profitable and there's nothing wrong with that. It's not a failure to say that a company can't be profitable at a small scale.
The real issues are the plethora of companies where the unit economics will never make sense regardless of scale. Painting VC money with such a large brush is unhelpful.
> VC Funding Means You Will Sell Your Company
I think this is the more serious critique. Your VC investor wants you to make an exit, either through IPO or acquisition. This is the VC business model. A steadily growing profitable business will almost never provide the kind of return neccesary to compensate the risk of a VC firm.
The writer is not an entrepreneur (according to his bio), and didn't back his "analysis" with any form of data (beyond some anecdotal telltales) — yet his conclusion is stated without any sliver of doubt: "it *will* destroy your company"!
I think the conclusion is justifiable, but it relies on the author's definition of "destroy".
"If you want to run a company that looks like X, then taking VC money will prevent that from happening" is a pretty easy conclusion to make, though the only value in it is in the description of potentially surprising parts of what not-X looks like, to allow readers to judge whether they care.
VC money is the rocket fuel. If you're not going to build a rocket, then don't take resources. There are plenty of tech startups generating over $100 million in revenue that didn't require that fuel.
Similar advice from Mark Cuban: "If you think that raising capital is the best way to get your business off the ground, you’re wrong, according to Mark Cuban.
You should actually do the complete opposite, the billionaire entrepreneur said during a panel at SXSW last month, and opt to start a business “with as little money as possible.”
VCs are not all created equal. Some are better than others. Some like to stick to a company’s vision unless things are clearly not working while others don’t care and will make you flail around. Some understand and specialize in a given market and others just throw spaghetti at the wall. Some are decent people and some are assholes.
Terms matter a lot too. If you raise a ton or raise on a super high multiple you will have to show cocaine growth to make that make sense. If you raise sanely the expectations are going to be more sane. (Lots of companies raised overstuffed rounds in 2021 to 2022 at batshit multiples. Expect some carnage soon.)
That being said it does put you on a certain track. If you don’t have something that can show VC scale growth, you shouldn’t take VC money. As with all other things know what you are getting into.
Right now I would consider VC for B2B but not B2C. There are no VC scale B2C business models right now that do not involve exploiting people. B2B can be done in much more above board ways because businesses will just pay for things directly. You will have to build a sales org though.
> you’ll also have the non-obvious effect that you hire people who are not perfect fits for your team.
That's only if "you" are not a smart manager. You hire some 'B' players, and they in turn hire 'C' players. An 'A' player will hire other 'A' players.
The article assumes that your business is already there and running. Many VC-funded startups only really get started when they have enough backing to do it. Hiring really good engineers and marketers takes some money (although less than it did back in the day).
He's right, though, that bootstrapping is cool and worth trying. It forces you to think about profitability right from the start, instead of all those BS metrics he decries.
A fun puzzle: if today you take $10m of VC funding at a $20m post-money valuation (ie you sold 50% your company), how much will you get if you sell the company for $20m tomorrow?
Answer: typically, you’ll walk away with $5m (25%) or less. VC funds usually have a 1x preference, which means the get their $10m back (plus interest), and THEN they split the remaining proceeds with you 50-50%.
So if you take VC money, you might have to double your valuation just to keep your take-home value the same.
VC makes sense if you can grow fast and very large. But assuming you have scenarios to grow slower or to a smaller size, those scenarios often turn into bad ones if you’ve taken VC funding.
> VC makes sense if you can grow fast and very large.
I could also argue that such companies are often a blight on the ecosystem. They're an invasive weed that outcompetes a rich variety of smaller companies, sucking the resources required to sustain such companies without doing nearly as much to enrich the environment. And then they tend to die off (perhaps through acquisition and having their product cancelled/absorbed into the larger company's), leaving customers high and dry. If they hadn't been there, some of the smaller companies would have still been around.
Looking at the author's bussineses website, here's a sales pitch for potential new employee:
>OpenRegulatory is different. It's 100% boostrapped. Ironically, having no investors (and less money) opens up interesting opportunities: We can serve customers who don't have a lot of money, like, Healthcare startups. And we can build software which only solves a tiny problem, and solves it well.
While eating your own dog food has a certain face value, future employees most likely won't be pure idealists who will take a lower pay out of the satisfaction that their work helped others who "don't have a lot of money".
> future employees most likely won't be pure idealists who will take a lower pay out of the satisfaction that their work helped others
If you rewrite that to "a much smaller percentage of prospective future employees won't be pure idealists..." then I would agree. But it's about the pool being smaller, and in fact small enough that you risk not being able to find anybody, but the fact that 95% of people are not going to be adequately motivated by helping underserved people does not mean that the remaining 5% won't be.
Existence proof: I am working for substantially less salary than I could get elsewhere. I can prove it, I've been offered the higher salary at a FAANG and turned it down twice. It's financially irrational. I don't think it's wrong for people to work for directly ad-funded Big Tech. Or even for me. I'm not ecstatically happy in my current position. If I were younger I might make a different choice.
