I know this isn't the craziest startup shutdown story, but wow.
At $10MM of revenue they can afford to keep a staff of 50 at a fully loaded cost per employee of $200,000. Yet, according to Linkedin they peaked at nearly 200 employees.
In other words they somehow were running at a loss of about 1.5 million a month for three years until their runway "suddenly" ran out today.
According to the CEO's linkedin post, they were basically trying to keep up appearances of being a 200 person company until some greater fool bought them out, which appears to have failed.
How do you find yourself as Board member or CEO of a company like this and not think to cut expenses a little sooner? Far better to be a growing, profitable 50 person company than a cash-burning Potemkin unicorn.
> According to the CEO's linkedin post, they were basically trying to keep up appearances of being a 200 person company until some greater fool bought them out, which appears to have failed.
Because that is what startups do. 80% of startups that are "successful" follow this pattern
You shoot for the moon, if you don't take massive risks, then you won't be rewarded.
It sounded like they were about to be bought out or aquihired, but it fell apart at the last moment (It's not uncommon)
> Far better to be a growing, profitable 50 person company than a cash-burning Potemkin unicorn.
because probably they looked at the pipeline and realised that if they wanted to deliver the features/customer growth they needed, they required 200 people to get there.
"Shoot for the moon" seems like a reasonable strategy when you're making the investment.
However, certainly at some point while they were burning through that $36 million it became evident that "moon" was no longer a viable destination. Why wouldn't everyone be aligned with making the adjustments needed to get back to default alive? Something is clearly better than nothing.
Now if it got to the stage where the CEO no longer wanted to operate at the reduced scale (and nobody else would take the role) or the product couldn't support itself at the reduced scale, then closure may have been the only option. It's just that the "moon or bust" mentality doesn't seem like something that should be set in stone for the life of the company.
Because this is not what the VC wants. The VCs are diversified across many startups and frankly make most of their money from tail event startups in their portfolio (e.g. Uber / Facebook). Since they don't know which startup will be the tail event, they don't want a profitable business, but a max growing business. This is different from the bootstrap model.
When it's still enough runway to trim it down, there's often still some hope of greater success - and a VC investor might believe that it's more valuable to have a 1% chance of it becoming a unicorn or a few percent chance of arranging some last-minute buyout, rather than pick up the 100% certain but low price it has as a non-growth business based on its revenue.
Yes, due to their large bankroll and diversified position, VCs can afford to be risk-neutral and only care about expected returns. Founders and employees obviously cannot be risk-neutral, ergo startups are a great bet for a VC and a terrible bet for anyone else.
I don't really see why such a side deal would be possible - if the VC goal is to get the founder-manager to try for that narrow hope of few percent of major success and discourage them from settling for a lower-value stable business, allowing the founders to cash out would be counterproductive, it's in the VCs interests to ensure that founders personal financial motivation is aligned to theirs, that the founders are also motivated to go big or go bust.
In essence, if the startup is slowing down and perhaps not going anywhere, then the standard existing deal with founders where the founders can cash out only if they enable to VCs cash out at a profit (for example, if they manage to pull out all the stops to make a failing startup look attractive to some bigger fool) is exactly what VCs want, and in such a situation the founders have no leverage to extract a compromise that's worse for VCs.
The typical situation is the company has been around for a few years and the founder has some reasonable sounding expenses. Then the next round includes some cashing out as new investors join.
What to you (and pretty much anyone else) looks like a business that just needs adjustments to reach profitability, to the VCs it's profile maintenance work for little relative benefit in the long-term. The chances of that company turning 10-20x profits in the next few years is basically zero and they just cut their losses (in their view).
I know this is the case but I wonder if this is a self-fulfilling prophesy.
I can easily imagine an alternate reality where VCs invest more thoughtfully based on more careful analysis of companies and they would have a much higher success rate and end up with even higher returns without creating unsustainable wealth inequality.
> an alternate reality where VCs invest more thoughtfully based on more careful analysis of companies and they would have a much higher success rate and end up with even higher returns without creating unsustainable wealth inequality.
Unlikely. The problem of that view is that, when you're handling large uncertainty, you don't know which projects are the ones you should cancel and which ones to nurture. Past performance is a terrible indicator for lucky shots.
See the Talent-Luck simulation for instance.[1] You measure a population of projects affected affected by random events and profiting proportionally to talent, and the projects that end better off are the ones that chain multiple beneficial lucky strikes, with talent having little influence past a minimum level.
And the way to maximise gains over the whole population is setting a small flat subsidy for all, allowing everybody to explore their talent even after a wrong turn.
>> And the way to maximise gains over the whole population is setting a small flat subsidy for all, allowing everybody to explore their talent even after a wrong turn.
