11 ms·

Why Does Your Company Deserve More Money?

176 points by ryanmercer 8y ago

mwseibel 8y ago
Happy to answer questions about the post here for the next couple of hours.
- ryanmercer 8y ago
  Michael, how do you avoid deluding yourself into thinking that you DO have a market fit when you actually do not?
  - shawn 8y ago
    User count. Put a big LED on your wall right above your monitor with your weekly active users in the last 7 days. Any time it goes up, play a bing noise. Eventually you'll pavlov yourself into liking that sound.
    - Zalastax 8y ago
      Chasing those numbers can be a fools game. I've seen money going down the drain because stakeholders wanted to stroke their egos. Instead of staying lean, and since there was money in the company to burn, a big sum was spent on ads to keep new users pouring in. It was a horrible sight.
    - nopinsight 8y ago
      Some combination of retention rate and user count, with a heavier weight on retention, looks more optimal for long-term viability. Daily or weekly meetings on the ‘scores’ sound like a good idea.
  - mwseibel 8y ago
    I tried to help with this question in this blog post: https://blog.ycombinator.com/the-real-product-market-fit/ https://blog.ycombinator.com/the-real-product-market-fit/
- sharemywin 8y ago
  Kind of seems like justin.tv became kind of an incubator of it's own building a $5m/yr platform. That spun off a couple pretty cool businesses.
- Retric 8y ago
  'Deserve' seems like a very odd word choice here. Startups can do a lot of great work and still fail unless they can 'Justify' more funding. Unless I am missing some nuance you where going for?
  - vinceguidry 8y ago
    I took it as a normative justification. Lots of companies out there looking to get capital, why should I give it to you? Are you going to do something useful with it or are you just going to fritter it away?
    - mwseibel 8y ago
      I agree with this comment. I think it’s too easy for founders to say - that shitty company over there got money so why can’t we get any. I want to reframe the conversation.
      - wsy 8y ago
        Reframing the conversation to make founders in this situation re-think their approach is very laudable, and you give very valuable and concrete advice. I still agree with the GP post that 'deserve' is an unfortunate choice of wording. It has the potential to again mislead founders, now in a different direction. Nobody deserves your investment (except some non-profit organizations). Fairness is no significant criterion for investors. You probably just give it to the founders with the best risk/gain ratio. The founders you want to educate might think that they now can say "I did what you suggested. Now I deserve your money". And they will again be surprised if "that shitty company over there" gets it instead.
- zminjie 8y ago
  How do you reconcile this advice and position yourself if the seed round is only enough to prove out whether the product can be built at all? As an analogy, say I had the idea for a car when everyone is still using horses. I raised a seed round to build my car but the funding is only enough to build a car prototype that goes 10mph. At 10mph, there is obviously no product/market fit since horses are still faster and cheaper. However, the prototype proved out the technical challenges, so I know with more capital I'd be able to make a car that can go 80mph, making the horses obsolete. How would your post apply in this case?
  - hkmurakami 8y ago
    High technical risk projects like this typically come with highly vetted market needs. On the other hand low technical risk projects tend to come with higher market need risk.
  - pg_bot 8y ago
    I think in that case your ability to raise additional funds will be dependent on the persuasiveness of your argument. The investors would need to believe that you have a viable plan, and that you are the person who can execute it. If they don't believe you are worthy of investment others may take inspiration from your work in their attempts to make the product a reality.
  - mwseibel 8y ago
    I think there are certain companies with significant upfront capital requirements that first time founders will find it almost impossible to get funded. This is unfortunate and probably reducing overall innovation but I think the revolution that has caused first time founders to get funding has been software. Software has significantly reduced the upfront capital required to get a business off the ground. I think we Founder venture further and further away from pure software companies they are going to find fundraising much more challenging.
    - numbsafari 8y ago
      A company that comes to my mind is Kestrel Aviation. They had a great plan up front, founder pedigree, and experience. But they got distracted by hubris and stopped executing. Launching a new general aviation company is massively capital intensive. They raised a bunch but failed to do anything that resembled shipping. They could have made individual parts, they could have sold kits. Any number of things. Sometimes you have to start with the small pieces, or do services engagements. These things generate revenue, attract staff, and enable you to build the kind of organization necessary to do something capital intensive. Trying to go to Mars as step one won’t typically work. Try to find business models for the components and assemble over time. My guess is that Elon Musk’s portfolio follows this model.
- notlob 8y ago
  What happened with the people you had to let go? Did you prioritize rehiring them once your ship was righted or help them find new positions?
  - mwseibel 8y ago
    We were doing well enough to give them good severance and the tech market was good enough that it was easy for them to find jobs.
    - notlob 8y ago
      There could be a good blog post in that? Planning to do right by your employees, even when times are hard. (Also, I can't imagine what it'd be like for jobs to be easy to find!)
      - scarface74 8y ago
        Also, I can't imagine what it'd be like for jobs to be easy to find! I’m curious. What do you mean?
        notlob 8y ago
        I’m not in IT tech, last job search a couple years ago took about a year and I’m starting another that’ll likely take as long. It’s just fantastic to me that multiple people could simultaneously find employment on short notice. It’s a world I haven’t experienced and am frankly envious of.
  - scarface74 8y ago