But I care enough about working for a mission-driven organization that I basically have no intention of leaving as long as the organization doesn't lose my trust about being mission driven. (There's often a gap between stated positions and reality, and I try to watch closely to monitor how big that gap is.) And I think I'm far from being the only one in this position.
I'm also aware that it's a privilege to even have the option. I grew up poor. Now I have a spouse and kids and live in an insanely high CoL area that we mostly don't get much from, but our past work was enough to make us financially comfortable. (Actually, I suspect it probably has more to do with the extremely unfair macroeconomic situation that has inflated our real estate and other investments, but whatever.) When I go to feed the worms, I won't be leaving my kids with as much financial security as I could have, but I hope to leave them with better respect for my values than I would have otherwise.
That said, "mission-driven" doesn't actually mean that much. Any mission is going to have unintended consequences, and it's pretty dispiriting what people are actually using my mission-driven labor for. There's no easy way to sort companies into "good" vs "bad". It's often not even a meaningful distinction at a whole-company level. But there are still large differences if you pay attention.
I was going to say exactly this. There are many talented engineers for whom compensation is not their primary motivation.
Working on interesting problems, working in specific domains or working for a mission-based company trying to make the world a little better are all strong motivators.
I suppose the overall pool of available candidates is smaller, but I don’t think the pool of candidates with strong skills is necessarily smaller.
Once you find purpose in your work life, that becomes a compensation all on its own.
>I was going to say exactly this. There are many talented engineers for whom compensation is not their primary motivation.
I presume those engineers and their families already solved some problems like having what to eat and having where to sleep, so they have the luxury to pursue other objectives.
I also presume only a small number of engineers are in that position.
The term “VC” has been colloquially generalised to the point of uselessness. I’ve seen straight-faced professionals use it to describe angels, growth investors in public companies and lenders.
Broad rule of thumb in finance is to understand how the people giving you money make money. Traditional VC is high-risk / high-reward. If that’s not your strategy, don’t take VC. OP seems to be describing small businesses. These frequently do need to raise capital to get going, and they do it through banks and the SBA. (That market entirely dwarfs traditional VC.)
> Companies which receive VC funding are not profitable.
This is absolutely false. Company may be at a stage where they are profitable, but lack the capital to establish themselves as undisputed market leader before competition catch up.
Banks only allow you to leverage so far, thus VC makes the most sense for truly scaling globally.
I'll skip all the other things in the article, but there are plenty truism like this to watch out.
Also it tries so hard to not be just an opinion piece, drawing for own experience, but sample size and none of the other details are never mentioned again.
I think this is a really poorly written blog post. Not because it was written in a thoughtless manner -- on the contrary, it was written in a very thoughtful manner! But it's not written by an expert. It was written by someone who has never raised VC themselves and doesn't have personal experience with it. And it shows.
The reality about raising VC versus not raising VC is never "yes or no" it's "on what terms." During the heady days of 2021, those terms were incredible for founders -- favorable multiples, lax governance, clean sheets, no loss of control. You'd have to be an idiot, or an incapable fundraiser, to not to take that deal because it was free money. And the reason why that money was free was because we were in a ZIRP environment where debt was extremely cheap as well; just not as cheap and unencumbered by equity for many companies.
Today, the situation is more varied. If the terms of the deal are not particularly founder favorable, you won't take it unless you really need it. That doesn't say anything about whether you should or should not take VC -- just that the cost of capital has changed.
To the author, all I will say is this -- be wary that a VC funded competitor doesn't look at your business model, say "that's a nice business you got there, shame if anything happened to it" and raised a ton of VC to build a competitor, out-execute you at lower margins and take a ton of territory from you, and effectively eat your lunch. There are long-term strategic costs to bootstrapping. There are costs to everything in business.
What's missing though is so critical for our time: R&D.
Yes -- it's usually wise to act like investors don't exist. But are you going to look at the world and go "oh, what we REALLY need is another SaaS company!"
The most pressing problems today require hardware, software (incl. data science), and a research component.
How to fund it, if not with investors? (They don't fund R&D anyway.) Take a dual-use approach. Bootstrap with government R&D contracts -- and in parallel, commercialize it, so that you don't get stuck in gov too much of course. And/or license technology from federal labs or agencies. E.g. go to Lawrence Livermore National Lab, or Lawrence Berkeley, or Los Alamos, or the many agencies, NASA, NSF, DoE, DoD (which is colossal) and connect with tech transfer folks. They have advanced technology sitting on shelves, waiting for capable entrepreneurs to come and pick it up. Same for many academic institutions.
This is how we get true technology companies like Qualcomm, and many, many smaller but by no means less significant companies.
Make not just "what people want" but also what is technologically needed in this partly fallen world today.
