First, this comment on Reddit isn't fundamentally better or more informed than any of dozens of comments that have expressed the exact same thing on HN. I'm not complaining, so much as again remarking about how "A Reddit's comment about $X" has become such a powerful signal of quality.
Second: there's a grain of truth† to the "bad decisions by VCs" or "working for VCs", but he's overplaying it in this comment. There's two countervailing forces here: (a) VCs don't care as much about which "flavor" their portfolio companies are producing than they do about the economics: there are indeed plenty of solid businesses you can grow that aren't VC-compatible. But you can't fault the VCs for that: when you took their money, you promised not to go down the slow path. And (b) when companies are doing well, VCs tend to get out of the way. It's when you're not doing well that the board's opinion starts to matter.
Third: The numbers he's using here set off alarm bells for me. He calls 1-10MM/yr companies "lifestyle" companies and "100MM+/yr" companies VC-style companies, and implies 10-100MM/yr businesses are in a no-mans-land. Uh, no? Companies doing 20-30-40MM/yr in revenue will probably have investors beating down their doors. I don't believe anyone is shunning companies doing 8 figure revenues.
† The first VC-funded company I worked at/cofounded was derailed by a crazy, VC-instigated decision to build out a CDN to go head-to-head with Akamai. But even then, our lack of traction is what set the scene for that dumb decision.
Regarding your second point, "you promised not to go down the slow path," I think that's true in most cases, but there is some VC money that's too easy to get, and the founder's don't really realize the promise they're making.
I feel like this is particularly true among YC startups, where it seems fashionable to take VC money right after demo day, regardless of other company factors (IE: traffic, growth, revenue, etc). The "invested in the team" argument works for YC and Start Fund, but it feels almost irresponsible for VC's to invest in first time entrepreneurs on the same premise. My sample size is tiny, but I think it puts far too many people in a situation they don't want to be in (which they'll realize X months down the road).
That last part is pretty controversial. Interested in other people's thoughts.
Also, from my experience, founders do actively promise not to go down the slow path. It isn't some implicit agreement. When you pitch to investors usually 2 of the most common questions are "What is your growth plan?" and "What are your exits routes?". If you project to be a 10MM/yr business in 5 years, VCs probably won't pull the trigger, and if you told them 100MM/yr in 5 years you can understand why a VC would maybe think you aren't moving fast enough if you're an order of magnitude off that number.
As for YC companies, as I've heard many time on HN when there is a post about an investment or an exit, it's all about the terms and where the company is, however it seems from reading his essays like PG's advice is to be aggressive about taking money when you can get it, so that may permeate down to the YC companies so you could be right.
But that's exactly what may be the problem with VCs. Sometimes you'd have to go through a dozen of ideas before you find one works. If you're frugal enough and can keep the company afloat for a few years, you're likely to succeed in the end.
But VCs may push the company to burn all cash in the next 4 months pursuing the idea #2. And if it doesn't work - you're down and out.
Very few businesses have the very first idea paying off handsomely. This may make VC's capital a very high-risk proposition: you either hit the jackpot with your first idea or you end up with nothing.
You can't moralize about VC's "pushing the company to burn all cash". It's the VC's money you're talking about The VCs invest with the expectation that you're going to go for broke. That's the model. Most startups fail, even the carefully run ones. The 1-2 successes need to pay back the failures and then some.
VCs won't invest in companies they think can only grow so big because it's not enough returns for them. In that sense, he's correct - VCs won't blink at a business that has a theoretical maximum revenue in 8 figures.
I agree that the mere promise of eventual $10MM/yr revenues is probably not an appealing pitch. But the reality of $10MM/yr revenue is wildly different. If you're bringing in $10MM/yr, you can probably do whatever you want.
Let's say that you've built up, from essentially nothing, enough of a presence in your industry that you're selling $10 million a year of SaaS. That's only 10k accounts at a blended average of $100 a month -- far less if, like many SaaS companies, you make a significant whack of your money on custom enterprise deals that are not on the pricing page.
Now consider this company from the perspective of a Fortune 500 like, say, Intuit:
1) They have software which exists.
2) Their software creates clear value for customers. They have 10,000 people signing their praises and case studies up the wazoo. We know people will pay $100 a month for it -- we have copious, audited financial statements that prove that.
3) Oh yeah, we're a Fortune 500 company. Launching a new product costs us $250 million and we could fail to produce something that both achieves technical success and produces any value for anyone anywhere. Assuming we do, selling to our built-in base of hundreds of thousands of customers is what we do best.
Intuit can totally justify spending, say, $300 million to buy $20 million a year of revenue and the opportunity to 20x that by selling it to everyone who has ever heard of Quickbooks. Or mid 8 figures for something which has, say, a million a year in revenue.
But by asking for a low figure, it seemed to signal that we didn't see ourselves as the next $100 million business (the horror!). As an experiment, we doubled the number in subsequent discussions and got a far more positive response. In the end we decided that getting early investment wasn't for us.