    If what caused the layoff is a microeconomic issue - your company isn’t profitable and not a macroeconomic issue - the entire economy sucks- and you’re technical with marketable skills, it shouldn’t be an issue. Between 2009-2011, I was working for a company that had three rounds of layoffs until the company finally shut down. We all knew the company was in dire straights, management was very up front with us. None of us who were left, jumped shipped because we liked our jobs, were working on resume building technology and we knew we could get a job relatively quickly. Without fail, within a month of being laid off, every person who was laid off had another comparable or better job. This was true for developers, QA analysts, and L1 and L2 tech support. On our last day, when the company shut down and laid all of us off, we hung around, went to lunch, laughed, joked and called our recruiters for our next opportunity. My biggest fear is never being unemployed, it’s being unemployable. If you keep your skills marketable in tech, finding a job or at least a contract is not hard. It’s been true for me for almost 25 years asa Developer - and I’m not on the west coast.
- robhunter 8y ago
  When you were at $4M-$6M in revenue, but not growing, what was your retention like? Were you adding new users but churning out so many that growth was flat? Or were you not adding new users, but retaining the ones you already had?
  - timr 8y ago
    I was at JTV during this time. We were basically churning. There was certainly a significant cohort of regular viewers, but much of our traffic owed to spikes of viewers who would come for specific content, then bounce. They didn't care about us, so long as we had the thing they wanted to see. We spent a lot of time debating whether or not this was just the nature of "live" content (e.g. live television derives most of its value from sports and real-time events, and they defend these verticals viciously). I have no special information on Twitch, but from the outside, it is a qualitatively different audience. There's a level of commitment that just wasn't there for JTV. The lesson is burned into my mind, because there are a lot of ways for a startup to generate deceptive "traction", and if you're not careful you can fool even yourself. You have to be brutally honest about how committed your users are, and what their actual value is. It's an easy way to become a zombie startup -- trundling along, nursing a "big" audience of users who require a lot of care and attention, but don't really care about your product in return. These kinds of audiences are worse than worthless, because they waste your time.
    - mwseibel 8y ago
      Perfect description of JTV
CiPHPerCoder 8y ago
> We let a lot of good people go and doubled down on generating the advertising dollars we needed to stay alive. And then > We even took all of our employees to Hawaii to celebrate This is an interesting juxtaposition within the same paragraph. I hope I'm not out of line for reading this as, "Let's celebrate our thriftiness that led to people becoming suddenly unemployed by splurging on an extravagant vacation!"
- hemantv 8y ago
  Those happened at completely different times. First was hard time where they had to let go people. Second was for people who stayed and worked hard to make it profitable.
  - CiPHPerCoder 8y ago
    > Those happened at completely different times. The article stated a 2 month difference toward profitability, and provided no other frame of reference for the (immediate? eventual?) Hawaii getaway. They do mention at "the end of the year" but there is no information stated about when this 6 month "get out of the tailspin" process began in the [calendar/fiscal] year, so that's non-helpful. Without additional context, that's a single digit number of pay cycles between, "Surprise! You're laid off to save the company" to "We can afford a lifestyle of excess". I mean, I would hope that it didn't go down this way, and the paragraph was just written awkwardly. If the author wants to make that clearer, I'd be happy to listen. But as that blurb stands now, it reads as a casual dismissal of the "good people" let go at best, and a slap in their face at worst, which isn't a good look.
    - mockingbirdy 8y ago
      I think I've learned something. Very eye-opening. > 1. staff up > 2. let your employees go > 3. profit > 4. give tips on the internet that you shouldn't staff up > 5. stop to look into a mirror because you don't have any integrity whatsoever I hope he just forgot to mention that there was a <minimum time to let it seem reasonable and humane> duration between the firing and the holiday.
yc-kraln 8y ago
What would be the equivalent gate from Series A to Series B?
tokai2 8y ago
The top advice from all startups that ‘survived’ seems to be, ‘don’t hire, be lean’, when almost all of them did hire and then lay off employees to get over bad times. In my view ‘not hiring good people’ during rosy times is an impossible thing to do. Things like these are self evident only in retrospect.
- LeftTurnSignal 8y ago
  The startup I was a part of in a previous life did that. The two owners took too much money for personal stuff and couldn't pay the employees. Several times we were told to not cash our paychecks for a few days or were asked to take an unpaid day off, etc. That same year that they let 3 employees go and they each bought a new house, new vehicles, and one of them bought a $75k trailer. So between the 2 of them, we figured that that year they could barely afford to pay us they got around $800k worth of personal stuff. Then they pushed all the extra work onto the remaining employees. 4 more left a few months after they let go of the first employees which caused them to change their business model quite a bit to retain the remaining employees. Now looking back, the 3 employees they let go were paid less than $80k between them and were considered contractors (until the IRS was involved). The lean stuff here burnt several of us out, and for those that remained, the thanks they got was being told there wasn't enough money for a holiday party. I keep in contact with several of the employees. They're a successful startup in most aspects I assume, but only because they were forced to change stuff that they didn't want to. If they didn't change the business model, they would have bled more employees within a few months and probably would have went under.
  - organsnyder 8y ago
    That sounds more like fraud than a legitimate startup.
  - mockingbirdy 8y ago
    Sounds criminal. "Move fast, break things". For example labor rights.
  - gaius 8y ago
OliverJones 8y ago
A good way to think about this issue: As you prepare to sell preferred shares to raise money, ask yourself "Is this product worth the next ten years of my life?" Come up with an answer that will satisfy your parents or spouse, not just your co-founders and seed investors. What can make it worth ten years? 1. A product with the potential to delight paying customers and make them talk to each other about how great it is. (If your revenue depends on ads, your customers are advertisers, duh.) 2. A big enough stake in your company (after you sell those shares) to give you good choices when it's time to do the next thing.
- ttul 8y ago
  I think this is a crucial question every entrepreneur should ask his or herself before taking money with a liquidation preference - and that includes long term debt (the ultimate liquidation preference). Whenever you take on leverage, you have to deliver a return to investors (or lenders). How long will that take? Do you really want to do this for another X years? And ten years is not a bad guess for preferred equity.