>You know, in ancient times, when Peter Drucker, the Master Yoda of business books, was still roaming the planet (alongside dinosaurs, probably) and writing business books, the definition of a successful company actually included the fact that the company was making more money than it was spending - it was profitable.
I guess some companies like Yahoo were never profitable but some people got rich buying and selling shares.
Yahoo isn't a good example. They were able to routinely turn a profit after the dotcom bust. Their business was very similar to Twitter's profitable years in terms of margins (pre Elon; 10-20% operating income margins). Yahoo had a gigantic (at the time), successful ad business and a lot of properties to display the ads on.
As of right now, the single greatest example in modern business history is Uber. Although they continue to trim their operating losses and it appears they may reach sustainability ($14.1b revenue with $8.5b operating loss in 2019; trimmed to a $1.8b operating loss on $31b in revenue the past four quarters). Their history of loss generation is astounding. Upwards of $30 billion in operating losses since 2009. Even in an ideal scenario it'll probably take them 10+ years after they finally reach an operating profit to turn that net positive.
Yikes. I knew they’ve hemorrhaged money but I didn’t know it was that much. I ran the numbers once back when their total funding a lot less. And I came to the conclusion that with that money they could have literally paid every cab driver’s salary for a year and given out free rides. But since you need regulators to look the other way, there was enough to literally give every state legislator in every single state a million dollars. And I’m sure it’d take far less. And there was still a sizable chunk left over.
I feel like the startup game for a while now has been… and the numbers are arbitrary but I don’t think the dynamic is wrong… raise about $100 million to get a total of $10m in revenue and then be worth $1b. That’s not business as we think of it.
And some companies are only profitable as-run for the shareholders, temporarily, despite being theoretically sound long-term businesses. Take a profitable company, cut costs to bone, arbitrage off all the goodwill generated by an erstwhile decent product, strip assets, pay executive salaries, bonuses and dividends on the "stunning" short term profits and flit before the emptied husk crashes down on top of the employees that once made it work. Bonus dead-eyed vulture points if it's public infrastructure and the tax payer is now on the hook for double-digit billions to restore the damage you did.
Fascinating. Seems like similar issue risk management issue to silicon valley bank where they didn't account for a jump in interest rates and increase in inflation.
Calling such shameless pocket-stuffing a "risk management issue" seems to rather be like calling a drink-driving accident that kills a pedestrian an "unforeseen kinetic event".
I'll take another position; since it might be keen to understand a little more from a different perspective.
I am a person who is a non-founder startup CTO; my company does not have any venture capital funding and we have enough capital to go to market.
However, certain institutions (especially US ones) give great discounts, insider incentives (such as early access to features or access to people) and so on to venture backed startups.
I have even been explicitly told this by AWS and Google; I am basically invisible to them except for the fact I have previously worked with a small handful of people coming from a large organisation. I have to use personal contacts which wouldn't be necessary if I was venture backed.
VC's also seem to open doors into other companies that they are invested in, which can be hugely beneficial.
Even companies that invest egregiously in everything, like Tencent, can't command such door-openings.
So, if you absolutely need some doors to open, VCs can be a good way to go, but it's very much a "selling your soul to the devil" type deal.
Yes, in fact I think this is probably the best way.
I think it might be an issue that people shoot themselves in the foot by going for insane valuations to get more money for less equity- I think if you’re honest about your valuation then theoretically this system can work.
One annoyance I have with VC funded startups is how they all try and use the same playbook. Founders are generally inexperienced. Likely good ICs, very good talkers, but not capable of holistically building a company from the ground up. They hire the same roles, in the same order. So many small startups will have over embellished leaders, who are 'head of' or 'director of' something, with 1-2 or sometime zero direct reports. You'll hear how "We NEED a" head of UX, data, support, etc. These types don't want to do the IC work, but want to be 'early stage'. Those people come in, buy the same crap SaaS tools and institute the same culture as the previous place. Maybe this is changing with money tightening up, but it can be off-putting. When considering a new job, I look at who works there, and if its a small company, with inflated titles and people with short tenure everywhere, its a pass.
Or it may also happen the opposite way, when CEOs try to achieve too much with too little all in the name of staying “lean” so they could stay afloat, and working their early employees into the ground until they’re dead and fresh meat replaces them.
There’s many reasons to start a company, ranging from “money money money!” to “this is my passion and it brings me joy.”
Figure out what matters to you and act accordingly. And you can’t decide “money and passion” because, in my opinion, they’re at odds with each other and is usually just a self-lie.
Like always, no post has a one-size-fits all answer. Well, except for this comment. ;)
> In your restaurant, would it make sense for your chef to spend their first six months on building a stove? No, that doesn’t make a lot of sense - your chef should instead be preparing food and supervising other people in the kitchen. Buy the stove, don’t build it yourself.