I don't think that's what VCs did. It looks more like they dumped millions of funding on a tiny number of hand-picked companies and used short term traction as the main metric and they equated profitability as anti-growth, failing to realize that, without demanding profits, growth could be produced artificially using money/advertising and that it doesn't mean that users actually want to use the product in the long run.
Profitability is how you know that users want to use a product; otherwise a company could just 'launder' investment money to their users somehow and of course nobody will refuse free surplus value and hence they will attract users... Until the investment money runs out and the surplus value stops being handed out to users.
Just think of Uber investors subsidizing rides as an example, as soon as that subsidy goes away, there's a good chance it will start declining. Uber is still unprofitable.
To you and I, this is patently obvious. This is not true however for VCs. In a lot of them, they'd prefer you fail entirely rather than limp along making 1x, 1.5x their investment. Zeroing out is preferable sometimes, weirdly.
I get preferring (10x or 0x) to (1.5x). I don’t get preferring a near-certainty of 0x to some recovery of their capital with a pivot to selling a smaller-but-sustainable business.
Is it something like they’re measured by LP’s (or someone?) on only non-zeroed investments?
I've worked at a VC, and consider that it is a low margin business until/unless you returns significantly above your targets. You get a management fee, which is a low yearly percentage of the invested amounts, and then you get carry - a proportion of the returns above a set target for the fund as a whole.
But carry doesn't kick in until you start exiting - for a typical VC fund it takes many years. (I left a year ago, and we were 6 years in when I left; I retained a portion of my carry rights, but still won't know for a couple more years how much I get if I get anything at all)
And surviving on the management fees after the initial phace of placing the investment requires being lean and not putting effort into your low performers.
Meanwhile while a 1.5x is better than nothing, a company that sells at 1.5x is likely to be near 0x for you, because odds are high that to get there there'll be one or more funding events along the way to help that happen at/triggering terms that will dilute you massively. And odds of failure remains high.
And you need the 10x or 100x's, but the low ones means little - most successful funds pay back the entire initial investment from just a couple of investments, and make their return on a couple more. Quite often a single "fund returner" carries the entire fund.
A small recovery here and there at makes almost no difference.
So even a 1% chance of salvaging a "moonshot" is better - most cases where you get back less than 1x is going to be a rounding error of your funds overall performance.
A VC is not where to get capital of you want to pull back and pivot when things get tough.
(And yes, you should keep that in mind if taking a job at a VC backed company as well, and it's part of why stock/options should be on top of your normal salary, not compensating for a low one, unless you get founder-level stock amounts, and even then, think it through; I once almost torpedoed a VC deal as a founder because I demanded a commitment to raising salary levels after the next raise, and I don't regret it for a moment because life would have sucked without it)
Don't VC companies basically gamble with other peoples money? So yes, the person that actually put the money into the fund might want 1x or 1.5x out over 0x, but for the VC firm it doesn't matter, right? It's not their money to begin with.
LPs in a VC fund know very well what the fund is incentivised to deliver. I worked for one, and our LPs would aggressively write low performers down to zero. It didn't matter to them either. Obviously wouldn't turn it down if still possible once all else has failed, but retaining even a fraction of a percent shot at a higher return was what mattered most, even knowing it was extremely unlikely.
Investors in these funds are diversified - they invest in VCs to take the high risk bets. They invest elsewhere for the steadier, lower risk returns.
That's not a major component of venture backed startups. For a company that has already been written off as a failure, often the board members that represent the VC would rather not have to stay involved and keep showing up for meetings -- they could be elsewhere; there's an opportunity cost.
You’re being way too reasonable! A stable, self-sustaining business is for mom and pop corner pizza shops.
Tech companies want to disrupt and destroy everything in their market segment or die trying.
I wish there were more companies that would focus on stability, sustainability and longevity. But in my experience lack of rapid growth is a mark of failure for most companies.
Oh indeed. But the problem is, you are the CEO, you are being told by your investors that you need more product market fit. This means selling more shit. PMF is the driver of value (we have x thousand/million/billion customers, therefore we are valuable)
That means you need more velocity. Which means more people.
More sales, more presales engineers, more subsidies to undercut the competition.
You have to remember that VCs are rarely there to make sustainable businesses, they are there to make valuable assets that can be sold. Even the nomenclature reflects this, startups are in batches. Because out of a set of 100, you expect 90 to fail after two years.
They could have done layoffs like almost every startup and big tech company did in the past few years. They could have gone there with 50 good employees. Gumroad almost went bankrupt then came back from the ashes.
>80% of startups that are "successful" follow this pattern
Doesn't this sound like selection bias? If every other startup follows this shoot fornthe moon plan then yeah it just becomes a self fulfilling prophecy
> But everyone is following the runbook as if they were the successful 1% (not even the successful 5%, they all act as if they are the top 1%)
I think it's because that's what makes sense from the VC's perspective. To the VC each startup is a lottery ticket with a low probability of an outsized success and a high probability of failure.