ben509 8y ago
> Why Does Your Company Deserve More Money? It's a business, it makes no sense to talk about it "deserving" anything. Either you think your investment will pay off or you don't. (And try to avoid taking VC cash or you'll wind up doing all the work while they walk off with the profits.)
typomatic 8y ago
> Unfortunately, I have to ask them a very unforgiving question: why does your company deserve more money? This is so stupid--do VCs ever ask this question in the first place? No. By the time your board is asking this question, they've already decided you don't deserve more money. Any random justifications they make up about "deserving" is a complete distraction from the fact that these choices never have a logical basis.
slap_shot 8y ago
>The hardest conversation I have to have with a founder is when they’ve spent their 1-2 million dollar angel round but haven’t found product market fit. As someone who has bootstrapped a company that found a product market fit and is profitable, I can't even explain how foreign it is to think that people raise and exhaust millions of dollars without finding product market fit. I constantly have anxiety about all of the facets of running the business. I cringe even thinking about the pressure an entrepreneur must while being in this predicament. I couldn't handle it.
- jacquesm 8y ago
  > I can't even explain how foreign it is to think that people raise and exhaust millions of dollars without finding product market fit. Quite a few raise money without even having a product, forget about product market fit.
  - ryandrake 8y ago
    This blows my mind. You’re basically betting money on an athlete before knowing what sport they’ll decide to play. It’s as if these people have run out of viable investments and are just guessing. That said, if anyone with $1M burning a hole in their pocket has no idea what to do with it, just reach out: I accept PayPal and Bitcoin. I offer you the same 0% return!
    - s73v3r_ 8y ago
      There are plenty of viable investments; they just usually don't offer ludicrous rates of return. Just normal, decent ones.
    - pbreit 8y ago
      Isn't it more like paying a drafted athlete? It's not like founders have no prior history to go on.
- ModernMech 8y ago
  > I can't even explain how foreign it is to think that people raise and exhaust millions of dollars without finding product market fit. This equates to about 18 months of operating time in SF. When you talk about it in terms of time instead of dollars, 18 months doesn't seem like long at all. Certainly not enough time to find product market fit in many cases if you start out with only a vague idea.
jacquesm 8y ago
Well, at least they had a plan 'B'. Quite a few companies have none and if their current investors don't pony up then it's end-of-story really quick. It's one thing to go raising money when things are looking good, quite another when you've lost momentum. B2B or B2C can make a huge difference here, in B2C there are some options that are much harder to come by than in B2B (see: youtube), but B2B is easier to land softly because it is far easier to monetize.
mbesto 8y ago
> Do you have product market fit or not? If not, save as much money as you can, spend more time with your customers, and build a product they need. I'm still waiting for the tech VC world to unilaterally agree on what "product market fit" is.
- zminjie 8y ago
  It is defined in the linked blog post and I believe it's a pretty good definition. “The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can.”
  - mwseibel 8y ago
    I’m pretty sure Marc invented the phrase so he gets to define it: https://pmarchive.com/guide_to_startups_part4.html https://pmarchive.com/guide_to_startups_part4.html
  - ttul 8y ago
    In other words: your growth is so astonishing that it justifies paying >30% IRR to investors rather than growing from internal cash or borrowing what you can from a bank.
  - mbesto 8y ago
    > It is defined There's not an agreement on a single definition though - that's my point https://www.quora.com/How-do-you-define-Product-Market-Fit https://www.quora.com/How-do-you-define-Product-Market-Fit
- wsy 8y ago
  Getting investment is a very subjective business. You can play it to your advantage that different VCs have different opinions. But not if you wait for them to deliver definitions to you. The first lesson to learn as founder is that you are not entitled. (side note: that is the trouble with using the word 'deserve')
Alex3917 8y ago
It's easy to believe that letting go of employees before finding product market fit was the right move, and maybe they never would have never been able to build and grow Twitch under the existing structure. But given that at least one of the products sold for a billion dollars, this seems like a textbook example of a company that did deserve more money based on having built a good platform but not yet having the required traction. If investors knew the company was going to sell for over a billion dollars, would they really not have invested? Maybe this is the case, but it doesn't seem like it. Instead it seems like the investors didn't believe the company would actually sell for a billion dollars based on the growth rate to date.
- mwseibel 8y ago
  We didn’t deserve more money when things weren’t working. It’s the investors who decide who deserves more money and if you are setup to need their money you better learn their rules and figure out how to convince them to give it to you.
  - Alex3917 8y ago
    I realize that in practice you're very unlikely to get money without having traction. But if we're talking about which companies are deserving of money, if such a category exists, then surely the ones that go on to succeed must (in most cases) make the cut. Especially when they succeed despite having not gotten the money. I also get what you're saying though, in terms of the companies that deserve money are the ones that can convince investors that they deserve money.
  - mijamo 8y ago
    I think here deserve is the wrong term, semantically speaking. Investors do not decide who "deserves" more money, they decide who GETS it. Deserving is more a moral term and makes things confusing: a company could deserve the money but not get it because they are not good enough at fundraising, or they need the money at a time when money is very hard to get etc. And many companies get money without deserving it because some investors are stupid, or because they are way too good at looking shiny.
- 8y ago
rhizome 8y ago
"because we're not spending n*10e06 per month on hosting."
jetsnoc 8y ago
Hiring folks also increases the communication overhead. If you are a team of 3 and hire a 4th you now have a new person that needs trained, needs to learn tribal knowledge, asks the other 3 people different things and keeps them busy distracting them from what were doing - finding product market fit. Any more, I prefer lean & scrappy teams. Small teams get more done. Only scale up the other bullshit when you absolutely have to.