By that logic - why even have staff in the first place? Pay for a catering service, don't make the food yourself.
> This may sound obvious. Yet, at VC-backed software startups, I see software engineers spending months on building “internal tooling” without shipping an actual product.
That may or may not make sense; but more importantly - it's independent of whether or not there's VC money. In fact, VC's may want to supervise you to make sure you're only working on getting something to market.
VC-funded companies are unprofitable by design. You build something very novel and then you spend a lot of time figuring out how it should work and growing it. Amazon, Google, Microsoft – all raised venture funding because that's what they were doing.
Still, many of those companies try to become cashflow positive (especially right now). Which means they earn more than they spent, but they invest a lot in their expansion (and as soon as they stop it they could show instant profit).
Ultimately, a very small share of companies ever raise VC funding.
It's completely OK to bootstrap your project, focus on the revenue and profitability from day one. But it's also difficult, especially you're building some kind of a SaaS product in a competitive space. Not everyone can be Basecamp (which started a long time ago and built an enormous marketing operation to get "free" leads).
People running startups shouldn't be so proud of raising capital; it's silly child's play. Instead, you should focus on your craft and your product.
The entire concept of corporations and shareholder capitalism is what is wrong with human civilization. It destroys the environment and reduces harmony in society.
And mindlessly taking in capital, whether VC-funded or not, creates overhead and bloat, along with so-called "bullshit jobs." You still have the same number of productive developers, for example, as you had in the early garage startup phase. Only now, a bureaucratic machine is created around them, making things even slower and less effective than before.
Every product that transitions from a startup to a bloated corporation produces a less useful product now. Look at Slack, Figma, Notion— they are all stagnating.
> Look at Slack, Figma, Notion—they are all stagnating.
We should commend companies that resist artificially expanding the scope of their products. Sometimes a product is done. I recall Antoine de Saint-Exupéry's aphorism that "perfection is finally attained not when there is no longer anything to add, but when there is no longer anything to take away".
All your examples are of single-product companies. They should expand their product portfolio instead.
I so much agree with this article! I always had the same thinking about investment, Mostly the part where you don't control your company (or control it way less).
And I would have kept it the same until we discussed with my co-founder about https://getfernand.com
The reason that makes us consider VC funding would be for the network and the exposure.
It would help us get in touch with other (big) founders with a broad reach and help us grow more. That would be a legitimate reason for us to get a (small) round.
(We are already profitable so we don't need the money for the money. But we need to find a VC firm that is not too manipulative in its investments. That might be the tricker part).
We're definitely thinking of anything that could help. It's also common that funded companies appear more serious and long-term oriented, which can help. (It goes along with what is written in the article, as the "successful unicorn raises money" while it might no be the case, but the reality vs what people believe is often different).
Since, for us, it wouldn't be because we aren't profitable and desperately need money, having VC money could help, or not ... :D
There was a company I can't recall its name, but they took VC funding for one round, retained voting control, built successfull business and then refused to go for another VC round. VC still owns company, but can't exit and founders are happy with the way things are.
This is a great example of "pick the right apple". Many VCs and investors can be control freaks, however if your company is profitable enough then you can demand whatever you want from investors.
Just as I would not suggest to start a relationship before healing, same principle applies here: don't ask for money while a company is on low (financial) morale. But once the company is (financially) confident - all VCs and investors will come along. And that's when you can set a tone. For example by not giving up baord seats and restricting what investor can do. Simply offer them 10x return + dividents and nothing more. This capital will be enough to further boost your company.
I come here because quite often the links posted are useful and interesting.
While the comment section sometimes have meaningful on-topic insights, those are few and far between. Most often are just bad takes and/or things that are unrelated to the content at hand, interwoven with a unique brand of mutual fart sniffing.
Filled? I would say some really intelligent 1% programmers use this site to reach out to average programmers like me. Discussions around programming are often filled with people that tried a technology for 15 minutes and gave up.
Every other subject? It's a lot of cherry picked data and political dog whistling with an occasional expert
>Maybe it’s the amount of customers a company has, or the speed at which that customer base is growing. Business dudes like to call it traction, but I’m not sure whether they know what they’re really talking about. I’m not even sure if they know what they’re talking about. Regardless, whatever traction may be, the minor problem is that, well, having traction doesn’t magically make your company profitable.
People wondered how Google and Facebook will going to be profitable with billions of users and gaining no money from those users. There's always going to be a way to convert users into money.
Many companies are trying to grow at first and then find a way to monetize the user base.
There's however not always going to be a way to convert users into enough money. During the dot-com boom, the VC's who invested in the company I co-founded around that time pushed us to switch from planning to charge for our service (vanity e-mail accounts) to offering them for free to attract users, driven by the greed of seeing pre-revenue companies in some instances acquired at a valuation of up to $4,000 per user before the bubble burst.