I completely appreciate where the more skeptical VCs were coming from, though. If you're going to spend the same amount of your time working with a group of people long-term, you might as well put that time into a company that is eventually worth billions instead of millions.
VC isn't an emotion game that is driven by jealousy - any more than any other business is driven by jealousy. It's driven by simple economics.
In order for a fund manager to return any money, they have to look for the deals that will compensate for 66% of their deals that go sideways (or tank). Ironically, some probably push all of their portfolio companies to try and achieve this which leads to an increase in the number of companies they have that goes sideways.
But I hardly think they are all sitting around saying..."Gosh Darnit...I never got into Facebook...so here is $5M, add on this Facebook feature."
People that think like that, you can usually tell from having a 10 minute conversation with them. If you take their money after that, then that's your problem. Money comes with strings.
Once you understand what VCs are looking for, it makes it easier for you to align your goals with theirs.
That's why Github never raised money until just now...because they understand the economics that VCs are looking for. They believe, rightfully so, that they have a strong chance of being that company for them.
A16Z, doing that deal, could easily be one of the best moves they ever did. That was a stroke of genius, all around.
My feelings are that Zuckerberg made it "cool" to start a company again. People had such a bad taste after the dot com bust and starting a company was viewed as very risky from around 2000 to 2005. Then Zuckerberg came in with this amazing success story and now everyone wants to start a company again.
Sometimes it bothers me that people throw around the word "startup" so casually now. There's kids that are "doing a startup" but the only thing they're building is a gmail plugin or "a better to-do list that will change the world". We don't need any more of this crap. It seems like some people just want the founder title so they can broadcast to their LinkedIn network and impress people.
Reminds me of this quote from Ronnie Coleman: "Everybody wants to be a bodybuilder, but nobody wants to lift no heavy-ass weights."
"Everybody wants to go to heaven, but nobody wants to die." - Unkown (at least to me)
"Everybody wants to be Seinfeld, but nobody wants to be Jerry Seinfeld" - Chris Rock
I also think quite a few just want to be known as Entrepreneurs or talk about startups & how to build a business, rather than doing it."
Source: http://fascinated.fm/post/25657917784/i-actually-think-most-... (it is actually just collection of four tweets)
Unless you have VC? nobody but your mom is impressed by the 'founder' title. If this "start companies to create features and get a really big hiring bonus" phenomena is a problem, it's the fault of the VC (and the companies that hire through acquisition.)
I mean, personally, I think it's a ridiculously inefficient way to hire, but hiring is hard, so maybe it's better than what companies can do on their own? (I think it's a horrible way to hire because the best founders often don't make the best employees, and vis-a-vis.)
Meh, my point of view? things are hot right now, if you are an Engineer. Take advantage of it. Gain experience and/or money. If the highest paying gig you can get is taking money from a VC? who am I to tell you that is the wrong thing to do?
I mean, clearly it's not sustainable... but really, what economic upswing is?
I wouldn't underestimate the value of someone who knows how to ship product. The half-effort from a solid entrepreneur could still be far more effective than an equally smart but subservient employee who wants to simply be assigned a discrete job and work 9 to 5.
Obviously not every entrepreneur has these weaknesses as an employee, but some do.
(I've been doing startups since 1995.)
I completely agree. I'm also guilty of it to an
extent, though I try to avoid it. Sometimes it is hard because then in a room where you're the one not saying it is a "startup" that changes the game you look like the loser, which is unfortunate, but can be worked around.
I'm the maker of an art community (ArtGrounds) and a multi-user painting program (Sketcher), and I know how hard it is to make money on ads. Even when I had thousands of daily visitors (the site is seeing a slow decline), I was still making pocket change. And even then, it was nigh impossible to get people interested in renting their own private Sketcher rooms.
Part of it is probably that I don't understand marketing, but the thing is that, in most cases, you must have a very compelling product that's available nowhere else (at least at that quality level) in order to sell it. And there must be demand.
Contrary to popular belief, you can't really create demand artificially. All you can do is tap into people's itches, and scratch them. "I wish I could stay in touch with all my friends" becomes Facebook. "It's so impractical to have to tell everyone where I'm going in case they need to call me" becomes the cellphone.
There's more to it than that of course, but looking at all these trendy startups, it seems that they don't even care about the basics much of the time. The products just seem awfully superficial and simple.
I think they're not so much dense as bitter. There's a subset of HN readers who regard startups as a whole as a sort of con game, and are angry that the participants get so much attention. There may not be that many of them, but their anger makes them disproportionately active as commenters and voters.
I kinda hope this submission gets killed, honestly.
What's worse is that VCs and Angels in Chicago are perhaps, to an extent, more clueless about building technology businesses. Sure, money here is not as plentiful but I still see frivolous 'apps' being touted as businesses and getting accepted into incubators.