- bytematic 8y ago
  Also less for everyone to work on. So it is a trade-off, especially from 3 to 4.
- aphextron 8y ago
  >Only scale up the other bullshit when you absolutely have to. Yet scaling becomes absolutely essential for a company doing anything sufficiently complex. The question is how do you maintain that small team efficiency across an enterprise. It seems that business and engineering are very similar in this regard in that the ultimate baseline problem to be solved is managing complexity. The answer seems to be in adhering to the Unix philosophy of tiny, self contained, composable parts which can be easily reasoned about and composed with.
  - smackay 8y ago
    As the parent comment states, the biggest killer of efficiency is communication, particularly across disciplines and across domains. Reducing the overhead of communication and reporting would seem to the the skill most essential to management but generally it's the skill that is generally lacking, or indeed, absent. The unix philosophy of composable teams can only happen when the communications are clear, concise and don't generate much, if any, overhead. I'd love to see a company with a CCO - Chief Communications Officer - who has a team responsible for making sure that the information passed among the various parts of the organisation was effective and free of bullshit or grandstanding.
- drawkbox 8y ago
  Communication channels formula where n is team members: n(n-1)/2 [1] As teams grow, not only do communication channels increase exponentially, individual contribution decreases overall and there is less ownership/responsibility so people care less i.e. a team of 100 has 99 other people to pick up slack, a team of 1 has noone else, a team of 3 has 2 people that will let the third know of slackage, where a team of 100 may never be able to apply that. Small teams get it all done, and sometimes single people, especially language designers like Guido, Stroustrup, Ritchie, Matz, Eich, etc and especially in the beginning. Small team strategy even in big companies is very smart and effective to get the best performance out of each contributor. Small team configuration does give some power and worth to employees though so it isn't used as much in large companies that looks at employees as resources in a machine. Employees as resources may work for established products/processes but rarely research and development or creative products. [1] https://pm.stackexchange.com/questions/14907/number-of-communication-channels-in-chief-programmer-model https://pm.stackexchange.com/questions/14907/number-of-commu...
staticautomatic 8y ago
Why do you deserve to invest in my company?
- mcherm 8y ago
  That is also a good question to ask and to answer honestly.
- trcollinson 8y ago
  That’s a fine question to ask if the investor comes to you. If you are coming to the investor asking for money, you are not profitable and spending way more than your income, then I’d suggest not asking this stupid question. I consult for VCs on a technical side and I sit in on many series A pitches. It’s funny how often when you ask a struggling startup why you, as a VC should invest millions into their business, they give the question like this back. “Why do you deserve to invest in my company?” “What are you as a VC bringing to the table?” “What kind of acceleration will you bring to my startup?” The answer is “Millions of dollars in cash you just asked for” and in our minds we say “you stuck up asshole, you came to us.” At that point we often look for different investments. And we never go looking for companies to invest in. They always come to us.
  - rdlecler1 8y ago
    >And we never go looking for companies to invest in. That’s pretty arrogant. I can tell you from first hand experience that the best VCs are vigilant and don’t just expect people to get referred to them. a16z rates themeselves by the % of their competitor’s deals they had seen. You don’t optimize that number just from waiting for the phone to ring.
    - trcollinson 8y ago
      All I can say to this is they are rather arrogant. They like the success they have with the methods that they use I guess. Ultimately, I think every VC is arrogant in their own special way!
  - rahimnathwani 8y ago
profalseidol 8y ago
Why do you deserve the privilege to control our lives?
- ddingus 8y ago
  We are accountable to those people who we need stuff from, are we not?
  - profalseidol 8y ago
    Do you think so?
    - ddingus 8y ago
      Hey, if you can go without, or have fuck you money, or have other options, then you aren't truly in need. That is a want scenario.
  - robertAngst 8y ago
    This is literally profit. If you do not create enough value you dont get paid.
    - ddingus 8y ago
      Indeed
graycat 8y ago
The OP has: > You need to have sustained growth to raise a Series A – understand that and you’ll be better off than most startups. Fine. So, that is the criterion, the "bar", the passing grade, the entrance exam. Good to know. Crucial to know. Similarly for the "seed round" of, what was it, $1-2 million? Gee, must be a lot of 200 pound "seeds"!!!! I thought a seed round might be $100,000. But whatever: Whatever the heck the criteria are, VCs, equity funders, YC, JUST SAY SO. Right, I'm pissed off. Why? Because a founding entrepreneur can look at lots of funding Web sites and read that the firms are interested in breakthrough this, leading edge that, disruptive this other thing, change the world something or other, high tech, break the mold, ... as if those were the criteria. Well, there's strong evidence those are NOT the criteria. So, the breakthrough, etc. are what, teasers to get entrepreneurs to send pitch decks? "Product market fit"? That "fit" thing, that's like a 42 long men's suit coat? Nope. From all I can see, here are the criteria: (1) Traction, see below, significantly high and growing rapidly. (2) Large market, plenty for a company to be worth $1+ billion. (3) For information technology (IT) funders (bio-medical is different), good use of computing and/or the Internet. (4) Team that looks good and has a few people, at least some of whom are technical. Definition: Traction means users and ad revenue, paying customers, or earnings, at least users, hopefully earnings. As the title of the OP implies, commonly entrepreneurs don't clearly understand what are the criteria of the equity funders. Well, a biggie reason for this lack of understanding is the statements of the equity funders. It will be a HUGE help for the entrepreneurs to know what the criteria really are. Well, for a simple answer, in one word, the criteria boil down to traction significantly high and growing rapidly. As a startup entrepreneur, that information was not easy to discover, apparently was mostly deliberately hidden, but is VERY good to know. Now all know. Good.