We stupidly agreed (everyone understood the $4k per user was a crazy aberration, but it triggered thoughts of "but even if we get to just $400 per user fast enough to get acquired...), and ended up selling off that service a year and and a half or so later for a pittance after pivoting (we did the ".name" top level domain, which was not a great money maker either - was eventually sold to Verisign and I got a little unexpected cheque years after I'd left, but nowhere close to f-you money), but the point being that there were a whole lot of companies spending far more on acquiring users at that point on the basis of crazy per-user valuations than there was any realistic way of earning back.
So, yeah, you can always convert users into money, but that doesn't necessarily mean you'll be able to convert them into profit.
Like much advice that is supposed to apply universally, this is false.
There are some kinds of startups so capital intensive that they came only built with massive external funding, notably hardware and biotech (and probably most deep tech).
In addition, products that face very slow sales cycles selling into enterprise or government can benefit from the time that external funding buys you.
What’s true is this: if you yourself are a builder and can run a very capital efficient software business in an industry you know well where you will not get lost in the idea maze, then you may not need VC funding.
In most cases, you will still need external capital from your savings, day job or friends/family.
That statement needs qualifiers. Most companies that need infra to serve customers need money to build that before they can start investing with money they make. Hard to see how Google or Amazon could have come about without VC funding
> On a quick side note, let’s talk about lottery winners for a moment. Their situation might seem quite similar. After receiving their winnings, they often end up unhappy, broke, or worse yet, dead.
From what I can tell, the appropriate time to take VC funding is precisely at the exponential growth curve when there is not enough revenue to serve the high rate of new business.
Not coincidentally, this may be when VC money is most interested in the business. Peter Thiel quipped that he knew that Facebook was a good investment because what they needed the cash for was more computers. To use an exceptional case to make a point that is broadly applicable.
For the rare small businesses that ever get to this juncture, what I also notice is that an acquisition tends to come soon after.
I’ve taken a class on new venture funding and what this article misses out on is a discussion of the term sheet.
VC can be a great deal for the company and the founder, or it can be a really bad one. That often depends on what ends up being negotiated into the term sheet that is signed by the VC and founders: what’s the pre-money valuation, what’s the liquidation preference, etc etc.
Basically, this article says “don’t buy a cheeseburger, it’s a bad deal” without having a discussion about how much the cheeseburger cost.
Definitely, one of the most interesting reads so far, and without a doubt, the best piece on "The other side of VC funding"
> "Company MagicalUnicorn has still not figured out how to perform food delivery in a profitable way. They’re going to run out of money soon. But to buy themselves more time, they sold parts of the company for 10m € to the VC investor DudeFund."
I never thought of this alternative opinion like that when reading about a startup raising more money!
My interpretation of this article: Don't take VC funding! It's the definition of failure! It will have you doing the wrong things for building a business with strong fundamentals! (Except this VC-powered kind of "failure" is a more likely way for the founders to become very wealthy.)
I'm open to criticisms of VC models, but I don't see how this argument is going to dissuade many founders, who are the ostensible audience.
Learn to manage up young bucks. It's the only way you can prevent these VCs from taking your lunch money. Get an informal advisory board if this is your first rodeo.
The first and main takeaway is this: Companies which receive VC funding are not profitable. They would run out of money if they wouldn’t get the VC funding. So the news announcement that your company MagicalUnicorn received VC funding is actually not a message of success, it’s rather a confession of failure.
I remember when a small company I worked for was super excited to announce how much of a loan they got. I took that as a sign to clean up my resume.
A bunch of very smart bankers have spent an enormous amount of time doing due diligence on the company you work for and they think that the risk is low and repay-ability is high … but the contrarian always knows better. To them this is a sign that the end is nigh, and they rejoice in the feeling of their beautiful superiority.
The company was sold in less than a year, everyone laid off 6 months after that, and the equipment was all shut down within 3 years of that announcement.
But your right, I'm sure the 5 shareholders and the bankers did fine for themselves.
> "The first and main takeaway is this: Companies which receive VC funding are not profitable."
This is patently untrue and deceiving by the author, doubtlessly set to tell a narrative. Sure, some companies that receive VC funding are not profitable, maybe even most, but a sizable portion of the companies that receive VC funding ARE profitable. Denying this is deceiving the readers. In fact, the easiest way to receive VC funding is being profitable!
The majority of public VC backed companies are not profitable and those are the best of the group. Must be 90+% of VC backed companies are unprofitable, and that’s ignoring all the ones that just shut cause they can’t make money
Yes, but the author is making a strong claim that is untrue, that "Companies which receive VC funding are not profitable", specially since from VC economics THOSE VC-backed companies that are profitable are the quintessential part of the equation!
BTW that's not even entering on the fact that "profitable" is not even clearly a financial goal for large companies: on one end Amazon has been "unprofitable" for a decade or so but that's BS ofc. On the other end WeWork was unprofitable as well but was highly valued, and that was BS ofc (being highly valued).
