5 ms·

> why wouldn’t you take it? One reason is because of what you're giving up in exchange. Obviously equity, for one. Quite possibly also control, if the investor

by arbuge 5y ago

> why wouldn’t you take it? One reason is because of what you're giving up in exchange. Obviously equity, for one. Quite possibly also control, if the investors also get board seats as part of the deal. If they have a different vision for the company's future (not to mention your personal future) than you do, that could create problems.

IgorPartola 5y ago
Well of course. But between working as a drone for a company and getting VC money to spend (with restriction) on how you see fit, the VC option is pretty appealing.
- codingdave 5y ago
  There is a middle ground - start something yourself, bootstrap, get profitable, spend the revenue how you see fit without restriction, and own it all. And you can still exit down the road if you so choose.
- lazide 5y ago
  The restrictions, stress, and pressure that comes with VC feels a lot different when you see them on a term sheet you are trying to decide to sign or not after already busting your butt for a long time making something real, vs from behind that desk at a company. It is a real, and sometimes very undesirable tradeoff. Go big or go home, vs wealthy but not obscenely so through steady effort?
jetpackjoe 5y ago
Sure, but a lot of people would rather own 10% of a billion dollar company than 100% of a 10 million dollar one.
- giansegato 5y ago
  While many others would prefer the other way around. There's no inherently better model. Someone might prefer flexibility over ambition. Others ambition over flexibility.
  - flyinglizard 5y ago
    I think bootstrapping is overly romanticized. In many cases those entrepreneurs aren’t good at taking feedback or telling their story or have a lousy idea to begin with. Not to say that it’s not going to work or not admirable, but getting VC money is a very early kind of “product market fit” in the sense that you need to sell people your vision in return for money. I did both bootstrap and VC paths. You can get it wrong in each, but I know that my previous insistence on not taking external money was somewhat rooted in arrogance.
- bacheson1293 5y ago
  I bootstrapped a SaaS business from my kitchen table...it's now worth just shy of $100M. I thank the heavens everyday that I didn't go the VC route. I can pretty much do whatever I want without this constant growth at all costs pressure. It also gives us a massive advantage against VC backed competitors. We can make decisions that reap benefits 2-5 years out. This has created a situation were every competitor follows the same trajectory where it eventually leads to an over-complicated, bloated product that users hate. They come to us and it's like a breath of fresh air.
- blacktriangle 5y ago
  But now you have to look at the expected value as well. A 10 million dollar company, lets say at a conservative 5x earnings multiple means 2mil annual profits. At 80% margin that's 2.5mil ARR. For a B2B SaaS product you should be able to get at least $1,000 / customer annually, which means you need to find 2500 customers to own 100% of a 10 million dollar company, which in the age of email and Facebook marketing is very much within reach. And these are conservative numbers. A strategic buyer might very well pay 10x if you're showing nice growth, margins of 90% are not unrealistic in SaaS, and you could possibly raise prices depending on the value you are providing and who you're selling to. Now ask how many stars have to align to reach a billion dollar valuation, assuming you haven't been screwed over by your investors by the time you reach that point.
flyinglizard 5y ago
The money added to the company’s coffers gets added to its valuation, so you are not trading equity really unless you are personally selling (a “secondary”). It’s just that the pie becomes larger. Now, most VCs don’t want to be in the business of management. Each partner oversees 5-10 companies, they do not intend to be managing each. Most intervention comes when the founder is running the company into the ground. I can find many more cases of scandalous compliance by VCs than active intervention. The first thing VCs look at is the quality of its founding team, it’s not for wanting to kick them out.
- codingdave 5y ago
  > the founder is running the company into the ground. Except that their definition of running a company into the ground is more about whether or not the company is track to be the their 1000x return or not. They push for high-risk, high-return moves, which are not the same thing as striving for a sustainable business. I've seen founders building companies that are stable and growing, and still getting booted by the VCs because they wanted to push for higher returns.
  - flyinglizard 5y ago
    Growing for aggressive returns is the deal you sign up for getting VC money. That said, I haven’t seen VCs pushing a founder out for this offense first hand, even in companies approaching somewhat of a zombie status. Usually VCs will just divest their attention. I have seen companies run into the ground with the VCs pushing the throttles forward though.
ufmace 5y ago
Yes, this. I get the impression that VCs are mostly looking for either ultra-growth no matter the risks or a high-value buyout by one of the tech majors. If you want steady growth and modest profit, your interests will be misaligned and there will be trouble. I'd say, don't take investment unless you have both a plan for exactly what you want to do with the money, and a vision for the company's future that's well-aligned with your investor.