176 points by ryanmercer 8y ago

mwseibel 8y ago

Happy to answer questions about the post here for the next couple of hours.

ryanmercer 8y ago
Michael, how do you avoid deluding yourself into thinking that you DO have a market fit when you actually do not?
- shawn 8y ago
  User count. Put a big LED on your wall right above your monitor with your weekly active users in the last 7 days. Any time it goes up, play a bing noise. Eventually you'll pavlov yourself into liking that sound.
  - Zalastax 8y ago
    Chasing those numbers can be a fools game. I've seen money going down the drain because stakeholders wanted to stroke their egos. Instead of staying lean, and since there was money in the company to burn, a big sum was spent on ads to keep new users pouring in. It was a horrible sight.
  - nopinsight 8y ago
    Some combination of retention rate and user count, with a heavier weight on retention, looks more optimal for long-term viability. Daily or weekly meetings on the ‘scores’ sound like a good idea.
- mwseibel 8y ago
  I tried to help with this question in this blog post: https://blog.ycombinator.com/the-real-product-market-fit/ https://blog.ycombinator.com/the-real-product-market-fit/
sharemywin 8y ago
Kind of seems like justin.tv became kind of an incubator of it's own building a $5m/yr platform. That spun off a couple pretty cool businesses.
Retric 8y ago
'Deserve' seems like a very odd word choice here. Startups can do a lot of great work and still fail unless they can 'Justify' more funding. Unless I am missing some nuance you where going for?
- vinceguidry 8y ago
  I took it as a normative justification. Lots of companies out there looking to get capital, why should I give it to you? Are you going to do something useful with it or are you just going to fritter it away?
  - mwseibel 8y ago
    I agree with this comment. I think it’s too easy for founders to say - that shitty company over there got money so why can’t we get any. I want to reframe the conversation.
    - wsy 8y ago
      Reframing the conversation to make founders in this situation re-think their approach is very laudable, and you give very valuable and concrete advice. I still agree with the GP post that 'deserve' is an unfortunate choice of wording. It has the potential to again mislead founders, now in a different direction. Nobody deserves your investment (except some non-profit organizations). Fairness is no significant criterion for investors. You probably just give it to the founders with the best risk/gain ratio. The founders you want to educate might think that they now can say "I did what you suggested. Now I deserve your money". And they will again be surprised if "that shitty company over there" gets it instead.
zminjie 8y ago
How do you reconcile this advice and position yourself if the seed round is only enough to prove out whether the product can be built at all? As an analogy, say I had the idea for a car when everyone is still using horses. I raised a seed round to build my car but the funding is only enough to build a car prototype that goes 10mph. At 10mph, there is obviously no product/market fit since horses are still faster and cheaper. However, the prototype proved out the technical challenges, so I know with more capital I'd be able to make a car that can go 80mph, making the horses obsolete. How would your post apply in this case?
- hkmurakami 8y ago
  High technical risk projects like this typically come with highly vetted market needs. On the other hand low technical risk projects tend to come with higher market need risk.
- pg_bot 8y ago
  I think in that case your ability to raise additional funds will be dependent on the persuasiveness of your argument. The investors would need to believe that you have a viable plan, and that you are the person who can execute it. If they don't believe you are worthy of investment others may take inspiration from your work in their attempts to make the product a reality.
- mwseibel 8y ago
  I think there are certain companies with significant upfront capital requirements that first time founders will find it almost impossible to get funded. This is unfortunate and probably reducing overall innovation but I think the revolution that has caused first time founders to get funding has been software. Software has significantly reduced the upfront capital required to get a business off the ground. I think we Founder venture further and further away from pure software companies they are going to find fundraising much more challenging.
  - numbsafari 8y ago
    A company that comes to my mind is Kestrel Aviation. They had a great plan up front, founder pedigree, and experience. But they got distracted by hubris and stopped executing. Launching a new general aviation company is massively capital intensive. They raised a bunch but failed to do anything that resembled shipping. They could have made individual parts, they could have sold kits. Any number of things. Sometimes you have to start with the small pieces, or do services engagements. These things generate revenue, attract staff, and enable you to build the kind of organization necessary to do something capital intensive. Trying to go to Mars as step one won’t typically work. Try to find business models for the components and assemble over time. My guess is that Elon Musk’s portfolio follows this model.
notlob 8y ago
What happened with the people you had to let go? Did you prioritize rehiring them once your ship was righted or help them find new positions?
- mwseibel 8y ago
  We were doing well enough to give them good severance and the tech market was good enough that it was easy for them to find jobs.
  - notlob 8y ago
    There could be a good blog post in that? Planning to do right by your employees, even when times are hard. (Also, I can't imagine what it'd be like for jobs to be easy to find!)
    - scarface74 8y ago
      Also, I can't imagine what it'd be like for jobs to be easy to find! I’m curious. What do you mean?
      - notlob 8y ago
        I’m not in IT tech, last job search a couple years ago took about a year and I’m starting another that’ll likely take as long. It’s just fantastic to me that multiple people could simultaneously find employment on short notice. It’s a world I haven’t experienced and am frankly envious of.
- scarface74 8y ago
  If what caused the layoff is a microeconomic issue - your company isn’t profitable and not a macroeconomic issue - the entire economy sucks- and you’re technical with marketable skills, it shouldn’t be an issue. Between 2009-2011, I was working for a company that had three rounds of layoffs until the company finally shut down. We all knew the company was in dire straights, management was very up front with us. None of us who were left, jumped shipped because we liked our jobs, were working on resume building technology and we knew we could get a job relatively quickly. Without fail, within a month of being laid off, every person who was laid off had another comparable or better job. This was true for developers, QA analysts, and L1 and L2 tech support. On our last day, when the company shut down and laid all of us off, we hung around, went to lunch, laughed, joked and called our recruiters for our next opportunity. My biggest fear is never being unemployed, it’s being unemployable. If you keep your skills marketable in tech, finding a job or at least a contract is not hard. It’s been true for me for almost 25 years asa Developer - and I’m not on the west coast.
robhunter 8y ago
When you were at $4M-$6M in revenue, but not growing, what was your retention like? Were you adding new users but churning out so many that growth was flat? Or were you not adding new users, but retaining the ones you already had?
- timr 8y ago
  I was at JTV during this time. We were basically churning. There was certainly a significant cohort of regular viewers, but much of our traffic owed to spikes of viewers who would come for specific content, then bounce. They didn't care about us, so long as we had the thing they wanted to see. We spent a lot of time debating whether or not this was just the nature of "live" content (e.g. live television derives most of its value from sports and real-time events, and they defend these verticals viciously). I have no special information on Twitch, but from the outside, it is a qualitatively different audience. There's a level of commitment that just wasn't there for JTV. The lesson is burned into my mind, because there are a lot of ways for a startup to generate deceptive "traction", and if you're not careful you can fool even yourself. You have to be brutally honest about how committed your users are, and what their actual value is. It's an easy way to become a zombie startup -- trundling along, nursing a "big" audience of users who require a lot of care and attention, but don't really care about your product in return. These kinds of audiences are worse than worthless, because they waste your time.
  - mwseibel 8y ago
    Perfect description of JTV