You can burn the startup as hard as you can, because the cost is primarily borne by the startup and the founders. If the startup fails it doesn't matter much to the investor because the portfolio is constructed to be resilient to a large number of failures.
What the OP is getting at is: if you look at this from the startup/founder's perspective isn't that kind of a huge waste? And yeah, it is. But I think the idea is that startups and founders aren't pets, they're cattle.
We are, of course, assuming that they grew the main dev group to 100, rather than creating a new team, for a new product.
The biggest issue is that product and project management isn't taught well. There isn't a wealth of easy to understand literature. The stuff thats available tends to be LLM level waffle.
you can hire consultants, but they also tend to speak in business vague, without offering specific advice.
Sadly, what you need are experienced PMs, lead engineers and business types. They are hard to find, and tend to come late to startups.
It is possible to grow a company from 25 devs to 100 and keep velocity. But it requires planning, clear communication and clear process to make sure that people are not spinlocking or re-inventing the wheel. I know its possible, because I've been at a place that's done it.
>> How do you find yourself as Board member or CEO of a company like this and not think to cut expenses a little sooner?
I've worked at several startups who never cut costs, meanwhile they're burning through cash faster than an incinerator at the local trash company. I had one company CEO who remodeled our entire offices, got sky boxes for all the local sports teams (there were four of those) and made a point to tell all the devs they're the highest paid startup devs in the city.
I found out later, our CEO also had a pissing contest with another startup CEO on the same floor of the building we were in. Both companies had over $200M in VC money, and both were trying to outdo each other with the lavish lifestyles they were living on the investors money.
The other company put on a massive "release" party to announce their internet software to the local tech new media. Apparently they blew close 10 $2M on it. Limo's for all the employees to the five star hotel ball room, a red carpet VIP entrance for all the employees like you see on those awards show, some 70's rock band played, and it was open bar all night and they reserved an entire floor of rooms in the hotel where the bash was thrown. Two of the devs told me afterwards, "Dude, totally not my scene, and none of our team were cool with this at all."
Less than two months later, both companies ran out of money, quietly shut their doors and closed down.
At a bar across the street, we had a group of devs from both companies sitting around lamenting what went wrong, where we were going to next, and reminisce about both companies.
We all reached the same conclusion:
>> According to the CEO's linkedin post, they were basically trying to keep up appearances
They're indoor VIP seatings the top of football stadiums with a panorama view of the entire field. It's usually where the sports commentators sit. Or rich people.
1) As a CEO, I want headcount. Being the CEO of a 200-person operation sets me up for better jobs than a 50-person one. Being in high-profile organizations if good too (and when they fail, I can switch jobs). Same for VPs and managers.
2) As a CEO, I want bonuses. Those come from growth. Zero bonus is the same whether the company lives or stagnates.
3) Rationally, in winner-takes-all markets, a lot of this depends on early losses and overspending. If you and I are building eBay, and I get there for $10M and you for $100M in 10% less time running massive losses, you win. A lot of tech is winner-takes-all or winner-takes-most.
.... and so on.
Except for retirement account holders whose money is being spent, it's almost certainly better to be a cash-burning Potemkin unicorn than a growing, profitable 50 person company.
>According to the CEO's linkedin post, they were basically trying to keep up appearances of being a 200 person company until some greater fool bought them out, which appears to have failed.
That's probably pretty brutal summary of most of past two decades I guess?
Also, had it been bootstrapped, might have a different outcome, could scale down, pivot while staying a small profitable shop.
If they received $36 MM in a fundraise 3 years ago, you better believe that those investors put pressure on the business to grow fast or die trying. Those investors are not looking for a somewhat risky medium % return, they're looking for each company to have a small % chance of being a unicorn.
So who out there is running an investment fund that's looking to make a much more reasonable rate of return off successful but slowly growing companies? Because I would put money into that fund.
Assuming you’re asking in earnest I would begin with S&P 600 Small Cap companies, and see how they got their starts. These are all profitable companies with various levels of earnings growth and indebtedness.
Also commercial real estate fits your criteria almost perfectly.
You probably want the kind of private equity funds that do succession transactions.
Small slow growing businesses tend not to actually need capital very often, so there isn't exactly a huge market for investing in them.
On the other hand, you get a lot of businesses whose owners are getting old / sick of the business. They need somebody to buy them out and install a new management structure.
There are a bunch of funds who do things like that. Look for "Private Equity" as a more broad category rather than just "Venture Capital".
Because no one that matters cares about a company that makes $10 million per year, neither the cofounders nor the board. Everyone wants 100x that because they want to become 9 figure wealthy or more. Better to close down, fuck the customers, and then have the cofounders start a new "journey" in hopes of getting that unicorn status and become fabulously wealthy.
