37 ms·

New Tech Incubators Put Finances First

69 points by jkuria 9y ago

ThomPete 9y ago
I hope this becomes a trend. I still think Clayton Christensen's "Be patient for growth, not for profit" quote is the sanest way to build a business. I understand the idea of giving startups money to explore business models but I also think it can lead companies astray and into some very problematic business models like Ubers where subsidizing is disguised as a business model. It's not that it doesn't work (it works remarkably well) it's just that it's creating a lot of companies taking in a lot of talent who aren't creating anything and I personally do not think the few that do end up being successful makes up for it. If you are forced to look at your finances you are foced to look at where you can create value that people want to pay for.
- maxxxxx 9y ago
  It would definitely make the job market a little saner. Right now it feels more like a lottery where you have to gamble on potential winners.
- coffeemug 9y ago
  I hope it doesn't. "Finances first everywhere" is dumb in technology for the same reason it's dumb in research -- you get predictable incremental improvements rather than quantum leaps. We get what we pay for, and it absolutely makes sense to invest into curiosity-driven technological research. People want "finances first" investment, but then complain that all we get is a bunch of sharing economy clones. If you want something other than doordash, uber, airbnb, instacart, caviar, lyft, etc. you have to be prepared to invest into ideas that have no financial story in the short term.
  - ThomPete 9y ago
    I am unconvinced about that argument but I am willing be convinced. Can you give some examples of quantum leap companies? I don't see why you would need SV money to make quantum leaps as a company or why that's important. Edit: I can see from the responses that there is some confusion. I am of course not talking about companies who do some sort of research based incubation. I am talking about the host of companies who do no research or innovation and simply use VC money to get a team of the ground.
    - lwansbrough 9y ago
      I suppose Magic Leap is a good example. No one would buy a silly incremental AR headset, but they will probably buy whatever Magic Leap is working on (provided it is as futuristic as advertised.)
      - maxxxxx 9y ago
        I have my doubts they will ever deliver anything. More likely they have sucked up a lot of investment other companies would have put to better use.
        JibJabLab 9y ago
        Might be hard to pull off considering they've done live demos to certain investors.
        joefourier 9y ago
        With a refrigerator sized device that they have been unable to miniaturize, and a glass-sized product that is not really any better than Hololens or Meta.
      - notyourday 9y ago
        Vapor Ware is always a great example.
    - askafriend 9y ago
      You don't need to look much further than the story of Google. Search was thought to be a "solved problem" and many at the time thought that there was zero money in search. Plus it was an incredibly saturated market with existing providers. If you took the finances first approach, you would have missed Google. Another good one is AirBnB. Staying in other people's homes was a pretty ridiculous idea at the time. Who would want to stay in a stranger's home? How does a company like that make any money? It's more obvious today but that capital had to be invested in order to open up the market for AirBnB to come in underneath the hotels and cement itself. If you took the finances first approach, you would have missed AirBnB. Yes, my examples are cherry-picked (I know someone is going to bring this up). But you asked for examples and here they are :)
  - watwut 9y ago
    Ultimately, investors want money back and them some. Or at least they should want it, definitely those who don't play with retirement and what not funds money instead of their own. Moreover, tons of money being poured into financially bad shops kills real market and skews incentives. Companies that could be able to make profit die. Meanwhile, startups are motivated to target quick growth instead of actual profit - until bubble breaks and everyone is effed for no fault of their own.
lkrubner 9y ago
I'd recommend Peter Drucker's book from 1985, "Innovation And Entrepreneurship". Drucker points out that the output of a small startup is radically different from a large, mature organization. From a large organization, investors might want growth of 15% and final profits of 20%. But he also points out, this is both too little and too much for a small startup. From an early stage organization, it is important to see triple digit growth, and no profits at all. The sign of a successful startup is that it finds a business model that allows it to grow rapidly. Drucker also describes the failure mode where the small startup gets enough growth to survive, but not enough to become a mature, independent organization. It then limps along in a crippled state. For my money, Drucker has a better density of insight-per-page than any other business writer. I strongly recommend him.
- eldavido 9y ago
  Here in Startupland we sometimes disparage 15%/year. But at the scale where big companies operate, that can be truly massive. facebook is realizing something like 15% return on 70 billion of equity book value. Getting 15% on a 100k real estate flip is one thing. Realizing 15% on 70 billion dollars is quite another.
thisisit 9y ago
> The first time Bitsbox co-founder Aidan Chopra had to create a forward-looking income statement, he “didn’t know where to get those numbers from.” Many founders are out to solve a problem which they think requires solving at a large level. The issue being not knowing - where to get the numbers. What is your market size? What is the income strategy? etc. Sure, there are some companies which succeed massively despite this but majority go down under because they don't understand it completely.
ultimatejman 9y ago
Agree. Focussing on financials pushes a sales first attitude over a raise money attitude which I feel more early-stage startups need. Doing sales before you have a product is uncomfortable and frustrating at times, but it is the best way to know what to build and for whom you are building.
khaledtaha 9y ago
IMO this is highly dependent on certainty. If there is a low uncertainty around the product, technology, and/or market then this is a very useful exercise. However, as uncertainty grows so does the futility of trying to articulate a coherent business model.
garry 9y ago
Startups certainly die because their shoelaces are untied, which is what getting tripped up on financial accounting is like. But you don’t see champion marathoners going to shoelace-tying workshops with the hope it will help them win races. Finance is important but product, engineering, and marketing are far more essential to making something people want, and that is why YC and the best incubators spend most of their time on that.
- jamestimmins 9y ago
  I noticed that most of the products here seemed to sell a physical product, so unit economics would presumably be a bigger factor than if it was pure software. Does this type of company have more of a need/ability then to focus on the underlying financials? I think of the failed Kickstarter campaigns that had massive customer interest, but weren't able to deliver a good because it ended up being more expensive than predicted, or they delivered it at considerable financial loss.
bob_theslob646 9y ago
I didn't read the article that closely, so please correct me if I'm wrong. Are finances not entirely dependent on the business plan and or idea? Applying a one size fits all approach is extremely dangerous. In my opinion, it is all dependent on which space you are in. Margins speak volumes.(They tell the story of most businesses) For software, the issue of money is not as important as it would be for a hardware business because it's much easier to scale. The fact that "now" incubators are focusing on ideas that make financial sense may be one of the silliest things that I have ever heard. What that shows is that these venture capitalists/investors are starting to realize that "free money"( super low interest rate environment) will end eventually and it will be more crucial for these companies to be catious on how they spend their money. Frankly, hearing this is scary, because they are somewhat admitting that the funded people lavishly and asked questions later. It always makes me wonder how they benchmark vc's who invest in startups. Considering their returns are not public, it is hard to say. What is even harder to realize and gauge is how they measure "successful investing." So much of this is luck, especially in a crowded space/market. Usually the best ideas(the paradigm shift) will always have access to infinite capital, but the ideas that may not be articulated fully, will be severely constrained until proven. That is not a bad thing, but may add some reality to what creating a company is actually about. Who knows whether is good or not, but in a few years we shall find out.