Perhaps it is the whole VC model that is to blame. By definition, VCs require companies to 'exit' through either acquisitions or IPOs. Their incentives are not aligned with building strong businesses that can thrive for years on end, but rather businesses that might 'seem' attractive in the next 3-5 years so as to attract potential acquirers. Only if a business shows unprecedented levels of growth do they let it do it's thing and thrive (Facebook, Google etc.).
Since 'social', 'mobile' and 'big data' are the buzz words these days, VCs are pouring money into these ridiculous and frivolous ideas in hopes of an acquisition. It's only fun while it lasts and I see a world of hurt coming their way.
If you're building a start-up now, you have two options the way I see it. 1) Build a sustainable business that charges some form of money. 2) Build a killer feature that attracts users and allows you to get bought by a larger company.
Right now, the larger companies are flush with money. Corporate revenues are outrageously high, particularly in the tech sector. So, the second option is just winning out right now because that's where the money is.
If this were to change and there was less investment from the existing players in tech, you'd see more sustainable businesses.
The complaint that the tech industry is not making any good tech is akin to people's gripes that the movie industry doesn't make good movies. For tech, the money right now is in features. For movies, the money right now is in mindless blockbusters. They're both businesses and like any good business, the players on the field optimize their strategy according to where the money is.
People raise funds and generally shoot for +10x exits. So, for a particular vintage, a VC fund of 10M aims to grow to 100M. They are squeezed for time (many funds are for 10-14 years, some shorter, some longer) and can't necessarily sit there and let companies bubble.
If you are presented with such a large hurdle, the easiest way to do it is swing for the fences and see if one gains traction. Generally, the one that gains traction will multiply your money far enough to cover for the other mistakes you made.
Look at how Pintrest comes from Iowa. I can think of more than one company in L.A. that wants to be the "next facebook" The exciting area in social networking is getting new groups of people involved in new activities and also bringing social media closer to other media. The tech skills in SV matter less than they used to and it's really an issue of marketing now... The unique perspectives that people bring from other parts of the world will be key.
People in the valley and SF seem to be more interested in infrastructure and SAAS plays, as well as transaction-oriented communities like AirBnB and stuff where you pay $X a month for a subscription. You can certainly find outrageous examples, but the better angels and VCs are (for the most part) making good decisions.
I might not agree with OP but this is more censorship of dissent. Very poor community management.
And some of them will listen until you clearly aren't such a business and then tune you out.
But how is that any different from a developer who wants to be a kernel engineer and won't listen to any job offers for doing database development or network programming Etc? Sure it could be just as rewarding, and they could learn just as much. But at the end of the day, somewhere in their brain, they have this bit set that their self image is tied up with being a "kernel developer" not "the guy who built a mySQL killer."
The cautionary tale is to try to look at things that you internally value rather than things you think you should value.
A short anecdote; When I got my first stock in Sun Microsystems as part of the employee purchase program it just sat there. My advisor suggested, as most do, that I diversify a bit (We were talking something like 150 shares so it wasn't a big position :-). Anyway, they explained that investing in stocks that suddenly doubled, tripled, or quintupled in price was thrilling and sexy, but ultimately unpredictable. Whereas investing in stocks that moved up 5 - 15% and then selling them and investing in something else that moved up a few percent. Was like a ratchet. You took $1,000 and each month you tried to add 3 - 5% to it. That grew your investment slowly but surely. Not as sexy but a better long term strategy.
EDIT: To be more clear, the strategy my advisor uses is to make a number of small investments shooting for growth in each of them. That doesn't always pan out but having a number of bets in the pool gives a better over all return than a single big bet (which is what I was trying to communicate), getting 80% return on something is great, but 80% return on 1% of the total portfolio means it contributes .8% to the overall gain.
So... um... what did you say your adviser's name was again?
There are many different kinds of (institutional) VCs. A firm with a $100MM active fund invest very differently than A16Z with a > $1 B available for investment. The ideal ownership stake within the portfolio company, comfort level with higher valuations, investment allocated across multiple rounds for a portfolio company all are a function of fund-size and investment strategy.
As the active fund size increases (e.g. $500MM or $1B), the fund is biased towards making big investments and hugs wins are needed for LP returns. When fundraising for your startup, its critical to understand if these dynamics are going to be a cause of conflict between your investors and you. Just because a VC firm invested in Facebook, doesn't mean their dynamics make sense for your startup.
Not that there is inherently anything wrong about learning to think like a programmer and problem-solve; the problem is that people equate learning to code to learning use the RoR/Django or some iOS framework. This is a direct result of all the dumb money being poured into stupid ideas - it leads everyone to believe that their time is best spent learning the tools to give shape to their photo-sharing app.
Internet millionaires driving around on cell phones drain the city’s sparkle. In the old days people who made tools built factory towns on the Ohio. It was honest work but not glamorous. Today the toolmakers work in software and they have been elevated in the culture, especially here. But there is a distinction between making an app and making art. A city of toolmakers imagining themselves as artists is barbaric, heartless, empty. You feel it in the crowd eating dinner at the many expensive restaurants. People speak in sound bites and are both assertive and lost.
User-facing is not a business.