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The red flags and magic numbers that investors look for in startup's metrics
- resters 8y agoOne way to fake a leading indicator is to increase headcount and cash burn rapidly. Those increases create a "hockey stick" graph. Just use that graph when pitching to investors. You can also time it so that your ad spend doesn't hit until the next financial period, which makes it look like there is actual growth commensurate with the headcount increase and disproportionate (in a good way) to cash burn. After all, what kind of founder would increase headcount unless it was needed :) Disclaimer: This works best when pitching a round after you have already got some early investors to help with the sales pitch to the next round of investors.
- coenhyde 8y agoI can't tell if you are being sarcastic or if this is intended as advice
- theseatoms 8y agoCynical advice can be both.
- bredren 8y agoAnd given how cut throat fund raising can be I can't blame the cynicism. Sometimes you're after the same money someone with a much stronger pedigree than you is after. Their false metrics are "Stanford" or ~"involved in building a popular but now defunct protocol" that is no better indicator than working on something.
- freehunter 8y agoLots of what startups do is some kind of fraud. Whether you're defrauding investors like `resters idea or defrauding users like Reddit's early days (each employee had multiple accounts to make it seem more active than it was) the trick is just not to get caught. Of course, defrauding investors has a far higher likelihood of getting you into serious legal trouble than defrauding users. And with this one, even if you don't get caught, if it doesn't work out properly you are fucked. But hey, if it does work, it'll make a great story to tell at your IPO celebration party over a glass of champagne.
- Wowfunhappy 8y agoCurious... is this fraud? It's certainly duplicitous, but are laws being broken?
- freehunter 8y agoIt certainly would be fraud [1] the question is, would it be illegal? Not all fraud is illegal, and not all illegal fraud is prosecuted as such (or at all). Even if it's not illegal, if the startup owner told the investor that they were growing rapidly and used these figures to show that, the investor could sue after the fact for civil fraud and the founder would have a hard time explaining why it shouldn't be. The only reason to grow headcount and increase burn rate to unsustainable levels and offset those expenses in the books right before an investor presentation would be to give the investor a misleading view of your company. You'd be at the very least inviting a lawsuit... that is, if you got caught. [1] "Fraud involves misrepresenting facts for the specific purpose of gaining something that may not have been provided without the deception." https://www.investopedia.com/terms/f/fraud.asp https://www.investopedia.com/terms/f/fraud.asp
- dragonwriter 8y ago> Even if it's not illegal, if the startup owner told the investor that they were growing rapidly and used these figures to show that, the investor could sue after the fact for civil fraud and the founder would have a hard time explaining why it shouldn't be. Civil fraud is illegal, so if it is not illegal, it is not civil fraud.
- mattmanser 8y agoHe was asking if Reddit was fraudulent. It wasn't. Please learn the meaning of such serious words before you start throwing them around.
- engineeringwoke 8y agoWhite collar crime in America? That's rich
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- fapjacks 8y ago"Fake it til you make it"
- throwaway080383 8y agoShouldn't any halfway decent investor discover this when performing due diligence? Or is there more stupid money out there than I realize?
- bkanber 8y agoThere is a LOT of money out there, and most of it is stupid.
- Benjammer 8y agoHow is an investor going to realize that some manufactured needs over time for 2 more developers here or 1 more there are not _really_ needed to run the company at some objectively higher level of efficiency?
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- ccantana 8y agoCouldn’t agree more regarding his point on landing page optimization. At TechLoaf, we experimented with a lot of different, elaborate, shiny landing pages that expounded on how amazing our newsletter was, etc... And after falling flat on our face for months, we realized that an incredibly simple, borderline-mysterious landing page converted users far more effectively. About 35% of all visitors to our site end up subscribing. (For the curious, this is the landing page: https://techloaf.io https://techloaf.io)
- athenot 8y agoThis is intersting. From a UX perspective, you're basically forcing the user into making a choice on the spot: to subscribe or not. You're in or you're out. It takes away the non-commital mind wandering, nudges those who are favorably on the fence to sign up ("why not; I might forget about this site so let's do it now") and weans out those who don't immediately see the value. For this use-case, it's probably a good thing.
- LiterallyDoge 8y agoI think it's basically a paywall mental model, but without the pay part.
- ccantana 8y agoExactly. It’s also kind of jarring in a world where content is unlimited, free, and available on every channel. It piques some people’s curiosity to land on a site where it’s semi-restricted.
- mkirklions 8y agoI run into the issue that I would much rather give away my money and time saving advice completely free, than charge money. I started my website to help people, not make a petty few grand in profits or grow an email list. However, I know this is bad capitalism. I just don't know if I want to restrict access.
- olliej 8y agoI’d think revenue would have been important - I read the entire article expecting something in that (which is what would have been interesting). Instead it’s just a variation of “how many email addresses do they have”
- DevX101 8y agoThe point of his presentation was how to identify real, sustainable growth before the point where it is self-evident that the company is a winner. To do that you have to go upstream of revenue. Also, you can hack revenue in the short term by spending $1.20 to get $1.
- jacquesm 8y agoYou can't really focus on a broad spectrum of anything. Broad is broad, focus is narrow. It's also ironic that many failed start-up founders end up on the investment side, I'd love to see more successful people in charge of who gets funded and who does not.
