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Becoming more formidable (42floors.com)
31 points by sethbannon on Dec 6, 2014 | hide | past | web | favorite | 11 comments

> But if you’re more of a normal case, where you could pursue profitability with marginally worse growth, go after the profitability; because once you are profitable you don’t need investors’ money. And not only will you be picky, you will appear picky as well. Investors will realize that they will have to convince you to take their money because you don’t need it.

This is silly and idealistic. Profitability in and of itself doesn't make a company more attractive from an investment perspective. Silicon Valley angels and institutional investors are looking for companies that are believed to be targeting a market opportunity of a certain size, capable of achieving certain growth, etc. Profitable companies that don't fit the profile are no more investable than unprofitable companies that don't fit the profile.

More startups should target profitability because many of them will eventually find that they can't raise additional capital and will either have to sustain themselves or die. They should not target profitability in the belief that it will instantly make them more attractive to investors.

His point is about BATNA, and ceterus paribus it is true. If you are profitable or even cash neutral, even if you are growing slowly, you are in a better negotiating position than if you are burning cash with an end in sight. VCs can sense your desperation, and have tons of experience calling bluffs.

If you are "growing slowly", especially in today's market, you are going to have a very difficult time raising capital from Silicon Valley investors. Period.

The fundamental point you're overlooking is the fact that profitability does not equate to leverage in a negotiation when you are not in a negotiation. Thinking that you're negotiating with investors because they're talking to you is sort of like thinking that you're pursuing a serious relationship with someone because they allowed you to buy them a drink at the bar.

Professional investors look at a lot of deals and fund a small percentage of them. They have a number of motivations for talking to entrepreneurs who they have no immediate interest in backing.

> If you are "growing slowly", especially in today's market, you are going to have a very difficult time raising capital from Silicon Valley investors. Period.

Bullshit. For many VCs, a startup that happens to be slowly but profitably growing can be a complete nonstarter, but it can also be a goldmine. For example, if the product is a slam dunk, but growth is bounded by the size of the sales team, then VC money can turn slow growth into fast growth overnight. This type of funding happens all the time in B2B startups.

Don't believe me? When USV invested in DDG, they were the definition of a slow growth company. Completely bootstrapped, not a cent of funding, and had taken 5 years and still wasn't at 1MM searches per day. They nearly tripled their growth rate with the addition of funding which allowed them to hire, move out of a basement, and start business development. They were positioned in the right niche at the right time, and the slow growth was nothing more than a symptom of a lack of resources rather than a lack of a viable business model.


Playing the survivorship bias game is always fun, but the devil is always in the details:

1. USV's investment was made in 2011. In 2014, we're at a point in the cycle where investors are even more focused on growth.

2. According to DDG itself[1], the inflection points in DuckDuckGo's growth correspond to key privacy-related and distribution events. There's nothing in DDG's growth to suggest that USV's investment itself sparked growth.

3. DDG's founder is a successful serial entrepreneur. Entrepreneurs with a track record can more easily raise money, even for bad ideas (see: Color).

4. USV's investment rationale ("we invested in DuckDuckGo because we became convinced that it was not only possible to change the basis of competition in search, it was time to do it") is fundamentally based on the potential size of DDG's market (search), which is one of the largest. In other words, it was a small bet (USV only invested $3 million) on there being an emerging opportunity to compete with Google.

I repeat: if you are "growing slowly", especially in today's market, you are going to have a very difficult time raising capital from Silicon Valley investors. Period.

There are a lot of entrepreneurs who believe they're the exception to the rule, and you see a lot of companies trying to game growth metrics because they know how important growth is to fundraising, but the vast majority of the post-launch startups that don't have a growth story to tell are getting "no" far more often than they're getting "yes."

[1] https://duckduckgo.com/traffic.html

I liked the piece, but "formidable" feels like the wrong word to me. This piece is about becoming more "impressive to seed stage investors in silicon valley", not becoming more "capable and relentless, plowing through everything in your way", which is closer to what I think PG was talking about and what I aspire to.

This piece does nothing to help you pass the "animal" test, in other words, which is what the title makes it sound like.

Great article...

Semi-related - who is the cartoonist? Can anyone (or Jason if following) xlate the signature?

Can someone as experienced write "Becoming profitable."

From the first paragraph:

> FlighCaster


> FlightCaster

If you can't even spell the name of your own company consistently within a self-promoting blog post like this, why should anyone give you money?

My mistake--typo fixed. Thanks!

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