VC funding is so you can accelerate your test for the thesis you started the company with. The ideal state is you rapidly discover fit. The second most ideal state is you rapidly fail. The worst state is you spend years on a thesis that doesn't have legs. VC funding moves the decision point earlier in either direction because you won't be capital constrained.
That's it. You can never make more time for yourself. That's the lesson.
It won't destroy the company. Rather, it defines it, for better or for worse. And it may remove the connection to the founders' vision for the company.
How is that not destroying the company from the founder's perspective? Is there any way to take the "don't accept VC money" relevant to anyone that's not a founder?
Your business entity will still exist if you take VC money. However, the VC now has a say in the business and its profits, while their target may not be aligned to the founders' vision, hence a wedge that splits the company from the vision. That wedge may immediately divorce (what most would call a destruction) or it may take time.
This article has a point, warning of some dangers of taking risk capital, but
it is too biased against it: better, more balanced advice would be to say: there
are use cases for risk capital, but there are also many use cases where bootstrapping or debt capital (taking a loan, borrowing money) is the right financing approach instead.
It all depends on how capital intensive your business is, and how fast you want or must grow to become how large.
It's not whether it's "wrong" or not, it's just a question of whether it aligns with your goals.
If your goal is to maximize the amount of money you make from a venture, there's nothing wrong with it. There's everything right with it, that's why it's done that way.
If your goal is to produce value in the world over a long term, then there's a lot wrong with it. Optimizing for actual value delivered is disincentivized.
If your competitors are VC funded you are going to have very hard time competing unless you are already very established. You can have smarter founders or whatever, but VC company can hire very smart people as well.
With how ubiqutous VC funding became in recent years, only small market niches are "viable" for non-VC funded startups. VCs will often still fund small market niches if they believe they can expand easily.
>If you had any romanticized notion of building the company of your dreams with your employees becoming your best friends or family, well, now’s the time to let go of those ideas
I think most people start a business to make money, not to gain friends or enlarge their families. If your objective is to gaing friends or enlarge your family, there might be better means to accomplish that than starting a business.
3. "You have to focus on large markets with many (or large) customers"
Yes you shouldn't take VC money if you don't want to go big eventually.
4. "Making existing customers happy is less important than acquiring many more new customers"
You have to do both and the goal should be to make existing customers so happy that tell others which will drive growth. If you don't make a product people love you won't win in the long run anyways.
Finally I think a common mistakes for Founders is making their VC's their boss. Although I agree with some of the sentiment of there is some perverse incentives with VCs as a founder you should take ownership of the decisions that impact your company.
That list sounds right I think their is nuance for this one
>3. "You have to focus on large markets with many (or large) customers"
>Yes you shouldn't take VC money if you don't want to go big eventually.
One can want to grow to a point of organically understanding the problem domain before going big.
The VC and the company may differ on the short term but agree on the long term.
Which is a distraction. If the company is doing everything else suggested and the VC pounds on this issue.
I would think the ideal time frame for the use of VC funds is probably about 2 years. If the company can't make productive use of the funds and return it in 2 years the timing of the funding is bad. If funding is needed for some large capital expenditure that will depreciate over decades should have existing revenue support.
I think Wall Street has created a different industry that is a business model of its own fantasy.
At some point around 2008 starting a (tech) company became possible at "ramen" levels - middle class kids could launch on AWS etc. Tech VC struggled to adjust and a new breed of VC (ie ycombinator) saw a gap and exploited it - they needed smart founders who could get to series A with minimal funding. (more fairly they also (slowly?) paid founders much more and encouraged earlier liquidity so founders you know could see earlier payoffs)
anyway, the point was that it became possible to launch and run with small capital investment. But at some point you had to hire more people to do the extra coding bits.
I am wondering if LLMs are about to chnage that. The coding output is so good it could put off hiring a tranche of new devs for months or years. "create a web page to show the cities in yellow where users > 1 poker per month" is something you used to hire someone to do, and correct their work. now you are hiring OpenAI.
How much early phase work can be delegated to OpenAI if you know the right questions? Can the onboarding work through a chat bot? the initial demos? And is the next ycombinator skill set going to be "I know the right questions to ask ChatGPT to allow you to keep lean for another year?"
Yes, mostly... sometimes a profitable company needs to grow faster than it can organically to capture enough of the market and you need outside investment.
Maybe taking debt is the right idea, sometimes it's not.
It's not common and it's a great place to be in (it's easier to price your company, and to bargain).
I think it's factually false that lottery winner end up mostly broke and miserable. Patrick Boyle (youtube) analyzed some of the research on the topic which seem to mostly say the opposite (I didn't double check any of his work).
>You’re no longer building your company the way you like it. You’re building your and the VCs company so that they can sell it, for a price higher than the one they paid. There are no alternatives. The course is set. You’re building to sell.