- nostrademons 8y agoOutside of the angel ecosystem, there's likely a reason for that: being a successful founder is more profitable than being a VC, so people whose startups took off have every incentive to keep managing them, while successful startup founders who exited aren't exactly in need of money or further success. There's also a bunch of bullshit that goes with the VC world (managing LPs, constantly searching for dealflow, taking board seats on the companies that are failing or going sideways) that you don't have in the angel world.
- Alex3917 8y agoIt's also much harder to be a successful VC than it is to be a successful founder, so if you're at all successful there isn't much reason to switch sides unless you're just interested in corporate finance or something. Being a VC is like running a restaurant in NYC, where you're literally competing against people who are fine with losing money, and in some cases are even purposely trying to lose money.
- justsomeguy3591 8y ago> and in some cases are even purposely trying to lose money. Just to clarify, what exactly do you mean by this? VCs or startups trying to lose money? For what purpose?
- Alex3917 8y ago> VCs or startups trying to lose money? For what purpose? VCs trying to lose money on either an individual investment, or else on their entire portfolio. Some reasons why this happens: - New VC funds engaging in 'logo shopping', where they invest in later staging companies everyone knows about so that they can put the logo on their webpage and establish credibility, even if they know the investment probably isn't going to be profitable at the valuation where they invested. - VCs are often misaligned with their LPs. E.g. the VCs are taking 2% management fees on a massive fund, and know it will be ten years before anyone knows their returns so they don't have much incentive to try to be good at their job. - Special situations. E.g. let's say Saudi Arabia is happy to invest in things like Bitcoin mining or Uber even if they think those investments will lose 10% of their value, because the only thing they really care about is hedging their risk of having their bank accounts frozen by the U.S. government. - Cases where an investor puts money into a startup and takes a board seat with the goal of purposely killing it so that one of their larger portfolio companies can purchase the assets in a fire sale. - Cases where a VC comes up with some scheme to try to shift LP money from their newest fund into a startup from their previous fund to artificially inflate their returns. None of these are necessarily common individually, but collectively things like this are common enough to distort valuations across the board and make it so that looking at what other people invest in and at what valuations isn't a great way to make decisions. edit: Consider also that if you look at the statistics about how the vast majority of VC funds lose money, these all come from before the 10x growth in early staging funds that we've seen over the last 10 years. As a startup founder you only need to start one of the best 1,000 or so startups of the year to do really well. But as an investor you need to invest in one of the 5 or 10 best startups of the year in order to make a ton of money for your fund. And the best startups often (but not always) have a ton of people trying to get into the deal. So if a startup could get 25 term sheets and only 1 in 25 of those investors are crooked, then the other 24 investors have to then decide whether they're going to gamble that this investment pays off anyway even though it's priced at way over what is economically rational. It's maybe a little more nuanced than that, but that's the basic idea.
- top256 8y agoI really like this article! Thanks for posting it
- buf 8y agoDisclaimer: I work at Reforge. Also: It feels like I should be paying Reforge to work there. The incredible depth of the material has helped me personally: - articulate ideas in a common vocabulary that were difficult to explain prior - identify loops within my own side projects which has led to explosive growth (even though the material is designed for larger companies) - understand how to derive important metrics for many different types of companies - connect with some of the most influential leaders in the growth space
- WalterBright 8y agoI remember in the 1990s when Bill Gates was asked about how he crafted his decisions to maximize the stock price. He replied that he paid no attention to the stock price - he concentrated on running the company well and the stock price took care of itself. Investing in MSFT during his reign was a spectacular investment. A CEO of another company told me he adjusted the accounting to give the metrics that Wall Street was looking for. The stock tanked (the company has since disappeared). Apparently, investors are not so easily fooled.
- rjvs 8y agoSo the accounting practices that MSFT got in trouble for (as I recall, pulling and pushing sales into different quarters to smooth growth and suit projections) was the stock price taking care of itself?
- WalterBright 8y agoCan you provide a year for that?
- rjvs 8y ago1999-2002 • https://www.nytimes.com/1999/07/01/business/microsoft-s-accounting-under-scrutiny.html https://www.nytimes.com/1999/07/01/business/microsoft-s-acco... • https://www.sec.gov/news/press/2002-80.htm https://www.sec.gov/news/press/2002-80.htm
- WalterBright 8y agoThanks for posting that. Wish I had a reference to when Gates made that statement.
- hammock 8y agoInteresting as MSFT met or exceeded earnings forecast from the street for 41 out of the first 42 quarters. Makes you wonder
- 8y ago
- throwaway487548 8y agoWhat a mix of Trump-like self-praise, unintelligible modern-day tantras (growth hacking) and obvious, self-evident metrics.
- bogomipz 8y agoThe article states: >1) First, we seek to understand the existing state of customer growth – including growth loops, the quality of acquisition, engagement, churn, and monetization. 2) Then, to identify potential upside based learnings from within the company as well as across benchmarks from across industry. Cold someone say what a "growth loop" is? And also what "upside based learnings" are?
- arminiusreturns 8y agoDoes anybody have any insight on the things investors are looking for after the series C?