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What to do when a company has found a market, reached sustainability with regard to its employees and customers, yet probably will not be providing the anticipa

What to do when a company has found a market, reached sustainability with regard to its employees and customers, yet probably will not be providing the anticipated return for its investors? I'd like to hear about ways this has been bridged. Have there been any SV "exits" to a ESOP? Unfortunately, an ESOP requires at a minimum 30+ people to be legitimate exit option and quite a bit of administrative attention and expense. It seems an unlikely path for a technology startup.

ithinkinstereo 8y ago
The company can continue to operate, but that'll probably depend on the equity structure. Not a lot of incentive for founders and key employees to stay-on and manage a "lifestyle" business if they only hold a minority stake in the company. In that scenario, I think the investor-owners would probably want to recoup some/all of their investment quickly in a sale to a competitor rather than slowly over-time by milking and growing cashflow.
- pc86 8y ago
  Do founders typically own a minority stake in VC-funded businesses? Even a lifestyle business may be able to throw off several million a year in disbursements beyond payroll. Sure if you own a fraction of a percent that's not much money but if you own 20% of a company disbursing $2MM+ every year that can fund quite a bit. I know VCs are aiming for home runs and 10x+ returns but trying to get someone to shut down a business like that seems short-sighted.
  - jacquesm 8y ago
    If a company is throwing off profits like that (as dividends, presumably) they are in absolutely no risk of being shut down.
  - rdiddly 8y ago
    Absolutely - I had to rub my eyes and make sure I just read that a sustainable, profitable business (by that metric already more successful than most startups) is being referred to as a "zombie" etc.!
    - StudentStuff 8y ago
      Anything that isn't a unicorn is a zombie if its received VC funding. Its a good reason to not take on VC unless your in a market that can magically meet the extreme growth expectations that are tied to that lump of cash.
robhunter 8y ago
I enjoyed this as an option and would love to see more companies doing things like this: https://wistia.com/learn/culture/taking-on-debt-to-grow-our-own-way https://wistia.com/learn/culture/taking-on-debt-to-grow-our-...
dbcurtis 8y ago
The dreaded "zombie". Profitable enough that the investors can't pull the plug by force. Not growing enough that anyone will make any money out of it. It is my observation that because of "natural attrition" often both the management and employees tend to get replaced with B-players over time. The investors lose interest, their money is gone, their incentive to care a whit is gone, so they apply their attention where it has the chance to make a difference.
- TeMPOraL 8y ago
  Dreaded by everyone except the users/customers, who come to depend on the service the startup provides.
  - rightbyte 8y ago
    ... and the people it employs? I see alot of winners in "zombie" startups. I wonder what the ROI of the average business is. Pizza places, AI shops alike.
    - lotsofpulp 8y ago
      Problem is when someone bigger comes and puts you out of business. Like a fancy new pizza place with modern decor or a Costco or amazon or Uber. You need the ROI to keep placing other bets to increase your chances of survival.
      - Zombiethrowaway 8y ago
        If you care for your pizza, your customers and employees, you will stay in business for a long time, regardless of who opens a shop next door. Staying power, habits: those are huge positive factors for businesses.
        lotsofpulp 8y ago
        “Mom and pop” businesses around the country show otherwise. A few restaurants with a very loyal customer base or outlier popularity might do well, but certainly not most. Same with hotels, rental cars, airlines, retailers, etc. There’s just advantages to scale that can’t be matched, and if there’s margin, someone is going to want a piece of it.
claudiulodro 8y ago
If you/investors are not satisfied with the current growth of the company but the company is profitable and not in danger of shutting down, it seems like it would be a wise move to invest the profits towards R&D to create some sort of product that may have better growth. You'd have the benefit of "infinite runway" for your next product and the investors have a chance at getting their money back.
- hn_throwaway_99 8y ago
  On the other hand, there was recently and article in Forbes about a tech billionaire who saw this pattern (small tech companies with one main successful product that were then pouring money into other speculative as-yet unsuccessful products) and built a fortune doing the exact opposite: he'd buy the companies, basically stop all investment in new products (meaning lay most people off and outsource the maintenance to cheaper countries) and milk the maintenance revenue stream until it basically died. I think of it as "the world's most depressing business model", but it was definitely highly profitable. https://www.forbes.com/sites/nathanvardi/2018/11/19/how-a-mysterious-tech-billionaire-created-two-fortunesand-a-global-software-sweatshop/#3987a2af6cff https://www.forbes.com/sites/nathanvardi/2018/11/19/how-a-my...
  - pcunite 8y ago
    Interesting. I found it discussed here: https://news.ycombinator.com/item?id=18516584 https://news.ycombinator.com/item?id=18516584
- pandapower2 8y ago
  Random idea. If you have profits sufficient to fund R&D you could also potentially approach your investors about buying them out with those profits. Something like "It has become apparent that this company is never going to provide the growth you are after. Instead, every quarter the company with pay you $X in exchange for N of your shares. After two years the company will have bought back the last of your shares and you will have twice your investment. We enjoy running the company and intend to do that for the foreseeable future despite the limited growth."
dragonwriter 8y ago
The people who invest labor in startups often have the same kind of vision of how things will go as people who invest capital, and are prone to looking to invest labor in a new startup if the old one doesn't produce as hoped. The trick is transitioning (not all at the same time, usually, but before people flee and destroy continuity) to ownership, management, and staff that are interested in a small, steady-state business.