69 points by jkuria 9y ago

I hope this becomes a trend. I still think Clayton Christensen's "Be patient for growth, not for profit" quote is the sanest way to build a business. I understand the idea of giving startups money to explore business models but I also think it can lead companies astray and into some very problematic business models like Ubers where subsidizing is disguised as a business model. It's not that it doesn't work (it works remarkably well) it's just that it's creating a lot of companies taking in a lot of talent who aren't creating anything and I personally do not think the few that do end up being successful makes up for it. If you are forced to look at your finances you are foced to look at where you can create value that people want to pay for.

maxxxxx 9y ago
It would definitely make the job market a little saner. Right now it feels more like a lottery where you have to gamble on potential winners.
coffeemug 9y ago
I hope it doesn't. "Finances first everywhere" is dumb in technology for the same reason it's dumb in research -- you get predictable incremental improvements rather than quantum leaps. We get what we pay for, and it absolutely makes sense to invest into curiosity-driven technological research. People want "finances first" investment, but then complain that all we get is a bunch of sharing economy clones. If you want something other than doordash, uber, airbnb, instacart, caviar, lyft, etc. you have to be prepared to invest into ideas that have no financial story in the short term.
- ThomPete 9y ago
  I am unconvinced about that argument but I am willing be convinced. Can you give some examples of quantum leap companies? I don't see why you would need SV money to make quantum leaps as a company or why that's important. Edit: I can see from the responses that there is some confusion. I am of course not talking about companies who do some sort of research based incubation. I am talking about the host of companies who do no research or innovation and simply use VC money to get a team of the ground.
  - lwansbrough 9y ago
    I suppose Magic Leap is a good example. No one would buy a silly incremental AR headset, but they will probably buy whatever Magic Leap is working on (provided it is as futuristic as advertised.)
    - maxxxxx 9y ago
      I have my doubts they will ever deliver anything. More likely they have sucked up a lot of investment other companies would have put to better use.
      - JibJabLab 9y ago
        Might be hard to pull off considering they've done live demos to certain investors.
        joefourier 9y ago
        With a refrigerator sized device that they have been unable to miniaturize, and a glass-sized product that is not really any better than Hololens or Meta.
    - notyourday 9y ago
      Vapor Ware is always a great example.
  - askafriend 9y ago
    You don't need to look much further than the story of Google. Search was thought to be a "solved problem" and many at the time thought that there was zero money in search. Plus it was an incredibly saturated market with existing providers. If you took the finances first approach, you would have missed Google. Another good one is AirBnB. Staying in other people's homes was a pretty ridiculous idea at the time. Who would want to stay in a stranger's home? How does a company like that make any money? It's more obvious today but that capital had to be invested in order to open up the market for AirBnB to come in underneath the hotels and cement itself. If you took the finances first approach, you would have missed AirBnB. Yes, my examples are cherry-picked (I know someone is going to bring this up). But you asked for examples and here they are :)
- watwut 9y ago
  Ultimately, investors want money back and them some. Or at least they should want it, definitely those who don't play with retirement and what not funds money instead of their own. Moreover, tons of money being poured into financially bad shops kills real market and skews incentives. Companies that could be able to make profit die. Meanwhile, startups are motivated to target quick growth instead of actual profit - until bubble breaks and everyone is effed for no fault of their own.