CiPHPerCoder 8y ago

> We let a lot of good people go and doubled down on generating the advertising dollars we needed to stay alive. And then > We even took all of our employees to Hawaii to celebrate This is an interesting juxtaposition within the same paragraph. I hope I'm not out of line for reading this as, "Let's celebrate our thriftiness that led to people becoming suddenly unemployed by splurging on an extravagant vacation!"

hemantv 8y ago
Those happened at completely different times. First was hard time where they had to let go people. Second was for people who stayed and worked hard to make it profitable.
- CiPHPerCoder 8y ago
  > Those happened at completely different times. The article stated a 2 month difference toward profitability, and provided no other frame of reference for the (immediate? eventual?) Hawaii getaway. They do mention at "the end of the year" but there is no information stated about when this 6 month "get out of the tailspin" process began in the [calendar/fiscal] year, so that's non-helpful. Without additional context, that's a single digit number of pay cycles between, "Surprise! You're laid off to save the company" to "We can afford a lifestyle of excess". I mean, I would hope that it didn't go down this way, and the paragraph was just written awkwardly. If the author wants to make that clearer, I'd be happy to listen. But as that blurb stands now, it reads as a casual dismissal of the "good people" let go at best, and a slap in their face at worst, which isn't a good look.
  - mockingbirdy 8y ago
    I think I've learned something. Very eye-opening. > 1. staff up > 2. let your employees go > 3. profit > 4. give tips on the internet that you shouldn't staff up > 5. stop to look into a mirror because you don't have any integrity whatsoever I hope he just forgot to mention that there was a <minimum time to let it seem reasonable and humane> duration between the firing and the holiday.

yc-kraln 8y ago

What would be the equivalent gate from Series A to Series B?

tokai2 8y ago

The top advice from all startups that ‘survived’ seems to be, ‘don’t hire, be lean’, when almost all of them did hire and then lay off employees to get over bad times. In my view ‘not hiring good people’ during rosy times is an impossible thing to do. Things like these are self evident only in retrospect.

LeftTurnSignal 8y ago
The startup I was a part of in a previous life did that. The two owners took too much money for personal stuff and couldn't pay the employees. Several times we were told to not cash our paychecks for a few days or were asked to take an unpaid day off, etc. That same year that they let 3 employees go and they each bought a new house, new vehicles, and one of them bought a $75k trailer. So between the 2 of them, we figured that that year they could barely afford to pay us they got around $800k worth of personal stuff. Then they pushed all the extra work onto the remaining employees. 4 more left a few months after they let go of the first employees which caused them to change their business model quite a bit to retain the remaining employees. Now looking back, the 3 employees they let go were paid less than $80k between them and were considered contractors (until the IRS was involved). The lean stuff here burnt several of us out, and for those that remained, the thanks they got was being told there wasn't enough money for a holiday party. I keep in contact with several of the employees. They're a successful startup in most aspects I assume, but only because they were forced to change stuff that they didn't want to. If they didn't change the business model, they would have bled more employees within a few months and probably would have went under.
- organsnyder 8y ago
  That sounds more like fraud than a legitimate startup.
- mockingbirdy 8y ago
  Sounds criminal. "Move fast, break things". For example labor rights.
- gaius 8y ago

OliverJones 8y ago

A good way to think about this issue: As you prepare to sell preferred shares to raise money, ask yourself "Is this product worth the next ten years of my life?" Come up with an answer that will satisfy your parents or spouse, not just your co-founders and seed investors. What can make it worth ten years? 1. A product with the potential to delight paying customers and make them talk to each other about how great it is. (If your revenue depends on ads, your customers are advertisers, duh.) 2. A big enough stake in your company (after you sell those shares) to give you good choices when it's time to do the next thing.

ttul 8y ago
I think this is a crucial question every entrepreneur should ask his or herself before taking money with a liquidation preference - and that includes long term debt (the ultimate liquidation preference). Whenever you take on leverage, you have to deliver a return to investors (or lenders). How long will that take? Do you really want to do this for another X years? And ten years is not a bad guess for preferred equity.