Venture capital is a tool. Understand it and then decide whether it’s appropriate for your company.
“Don’t hire employees. They will destroy your company.” They will! If you hire a bunch of people just because it sounds cool and you think it’ll magically make you rich.
If you sell, say, 10-20% of your company to VCs, how can they force you to behave differently? Why can't you move on as if you were bootstrapped, while using the cash for whatever your company needs at the time (hiring, marketing, etc.).
I don't think the existence VCs are bad, but I do know many people that are taking VC money either shouldn't be or don't know what they are putting themselves into.
This is like if David Heinemeier Hansson took drugs and gave a speech.
I like DHH, and his and his cofounder’s opinionated approach to, well, everything. Ruby on Rails was opinionated. Their company stood for building products you charge for and never taking VC. (I think Atlassian and JetBrains toom that even further.)
Until today, we never took VC. The way I live my personal life I have never attracted gold-diggers and I guess the same thing applied here… both my largest companies are a open source platforms, each builds an alternative to Big Tech, and I even extol the virtues of Utility Tokens and Web3 smart contracts in the face of massive opposition here on HN which has mostly ever seen Shareholder Capitalism. They haven’t really understood how taking VC or going public creates a parasitic class — equity investors — who every earnings call expect profits and rents to be extracted from all sides of the market. I think a word got pioneered recently by Cory Doctorow — enshittification — to describe what happens in Shareholder Capitalism, whether a company ends up being run by a benevolent dictator (Zuck, who isolated himself from ever being removed, or Elon, who straight up bought Twitter together with a group of friendly sovereign wealth funds) or bought out (FogBugz, Reddit) or acqui-hired and turned into a money-making machine (WhatsApp, Instagram, Oculus) while its founders leave in disgust after their golden handcuffs are off.
I recommend everyone TRY to start a project funded by sales of a utility tokens, similar to FileCoin or Ether. Even better if your project already works (IPFS, Ethereum, BitTorrent) by the time you introduce the utility coin.
The reason I prefer this is the same reason funding DisneyWorld through Disney Dollars are better than Disney Inc. shares. It’s “stakeholder capitalism.” The people using the network own the network. The incentives are aligned and there is no parasitic class.
Well — here is an important caveat. Do this only if you are building a PLATFORM, like The Web, because it can benefit the world more by being permissionless and open (and not fake-open like OpenAI).
My favorite model is “seed-strapped” (a play on bootstrapped).
1) Raise $1-2 million (ideally from multiple small investors rather than 1 big investor, many smaller investors increases your control since every investor alone is too small to make serious demands about how you should run your business)
2) use the $1-2 mill to find product market fit and (more importantly) achieve profitability (or be cash flow neutral) within 12-18 months. If you can’t reach profitability, close your doors and start another company with a new idea rather than raising a 2nd VC round (fail fast)
3) reinvest new sales into growth, and don’t raise another round of capital even if people are offering you lots of money
Some advantages:
- Fail fast. It’s better to be resource constrained in the early days so that you don’t spend many years chasing an idea “just because you can afford to” when it’s destined to fail
- It lowers the valuation where selling your company will be a profitable transaction for founders & employees. If you raise $2m you can sell for $8m and make a good return for founders/employees, whereas if you raise $20 million you’ll never be able to sell your company for less than $20m, and you now need to sell for $25m+ in order to see any meaningful as a founder
- Without huge investors, you have a lot of latitude to operate your business however you want. When you raise $20m+, you basically become an employee of your investors
- You typically retain full board control if only raising $1-2 million, this amount is low enough that the VCs probably won’t even need or want a board seat
Disadvantages:
- You’ll get less support from your investors because they invested less. The less money VCs invest, the less attention they give you. This can be a downside if you actively want VC help (which personally I find overrated, very few VCs actually add value beyond the money invested, most VCs have never actually run a company and have only watched from the sidelines)
—
TLDR: raising low single digit millions in seed money to get going in the beginning is rarely a bad idea. Raising too much money too soon (especially before reaching PMF/profitability) severely limits options for a future exit and potentially creates difficult dynamics with VCs to deal with, if you accept a lot of money from a VC most will want you to do whatever necessary for them to get their money back.
VC isn’t bad, there’s a time and place for VC. But it’s 100% a game.
You must know the rules of the game before playing.
Not all VCs operate on the "we just need 1 unicorn" model. Some VCs are a bit more conservative and would be happy with a 4-5x return on their money.
What's nice about the seed-strapped model is primarily optionality (which is good for you and also good for seed investors). Meaning you can start out with a seed-strapped mentality and flip to a "Big VC" mentality later on IF it makes sense. IMO during seed stage, most founders won't know upfront whether they would benefit from a huge capital injection or not, so IMO it's best to start with raising a small amount and then raising larger amounts later if/when you want to.