ithinkinstereo 8y ago

The company can continue to operate, but that'll probably depend on the equity structure. Not a lot of incentive for founders and key employees to stay-on and manage a "lifestyle" business if they only hold a minority stake in the company. In that scenario, I think the investor-owners would probably want to recoup some/all of their investment quickly in a sale to a competitor rather than slowly over-time by milking and growing cashflow.

pc86 8y ago
Do founders typically own a minority stake in VC-funded businesses? Even a lifestyle business may be able to throw off several million a year in disbursements beyond payroll. Sure if you own a fraction of a percent that's not much money but if you own 20% of a company disbursing $2MM+ every year that can fund quite a bit. I know VCs are aiming for home runs and 10x+ returns but trying to get someone to shut down a business like that seems short-sighted.
- jacquesm 8y ago
  If a company is throwing off profits like that (as dividends, presumably) they are in absolutely no risk of being shut down.
- rdiddly 8y ago
  Absolutely - I had to rub my eyes and make sure I just read that a sustainable, profitable business (by that metric already more successful than most startups) is being referred to as a "zombie" etc.!
  - StudentStuff 8y ago
    Anything that isn't a unicorn is a zombie if its received VC funding. Its a good reason to not take on VC unless your in a market that can magically meet the extreme growth expectations that are tied to that lump of cash.

robhunter 8y ago

I enjoyed this as an option and would love to see more companies doing things like this: https://wistia.com/learn/culture/taking-on-debt-to-grow-our-own-way https://wistia.com/learn/culture/taking-on-debt-to-grow-our-...

dbcurtis 8y ago

The dreaded "zombie". Profitable enough that the investors can't pull the plug by force. Not growing enough that anyone will make any money out of it. It is my observation that because of "natural attrition" often both the management and employees tend to get replaced with B-players over time. The investors lose interest, their money is gone, their incentive to care a whit is gone, so they apply their attention where it has the chance to make a difference.

TeMPOraL 8y ago
Dreaded by everyone except the users/customers, who come to depend on the service the startup provides.
- rightbyte 8y ago
  ... and the people it employs? I see alot of winners in "zombie" startups. I wonder what the ROI of the average business is. Pizza places, AI shops alike.
  - lotsofpulp 8y ago
    Problem is when someone bigger comes and puts you out of business. Like a fancy new pizza place with modern decor or a Costco or amazon or Uber. You need the ROI to keep placing other bets to increase your chances of survival.
    - Zombiethrowaway 8y ago
      If you care for your pizza, your customers and employees, you will stay in business for a long time, regardless of who opens a shop next door. Staying power, habits: those are huge positive factors for businesses.
      - lotsofpulp 8y ago
        “Mom and pop” businesses around the country show otherwise. A few restaurants with a very loyal customer base or outlier popularity might do well, but certainly not most. Same with hotels, rental cars, airlines, retailers, etc. There’s just advantages to scale that can’t be matched, and if there’s margin, someone is going to want a piece of it.

claudiulodro 8y ago

If you/investors are not satisfied with the current growth of the company but the company is profitable and not in danger of shutting down, it seems like it would be a wise move to invest the profits towards R&D to create some sort of product that may have better growth. You'd have the benefit of "infinite runway" for your next product and the investors have a chance at getting their money back.

hn_throwaway_99 8y ago
On the other hand, there was recently and article in Forbes about a tech billionaire who saw this pattern (small tech companies with one main successful product that were then pouring money into other speculative as-yet unsuccessful products) and built a fortune doing the exact opposite: he'd buy the companies, basically stop all investment in new products (meaning lay most people off and outsource the maintenance to cheaper countries) and milk the maintenance revenue stream until it basically died. I think of it as "the world's most depressing business model", but it was definitely highly profitable. https://www.forbes.com/sites/nathanvardi/2018/11/19/how-a-mysterious-tech-billionaire-created-two-fortunesand-a-global-software-sweatshop/#3987a2af6cff https://www.forbes.com/sites/nathanvardi/2018/11/19/how-a-my...
- pcunite 8y ago
  Interesting. I found it discussed here: https://news.ycombinator.com/item?id=18516584 https://news.ycombinator.com/item?id=18516584
pandapower2 8y ago
Random idea. If you have profits sufficient to fund R&D you could also potentially approach your investors about buying them out with those profits. Something like "It has become apparent that this company is never going to provide the growth you are after. Instead, every quarter the company with pay you $X in exchange for N of your shares. After two years the company will have bought back the last of your shares and you will have twice your investment. We enjoy running the company and intend to do that for the foreseeable future despite the limited growth."

dragonwriter 8y ago

The people who invest labor in startups often have the same kind of vision of how things will go as people who invest capital, and are prone to looking to invest labor in a new startup if the old one doesn't produce as hoped. The trick is transitioning (not all at the same time, usually, but before people flee and destroy continuity) to ownership, management, and staff that are interested in a small, steady-state business.