No to be pedantic, but payroll isn’t 100% of cost. Plus cash flow issues, sales volatility, probably declining revenue as you scale down…my guess is the headcount should be more like 20-30. And that might not cover their personnel needs if a lot of their revenue relies on services and customer success (which is usually the case for OSS companies)
Sometimes investors have no interest in anything but a large exit. So it's large exit or bust. Building something stable that grows at a reasonable pace is considered the worst outcome because it both consumes investors time/energy and delays closure of a fund. They're left holding shares that are illiquid.
It's perverse of course but it can be something baked into the structure of how VCs and other funds work.
More specifically, how much is a SAFE for 7% of a small business worth? If there are no liquidity events it will be impossible for investors to even get their money back let alone outperform SPX
> How do you find yourself as Board member or CEO of a company like this and not think to cut expenses a little sooner?
It's like playing Super Mario: one life left? Die sooner to restart again.
There will be a next startup soon, and saving this one does not worth effort. Besides that, the CEO has probably got his cut already as salary. This cow is done, bring in the next one.
Another 'CEO' with "Everything was going AWESOME! Our numbers were great and getting BETTER! Our customers LOVED us! Buuut...we're closing shop, today. Totes sorry, bro.". Not a single mention of "because we managed cash like a drunken sailor and bet the farm on a singular exit event". The spin is making me a tad dizzy.
I think, motivation would have been, if they were able to sell themselves as 200 person company, the CEO and Board would gotten a bigger piece of the pie in the landing space.
As I pointed out elsewhere the 200 person company is not accurate. The OP is quoting something listed as "peak" on Linkedin without even providing a reference. And for some reason everyone is running with that figure. Nearly every tech company had a peak headcount during the height of Covid. Techcrunch generally also has inaccurate tech company numbers in their profiles. Also you can't sell yourself as a 200 person company if you don't actually have 200 people as that would come out immediately in any due diligence an acquiring company would would do on you.
We don't know all the details. Maybe they had high costs elsewhere or a market insight that made them re-think whether they want to be continuing to operate that business
Incentives. Lots of incentive to ride the horse to death while the money's still available. You get free stuff, get to live the high life, gain celebrity, get interviewed, make social media posts people pay attention to, get invited to fancy parties like Davos. No bad publicity.
In a lot of cases, it seems like the real incentive is "pretend to have a really desirable product, make demo after demo to draw in investment, party as much as you can while pretending to make something, lateral to the next company while claiming external market conditions." Live the Wolf of Wall St. life while the Titanic sinks.
Still think the main Pokemon advancement for companies is mostly -> Bankemon -> Casinomon
It's not that unreasonable. During the post-covid inflation and high interest rates getting loans and attracting funding got very much more difficult. Downsizing by 75% probably would result in a failure that just took longer. They chose to keep going in attempts of securing that next step and it didn't work so they shuttered. The environment for funding changed and the less attractive startups shuttered, that's what happens. Maintaining a short runway is a vibe, a path towards a big reward or a quick failure. That risk isn't for everybody.
>"According to the CEO's linkedin post, they were basically trying to keep up appearances of being a 200 person company"
Where in the linkedin post does the CEO state that?
My understanding is that they reduced headcount greatly over the last couple of years and were well below a 100 people. The source of this was a then current employee that my company interviewed in November.
we all know that once you get 36 Million$ of investment, you cannot "just" run a 50 people startup that will have a stable valuation of maybe 100m$.
Once you take big investment it comes with the expectation you will get to 500m$ at least. VCs don't want to 2x their money. They want a small chance of 20x.
It's a naive point of view, I know, but I often wonder how a business could function if wages and salaries were considered to be profit. This is clear enough for an individual running a business, or even a family operation.
For larger businesses would it be possible without adopting an extreme socialist (or even communist) approach? If so, how would you balance this with the interests of investors/owners (i.e. people that aren't involved in the operation of the business)? Would the businesses be more or less sustainable on average? Does the very existence of outside investors necessitate categorising wages and salaries as a cost?
At $10MM of revenue they can afford to keep a staff of 50 at a fully loaded cost per employee of $200,000. Yet, according to Linkedin they peaked at nearly 200 employees.
On top of this, they appear to have raised $36 million three years ago - https://www.weave.works/press/releases/weaveworks-raises-36-...
In other words they somehow were running at a loss of about 1.5 million a month for three years until their runway "suddenly" ran out today.
According to the CEO's linkedin post, they were basically trying to keep up appearances of being a 200 person company until some greater fool bought them out, which appears to have failed.
How do you find yourself as Board member or CEO of a company like this and not think to cut expenses a little sooner? Far better to be a growing, profitable 50 person company than a cash-burning Potemkin unicorn.