ben509 8y ago

> Why Does Your Company Deserve More Money? It's a business, it makes no sense to talk about it "deserving" anything. Either you think your investment will pay off or you don't. (And try to avoid taking VC cash or you'll wind up doing all the work while they walk off with the profits.)

typomatic 8y ago

> Unfortunately, I have to ask them a very unforgiving question: why does your company deserve more money? This is so stupid--do VCs ever ask this question in the first place? No. By the time your board is asking this question, they've already decided you don't deserve more money. Any random justifications they make up about "deserving" is a complete distraction from the fact that these choices never have a logical basis.

slap_shot 8y ago

>The hardest conversation I have to have with a founder is when they’ve spent their 1-2 million dollar angel round but haven’t found product market fit. As someone who has bootstrapped a company that found a product market fit and is profitable, I can't even explain how foreign it is to think that people raise and exhaust millions of dollars without finding product market fit. I constantly have anxiety about all of the facets of running the business. I cringe even thinking about the pressure an entrepreneur must while being in this predicament. I couldn't handle it.

jacquesm 8y ago
> I can't even explain how foreign it is to think that people raise and exhaust millions of dollars without finding product market fit. Quite a few raise money without even having a product, forget about product market fit.
- ryandrake 8y ago
  This blows my mind. You’re basically betting money on an athlete before knowing what sport they’ll decide to play. It’s as if these people have run out of viable investments and are just guessing. That said, if anyone with $1M burning a hole in their pocket has no idea what to do with it, just reach out: I accept PayPal and Bitcoin. I offer you the same 0% return!
  - s73v3r_ 8y ago
    There are plenty of viable investments; they just usually don't offer ludicrous rates of return. Just normal, decent ones.
  - pbreit 8y ago
    Isn't it more like paying a drafted athlete? It's not like founders have no prior history to go on.
ModernMech 8y ago
> I can't even explain how foreign it is to think that people raise and exhaust millions of dollars without finding product market fit. This equates to about 18 months of operating time in SF. When you talk about it in terms of time instead of dollars, 18 months doesn't seem like long at all. Certainly not enough time to find product market fit in many cases if you start out with only a vague idea.

jacquesm 8y ago

Well, at least they had a plan 'B'. Quite a few companies have none and if their current investors don't pony up then it's end-of-story really quick. It's one thing to go raising money when things are looking good, quite another when you've lost momentum. B2B or B2C can make a huge difference here, in B2C there are some options that are much harder to come by than in B2B (see: youtube), but B2B is easier to land softly because it is far easier to monetize.

mbesto 8y ago

> Do you have product market fit or not? If not, save as much money as you can, spend more time with your customers, and build a product they need. I'm still waiting for the tech VC world to unilaterally agree on what "product market fit" is.

zminjie 8y ago
It is defined in the linked blog post and I believe it's a pretty good definition. “The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can.”
- mwseibel 8y ago
  I’m pretty sure Marc invented the phrase so he gets to define it: https://pmarchive.com/guide_to_startups_part4.html https://pmarchive.com/guide_to_startups_part4.html
- ttul 8y ago
  In other words: your growth is so astonishing that it justifies paying >30% IRR to investors rather than growing from internal cash or borrowing what you can from a bank.
- mbesto 8y ago
  > It is defined There's not an agreement on a single definition though - that's my point https://www.quora.com/How-do-you-define-Product-Market-Fit https://www.quora.com/How-do-you-define-Product-Market-Fit
wsy 8y ago
Getting investment is a very subjective business. You can play it to your advantage that different VCs have different opinions. But not if you wait for them to deliver definitions to you. The first lesson to learn as founder is that you are not entitled. (side note: that is the trouble with using the word 'deserve')

Alex3917 8y ago

It's easy to believe that letting go of employees before finding product market fit was the right move, and maybe they never would have never been able to build and grow Twitch under the existing structure. But given that at least one of the products sold for a billion dollars, this seems like a textbook example of a company that did deserve more money based on having built a good platform but not yet having the required traction. If investors knew the company was going to sell for over a billion dollars, would they really not have invested? Maybe this is the case, but it doesn't seem like it. Instead it seems like the investors didn't believe the company would actually sell for a billion dollars based on the growth rate to date.

mwseibel 8y ago
We didn’t deserve more money when things weren’t working. It’s the investors who decide who deserves more money and if you are setup to need their money you better learn their rules and figure out how to convince them to give it to you.
- Alex3917 8y ago
  I realize that in practice you're very unlikely to get money without having traction. But if we're talking about which companies are deserving of money, if such a category exists, then surely the ones that go on to succeed must (in most cases) make the cut. Especially when they succeed despite having not gotten the money. I also get what you're saying though, in terms of the companies that deserve money are the ones that can convince investors that they deserve money.
- mijamo 8y ago
  I think here deserve is the wrong term, semantically speaking. Investors do not decide who "deserves" more money, they decide who GETS it. Deserving is more a moral term and makes things confusing: a company could deserve the money but not get it because they are not good enough at fundraising, or they need the money at a time when money is very hard to get etc. And many companies get money without deserving it because some investors are stupid, or because they are way too good at looking shiny.
8y ago

rhizome 8y ago

"because we're not spending n*10e06 per month on hosting."

jetsnoc 8y ago

Hiring folks also increases the communication overhead. If you are a team of 3 and hire a 4th you now have a new person that needs trained, needs to learn tribal knowledge, asks the other 3 people different things and keeps them busy distracting them from what were doing - finding product market fit. Any more, I prefer lean & scrappy teams. Small teams get more done. Only scale up the other bullshit when you absolutely have to.