Again, VC is 100% a game. You need to know how the game is played in order to know whether you want to play it in the first place. So many founders don't understand VC/Founder dynamics, especially first time founders. Starting with a seed-strapped model gets your feet wet in the VC game without diving head first.
>So, what about those 10 million Euros? If MagicalUnicorn were your company, would you as a founder personally receive that sweet cash when your company gets VC funding? Nope.
If the company receives 10 millions for 50% of the shares and it becomes valued at 100 millions, you can sell the other 50 % of the shares for 50 millions and let the venture capitalists deal with the business while you enjoy cocktails at the beach.
There's a question of values here. VC may be the path for maximum monetary gain and maximum growth, but maybe it's not if you want to _make_ something that represents your values. Once your 50% slips to 49% and below, it's game over.
i think this would be much better written if it compared and contrasted the pros and cons of building a fun and sustainable small business vs. taking investor funds with the hopes of doing something more ambitious.
u need to have vc money and their involvement. i rather take 50m with same valuation outcome if the guy gives me hands than 150m from some rando dumper of funds with demands/takeover ideas
there's a modicum of irony in posting this on an Ycombinator-enabled site. But at least they give enough leeway to keep this post here, so that's a good thing
The topic of not taking VC is routinely discussed on HN. It's a very popular subject. I've been coming here for ~11-12 years and there has always been a vibrant back and forth, pro / con, discussion on the subject of why or when VC makes sense (or not).
It seems the author views venture capitalists as a bunch of idiots who are eager to lose money.
And yet, venture capitalists are making money and many founders along with them.
Ok, if your goal is to have a very small business, with just a few employees and a few customers, rule that business how you want and have fun, you can bootstrap your business and keep it small.
But I think the majority of founders would prefer a fast grow and making lots of money relatively fast, followed by starting a new business.
I think it suggests that their interests are not your interests and success for them doesn't mean success for you. Their approach helps to give them one big success occasionally to pay for the things that fail but that's no use if you are one of the failures.
So they are not carefully trying to grow each company - they are adding lots of fertiliser and seeing what survives. In fact they make success harder for you by the things they force you to do. This is fine for them because one company will grow big but not fine for you unless you are that one company.
Selling part of your company to venture capitalists is a status symbol, and lots of people will chase the status symbol even when it's not required and they don't have a plan for how to spend the money should they get it.
A title like this is probably the only thing that could get an HN thread to fill up with substantive, thoughtful comments defending venture capital. The contrarian dynamic strikes again!
For every example there is the counter example. It's sort of hard for me to take this advice seriously without the author actually having had raised money. I couldn't tell from skimming it but it feels like it's a lot of common things we know are written by someone who was either rejected by VCs or has a real aversion to it. Look venture capital serves a purpose and that purpose is to accelerate and grow innovative technologies that would otherwise not be capable of doing it another way. Part of that assumption is there will be a way to "capitalize" on that investment and it will go on to be incredibly valuable for end users, businesses or an acquirer. The most important technologies of our lives and the foundations for most things we use were venture funded, that's a fact.
I've worked at bootstrapped companies, I've worked at VC funded companies. I've seen exits and I've seen deaths. I've done the solo founder thing, raised money, blah blah. What I'll tell you is, raise money if you believe there is no other way for you to achieve the goal of turning your vision into a reality without it. Seek out the expertise, the past experience, the people who will be most helpful to you. If they happen to be in venture, then there you go, but if there's a different path, take it. If you have any sort of incentive misalignment with your investors, yes it's going to destroy your company, but even more so it's going to ruin your life, your relationships, the joy you had in the thing you were building. You can either see VC funding as a game and the hot shiny thing to chase that will solve all your problems or you can be truly realistic about it and understand that it's a tool like any other to build and manifest into reality a product and vision you have for something you believe should exist.
Today due to the saturation of accelerators, venture and the abundance of capital it's basically just a lifestyle thing that you raise a round and hack on side projects like it's a job but there's also the self selecting group within there who take it really seriously. So you know when I bootstrapped for 4 years solo, raised funding and tried to build a product/team/company through COVID it was a brutal experience but one I took seriously and tried really hard not just to manifest my vision into reality but also take care of the people on that journey, be forthright with my investors, etc. It's hard man, only do it if you really get that.
Kidding aside, it is true that raising money from VCs puts you on a very defined path with really only three potential outcomes: 1) failure, 2) sell to acquirer, or 3) go public. There are a small handful of exceptions, mostly for companies that throw off massive amounts of cash, but, realistically, those are the outcomes.
If you don’t like any of those end states and what it realistically will take to get to them, don’t raise money from VCs.
But, having done so and been successful and taken a company public, I can say: it’s pretty great and I have zero regrets about anyone we raised money from. And I’m proud that everyone who invested in us prior to going public made at least a 10x return.
While there are plenty of VC horror stories, there are fairytales as well.