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It really depends on how your business is financed and on your access to capital. As many of the comments (correctly IMO) point out, VC-backed start-ups trade

It really depends on how your business is financed and on your access to capital. As many of the comments (correctly IMO) point out, VC-backed start-ups trade money to compress timelines: for example, hire in two weeks what a non-VC might be able to hire across two years. When you have VC funding and more of it is available, it is in your interest to leverage that money as efficiently as possible to make the case for growth and further investment. Frugality can further hurt you if you are in a VC-fueled industry race because you’ll be outspent and outbuilt by your VC-fueled competition, and it will be harder for you to raise $. That said, if you’re a regular entrepreneur or business owner, the script is flipped. You are always working within the constraints of profitability and (assuming no major investments are made in you), access to capital is difficult and expensive - debt and credit financing can only grow as a function of revenue and needs to be paid back (whereas VCs give you ‘free’ money, free-as-in-equity). Given that, if you make a dumb financial decision it makes more of an impact on your business. While you still want to go in on big (validated) bets, in general it makes sense to err on the side of frugality and spend less than you bring in.

malavwarke 6y ago
ok got it thanks for sharing:)
stork19 6y ago
Equity is actually the most expensive form of capital (measured by an investor's required return on capital). If a startup could raise debt financing, that would no doubt be preferable. However that's quasi-impossible with no revenue. I do agree with the other parts of this answer though.
- texasbigdata 6y ago
  Not true. If a startup could access debt but future uncertainty about its cash flows (say between series A and Series B) combined with the cash pay requirements for such cash flow (likely 18%) make the debt vs equity calculation not as straight forward as it seems.
- carlineng 6y ago
  Minimum rate of return is only one measure of cost. If we look at cash flows, the story is much different. Startups are usually cash-constrained, and equity financing is a way to raise cash without negatively impacting future prospects. Debt financing causes a drag on a company's cash flows and reduces flexibility, since now the company must divert a portion of its cash flow to interest payments. For a young company with low revenues and no profits, and thus unable to make tax deductions on interest, debt financing is actually a highly unattractive proposition.
yowlingcat 6y ago
> That said, if you’re a regular entrepreneur or business owner, the script is flipped. The problem is that regular entrepreneurs and business owners still must share the market with venture backed startups. You're always one pivot away from some hotshot startup or bigcorp going to war to take away your marketshare by forcing you to address that "the market can remain irrational longer than you can remain solvent" -- in order to compete with VC-backed startups, you need /more/ than just frugality. You need actually better execution -- execution which more effectively serves market demand than your competitors.
- computerlab 6y ago
  And the ability to cost-effectively signal to customers that your execution is better.
- ufmace 6y ago
  Somebody bigger than you stomping on your toes is always a possibility. This is somewhat mitigated by the fact that VCs are looking for super huge 1000x growth possibilities. If your market will only bear a modest level of growth and possibility, most likely nobody will be interested in investing millions to squash you.
  - yowlingcat 6y ago
    > If your market will only bear a modest level of growth and possibility, most likely nobody will be interested in investing millions to squash you. I used to be a lot more bullish about this before 2020's interest rate drop and subsequent declining bond yields, and the insane injection of capital into the markets. But now, I'm not so sure. Investors are reaching quite a bit further than I originally had expected in order to seek yield.
- pasttense01 6y ago
  No. VCs back an extremely limited number of companies. Most startups target such a limited market (geographic or otherwise) that the VC-backed companies don't bother to compete in such a small market.
- 6y ago

malavwarke 6y ago

ok got it thanks for sharing:)

stork19 6y ago

Equity is actually the most expensive form of capital (measured by an investor's required return on capital). If a startup could raise debt financing, that would no doubt be preferable. However that's quasi-impossible with no revenue. I do agree with the other parts of this answer though.

texasbigdata 6y ago
Not true. If a startup could access debt but future uncertainty about its cash flows (say between series A and Series B) combined with the cash pay requirements for such cash flow (likely 18%) make the debt vs equity calculation not as straight forward as it seems.
carlineng 6y ago
Minimum rate of return is only one measure of cost. If we look at cash flows, the story is much different. Startups are usually cash-constrained, and equity financing is a way to raise cash without negatively impacting future prospects. Debt financing causes a drag on a company's cash flows and reduces flexibility, since now the company must divert a portion of its cash flow to interest payments. For a young company with low revenues and no profits, and thus unable to make tax deductions on interest, debt financing is actually a highly unattractive proposition.

yowlingcat 6y ago

> That said, if you’re a regular entrepreneur or business owner, the script is flipped. The problem is that regular entrepreneurs and business owners still must share the market with venture backed startups. You're always one pivot away from some hotshot startup or bigcorp going to war to take away your marketshare by forcing you to address that "the market can remain irrational longer than you can remain solvent" -- in order to compete with VC-backed startups, you need /more/ than just frugality. You need actually better execution -- execution which more effectively serves market demand than your competitors.

computerlab 6y ago
And the ability to cost-effectively signal to customers that your execution is better.
ufmace 6y ago
Somebody bigger than you stomping on your toes is always a possibility. This is somewhat mitigated by the fact that VCs are looking for super huge 1000x growth possibilities. If your market will only bear a modest level of growth and possibility, most likely nobody will be interested in investing millions to squash you.
- yowlingcat 6y ago
  > If your market will only bear a modest level of growth and possibility, most likely nobody will be interested in investing millions to squash you. I used to be a lot more bullish about this before 2020's interest rate drop and subsequent declining bond yields, and the insane injection of capital into the markets. But now, I'm not so sure. Investors are reaching quite a bit further than I originally had expected in order to seek yield.
pasttense01 6y ago
No. VCs back an extremely limited number of companies. Most startups target such a limited market (geographic or otherwise) that the VC-backed companies don't bother to compete in such a small market.
6y ago