lkrubner 9y ago

I'd recommend Peter Drucker's book from 1985, "Innovation And Entrepreneurship". Drucker points out that the output of a small startup is radically different from a large, mature organization. From a large organization, investors might want growth of 15% and final profits of 20%. But he also points out, this is both too little and too much for a small startup. From an early stage organization, it is important to see triple digit growth, and no profits at all. The sign of a successful startup is that it finds a business model that allows it to grow rapidly. Drucker also describes the failure mode where the small startup gets enough growth to survive, but not enough to become a mature, independent organization. It then limps along in a crippled state. For my money, Drucker has a better density of insight-per-page than any other business writer. I strongly recommend him.

eldavido 9y ago
Here in Startupland we sometimes disparage 15%/year. But at the scale where big companies operate, that can be truly massive. facebook is realizing something like 15% return on 70 billion of equity book value. Getting 15% on a 100k real estate flip is one thing. Realizing 15% on 70 billion dollars is quite another.

thisisit 9y ago

> The first time Bitsbox co-founder Aidan Chopra had to create a forward-looking income statement, he “didn’t know where to get those numbers from.” Many founders are out to solve a problem which they think requires solving at a large level. The issue being not knowing - where to get the numbers. What is your market size? What is the income strategy? etc. Sure, there are some companies which succeed massively despite this but majority go down under because they don't understand it completely.

ultimatejman 9y ago

Agree. Focussing on financials pushes a sales first attitude over a raise money attitude which I feel more early-stage startups need. Doing sales before you have a product is uncomfortable and frustrating at times, but it is the best way to know what to build and for whom you are building.

khaledtaha 9y ago

IMO this is highly dependent on certainty. If there is a low uncertainty around the product, technology, and/or market then this is a very useful exercise. However, as uncertainty grows so does the futility of trying to articulate a coherent business model.

garry 9y ago

Startups certainly die because their shoelaces are untied, which is what getting tripped up on financial accounting is like. But you don’t see champion marathoners going to shoelace-tying workshops with the hope it will help them win races. Finance is important but product, engineering, and marketing are far more essential to making something people want, and that is why YC and the best incubators spend most of their time on that.

jamestimmins 9y ago
I noticed that most of the products here seemed to sell a physical product, so unit economics would presumably be a bigger factor than if it was pure software. Does this type of company have more of a need/ability then to focus on the underlying financials? I think of the failed Kickstarter campaigns that had massive customer interest, but weren't able to deliver a good because it ended up being more expensive than predicted, or they delivered it at considerable financial loss.

bob_theslob646 9y ago

I didn't read the article that closely, so please correct me if I'm wrong. Are finances not entirely dependent on the business plan and or idea? Applying a one size fits all approach is extremely dangerous. In my opinion, it is all dependent on which space you are in. Margins speak volumes.(They tell the story of most businesses) For software, the issue of money is not as important as it would be for a hardware business because it's much easier to scale. The fact that "now" incubators are focusing on ideas that make financial sense may be one of the silliest things that I have ever heard. What that shows is that these venture capitalists/investors are starting to realize that "free money"( super low interest rate environment) will end eventually and it will be more crucial for these companies to be catious on how they spend their money. Frankly, hearing this is scary, because they are somewhat admitting that the funded people lavishly and asked questions later. It always makes me wonder how they benchmark vc's who invest in startups. Considering their returns are not public, it is hard to say. What is even harder to realize and gauge is how they measure "successful investing." So much of this is luck, especially in a crowded space/market. Usually the best ideas(the paradigm shift) will always have access to infinite capital, but the ideas that may not be articulated fully, will be severely constrained until proven. That is not a bad thing, but may add some reality to what creating a company is actually about. Who knows whether is good or not, but in a few years we shall find out.