by arbuge 5y ago

IgorPartola 5y ago

Well of course. But between working as a drone for a company and getting VC money to spend (with restriction) on how you see fit, the VC option is pretty appealing.

codingdave 5y ago
There is a middle ground - start something yourself, bootstrap, get profitable, spend the revenue how you see fit without restriction, and own it all. And you can still exit down the road if you so choose.
lazide 5y ago
The restrictions, stress, and pressure that comes with VC feels a lot different when you see them on a term sheet you are trying to decide to sign or not after already busting your butt for a long time making something real, vs from behind that desk at a company. It is a real, and sometimes very undesirable tradeoff. Go big or go home, vs wealthy but not obscenely so through steady effort?

jetpackjoe 5y ago

Sure, but a lot of people would rather own 10% of a billion dollar company than 100% of a 10 million dollar one.

giansegato 5y ago
While many others would prefer the other way around. There's no inherently better model. Someone might prefer flexibility over ambition. Others ambition over flexibility.
- flyinglizard 5y ago
  I think bootstrapping is overly romanticized. In many cases those entrepreneurs aren’t good at taking feedback or telling their story or have a lousy idea to begin with. Not to say that it’s not going to work or not admirable, but getting VC money is a very early kind of “product market fit” in the sense that you need to sell people your vision in return for money. I did both bootstrap and VC paths. You can get it wrong in each, but I know that my previous insistence on not taking external money was somewhat rooted in arrogance.
bacheson1293 5y ago
I bootstrapped a SaaS business from my kitchen table...it's now worth just shy of $100M. I thank the heavens everyday that I didn't go the VC route. I can pretty much do whatever I want without this constant growth at all costs pressure. It also gives us a massive advantage against VC backed competitors. We can make decisions that reap benefits 2-5 years out. This has created a situation were every competitor follows the same trajectory where it eventually leads to an over-complicated, bloated product that users hate. They come to us and it's like a breath of fresh air.
blacktriangle 5y ago
But now you have to look at the expected value as well. A 10 million dollar company, lets say at a conservative 5x earnings multiple means 2mil annual profits. At 80% margin that's 2.5mil ARR. For a B2B SaaS product you should be able to get at least $1,000 / customer annually, which means you need to find 2500 customers to own 100% of a 10 million dollar company, which in the age of email and Facebook marketing is very much within reach. And these are conservative numbers. A strategic buyer might very well pay 10x if you're showing nice growth, margins of 90% are not unrealistic in SaaS, and you could possibly raise prices depending on the value you are providing and who you're selling to. Now ask how many stars have to align to reach a billion dollar valuation, assuming you haven't been screwed over by your investors by the time you reach that point.

flyinglizard 5y ago

The money added to the company’s coffers gets added to its valuation, so you are not trading equity really unless you are personally selling (a “secondary”). It’s just that the pie becomes larger. Now, most VCs don’t want to be in the business of management. Each partner oversees 5-10 companies, they do not intend to be managing each. Most intervention comes when the founder is running the company into the ground. I can find many more cases of scandalous compliance by VCs than active intervention. The first thing VCs look at is the quality of its founding team, it’s not for wanting to kick them out.

codingdave 5y ago
> the founder is running the company into the ground. Except that their definition of running a company into the ground is more about whether or not the company is track to be the their 1000x return or not. They push for high-risk, high-return moves, which are not the same thing as striving for a sustainable business. I've seen founders building companies that are stable and growing, and still getting booted by the VCs because they wanted to push for higher returns.
- flyinglizard 5y ago
  Growing for aggressive returns is the deal you sign up for getting VC money. That said, I haven’t seen VCs pushing a founder out for this offense first hand, even in companies approaching somewhat of a zombie status. Usually VCs will just divest their attention. I have seen companies run into the ground with the VCs pushing the throttles forward though.

ufmace 5y ago

Yes, this. I get the impression that VCs are mostly looking for either ultra-growth no matter the risks or a high-value buyout by one of the tech majors. If you want steady growth and modest profit, your interests will be misaligned and there will be trouble. I'd say, don't take investment unless you have both a plan for exactly what you want to do with the money, and a vision for the company's future that's well-aligned with your investor.