bytematic 8y ago
Also less for everyone to work on. So it is a trade-off, especially from 3 to 4.
aphextron 8y ago
>Only scale up the other bullshit when you absolutely have to. Yet scaling becomes absolutely essential for a company doing anything sufficiently complex. The question is how do you maintain that small team efficiency across an enterprise. It seems that business and engineering are very similar in this regard in that the ultimate baseline problem to be solved is managing complexity. The answer seems to be in adhering to the Unix philosophy of tiny, self contained, composable parts which can be easily reasoned about and composed with.
- smackay 8y ago
  As the parent comment states, the biggest killer of efficiency is communication, particularly across disciplines and across domains. Reducing the overhead of communication and reporting would seem to the the skill most essential to management but generally it's the skill that is generally lacking, or indeed, absent. The unix philosophy of composable teams can only happen when the communications are clear, concise and don't generate much, if any, overhead. I'd love to see a company with a CCO - Chief Communications Officer - who has a team responsible for making sure that the information passed among the various parts of the organisation was effective and free of bullshit or grandstanding.
drawkbox 8y ago
Communication channels formula where n is team members: n(n-1)/2 [1] As teams grow, not only do communication channels increase exponentially, individual contribution decreases overall and there is less ownership/responsibility so people care less i.e. a team of 100 has 99 other people to pick up slack, a team of 1 has noone else, a team of 3 has 2 people that will let the third know of slackage, where a team of 100 may never be able to apply that. Small teams get it all done, and sometimes single people, especially language designers like Guido, Stroustrup, Ritchie, Matz, Eich, etc and especially in the beginning. Small team strategy even in big companies is very smart and effective to get the best performance out of each contributor. Small team configuration does give some power and worth to employees though so it isn't used as much in large companies that looks at employees as resources in a machine. Employees as resources may work for established products/processes but rarely research and development or creative products. [1] https://pm.stackexchange.com/questions/14907/number-of-communication-channels-in-chief-programmer-model https://pm.stackexchange.com/questions/14907/number-of-commu...

staticautomatic 8y ago

Why do you deserve to invest in my company?

mcherm 8y ago
That is also a good question to ask and to answer honestly.
trcollinson 8y ago
That’s a fine question to ask if the investor comes to you. If you are coming to the investor asking for money, you are not profitable and spending way more than your income, then I’d suggest not asking this stupid question. I consult for VCs on a technical side and I sit in on many series A pitches. It’s funny how often when you ask a struggling startup why you, as a VC should invest millions into their business, they give the question like this back. “Why do you deserve to invest in my company?” “What are you as a VC bringing to the table?” “What kind of acceleration will you bring to my startup?” The answer is “Millions of dollars in cash you just asked for” and in our minds we say “you stuck up asshole, you came to us.” At that point we often look for different investments. And we never go looking for companies to invest in. They always come to us.
- rdlecler1 8y ago
  >And we never go looking for companies to invest in. That’s pretty arrogant. I can tell you from first hand experience that the best VCs are vigilant and don’t just expect people to get referred to them. a16z rates themeselves by the % of their competitor’s deals they had seen. You don’t optimize that number just from waiting for the phone to ring.
  - trcollinson 8y ago
    All I can say to this is they are rather arrogant. They like the success they have with the methods that they use I guess. Ultimately, I think every VC is arrogant in their own special way!
- rahimnathwani 8y ago

profalseidol 8y ago

Why do you deserve the privilege to control our lives?

ddingus 8y ago
We are accountable to those people who we need stuff from, are we not?
- profalseidol 8y ago
  Do you think so?
  - ddingus 8y ago
    Hey, if you can go without, or have fuck you money, or have other options, then you aren't truly in need. That is a want scenario.
- robertAngst 8y ago
  This is literally profit. If you do not create enough value you dont get paid.
  - ddingus 8y ago
    Indeed

graycat 8y ago

The OP has: > You need to have sustained growth to raise a Series A – understand that and you’ll be better off than most startups. Fine. So, that is the criterion, the "bar", the passing grade, the entrance exam. Good to know. Crucial to know. Similarly for the "seed round" of, what was it, $1-2 million? Gee, must be a lot of 200 pound "seeds"!!!! I thought a seed round might be $100,000. But whatever: Whatever the heck the criteria are, VCs, equity funders, YC, JUST SAY SO. Right, I'm pissed off. Why? Because a founding entrepreneur can look at lots of funding Web sites and read that the firms are interested in breakthrough this, leading edge that, disruptive this other thing, change the world something or other, high tech, break the mold, ... as if those were the criteria. Well, there's strong evidence those are NOT the criteria. So, the breakthrough, etc. are what, teasers to get entrepreneurs to send pitch decks? "Product market fit"? That "fit" thing, that's like a 42 long men's suit coat? Nope. From all I can see, here are the criteria: (1) Traction, see below, significantly high and growing rapidly. (2) Large market, plenty for a company to be worth $1+ billion. (3) For information technology (IT) funders (bio-medical is different), good use of computing and/or the Internet. (4) Team that looks good and has a few people, at least some of whom are technical. Definition: Traction means users and ad revenue, paying customers, or earnings, at least users, hopefully earnings. As the title of the OP implies, commonly entrepreneurs don't clearly understand what are the criteria of the equity funders. Well, a biggie reason for this lack of understanding is the statements of the equity funders. It will be a HUGE help for the entrepreneurs to know what the criteria really are. Well, for a simple answer, in one word, the criteria boil down to traction significantly high and growing rapidly. As a startup entrepreneur, that information was not easy to discover, apparently was mostly deliberately hidden, but is VERY good to know. Now all know. Good.