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> The huge investments themselves are something founders would dislike, if they realized how damaging they can be. VCs don't invest $x million because that's th

by yashap 5y ago

> The huge investments themselves are something founders would dislike, if they realized how damaging they can be. VCs don't invest $x million because that's the amount you need, but because that's the amount the structure of their business requires them to invest. Like steroids, these sudden huge investments can do more harm than good. Google survived enormous VC funding because it could legitimately absorb large amounts of money. They had to buy a lot of servers and a lot of bandwidth to crawl the whole Web. Less fortunate startups just end up hiring armies of people to sit around having meetings. I really saw this at the first startup I worked at. We did a massive VC round (I think the largest in Canadian tech history?), hired like absolute crazy after it. The company got bureaucratic and bloated, lost the ability to move quickly and efficiently, and never got it back. I still loved working there for the coworkers, management and interesting problems, but I don’t think the investment was good for the company long term. A company of ~150 people grew to ~1000 in a year, but I think the 1000 people got less done, with a lot less agility, than the 150. Not out of laziness, just too many people for the size of the business problem, which led to a lot of unnecessary communication/coordination overhead. Even disregarding the salary costs, I think had we stayed a lot smaller/leaner, we would have been able to move a lot faster, be more innovative, and ultimately become a larger/more successful company.

ganeshkrishnan 5y ago
element.ai?
- yashap 5y ago
  Hootsuite, though I’m sure many startups have similar stories.
  - ido 5y ago
    I've worked in a bunch of companies that experienced similar (in %) growth & similar results.
  - altdataseller 5y ago
    Not sure if you still have shares but heard they are doing an IPO so you might get a small windfall?
    - yashap 5y ago
      :crossed_fingers:
chii 5y ago
> 1000 people got less done, with a lot less agility, than the 150. too many chefs, not enough cooks.
- ido 5y ago
  Even if they are cooks, it's not easy to parallelize every problem. If the money is mostly used to pay for massive infrastructure - e.g. google, fb, etc buying lots of servers and other equipment investment or king/supercell spending on user acquisition (=advertisement) you can spend practically as much money as you can raise into it. But if your costs are mostly salaries putting a lot more people to work is a hard problem to solve. I'm currently running a startup with 6 employees (myself included) and if i get some extra money i can easily grow to 8 and immediately find plenty for the new people to do. But if you give me $Xm and i can/should suddenly grow to 30 people I'm going to have a hard time putting them all to use. I may eventually get to it but I can't start hiring them today because they will just idle or do unimportant work until I figure that out. Beyond that, even if you do have a good use of 5x as many people productivity grows in sublinearly to the number of employees due to communication overhead. So even a well run company (which the above example was not) will probably get less per-person out of 1000 people than out of 150.
gonehome 5y ago
Is it possible to take the money and just not do any of that? Just increase your runway? I’d guess it’s socially impossible even if it’d be legally allowed. PG alludes to this idea with the treasury comment, but I really wonder about it. Maybe your investors would hate you, but it’d be a pretty comfortable move.
- ido 5y ago
  I don't know the answer but I think investors at the very least expect you to invest the money they give you, not just keep it for a rainy day. I don't know how much leverage they will have to make you spend it.
  - usrusr 5y ago
    I'm another poster completely devoid of actual knowledge (old Paul Graham posts are the fanfic corner of hn, right?) I'd expect that to be part of the standard threat models that a fund would have prefab contract modules for. Founders still have 50+1? (otherwise it's clear what would happen) Include module "contingency stake transfer agreement" or something like that. But it won't come to that, I'd expect GP's "socially impossible" to work well enough. Particularly when there actually is something in the contracts, that something will never be tested.
- yashap 5y ago
  I’ve never been a founder or a VC, so I don’t really know, but happy to speculate :) I’d imagine it depends on the company, and “how are you going to spend the money” is something you’d discuss with VCs before the investment goes through. I think the strong majority of the time, VCs want you to pump the money into the business to drive immediate hyper growth. They want to identify businesses that can soak up VC money and make good use of it … like Google, FB, etc. Most companies can’t, the money drives just moderate growth and a lot of inefficiency, but they want to do this test to see if they’ve struck gold. If you agree to do this, then don’t, new CEO time. But I think there’s some companies that are clearly big, long term product bets. Where they know the runway has to be long, and years of product development has to happen before major growth. For example, I’m guessing if you’re a series A investor in something like CockroachDB, Tesla, SpaceX, you’re a bit more “yeah, take your time, spend this over 5+ years.” But that’s an anomaly, not the norm.
qwertyuiop_ 5y ago
500 of those hires sure as hell are MBAs
- yashap 5y ago
  I'd think more in the range of ~10 MBA hires. Middle management definitely grew a lot, but most were not MBAs. Lots of new positions were created that didn't really need to exist. In more "lean startup mode", if you have an idea for a creative way to grow, existing employee(s) just start trying it, and if it works really well but is making those employees too busy/overworked, then you hire for it. If it doesn't work, you stop doing it. But in "pumped full of VC $$$" mode, you never test the idea out, you just hire someone new to do it, which is often a mistake. Also, on top of totally new roles, there was a lot of duplication of roles. Think multiple departments hiring email marketing teams, while before there was just a single email marketing person for the whole company, that sort of thing. Lots of things that used to be a single person, and were doing fine that way, became a team or multiple teams, each with their own manager.
- bsder 5y ago
  If I'm not being cynical--sales and marketing. Building out a marketing organization is expensive in terms of manpower and money. Not everything can be bootstrapped. Enterprise sales, in particular, is expensive, slow, and annoying and needs a marketing organization dedicated to it. It's rare that you can pour money to hyper-activate the technical side of things. However, normally you can do that on the sales and marketing side.
mytailorisrich 5y ago
> Not out of laziness, just too many people for the size of the business problem That sounds like a very common pattern: Got money so go on a hiring frenzy even if there isn't an actual and well-defined need for that. One cause I think is that this is very good for careers: You hire below you, you expand your 'empire', and you become a much more senior and powerful employee as a consequence while projecting an image of impressive company growth.
- yashap 5y ago
  A major cause is just the nature of a big VC round, too. In my experience (and I think generally?), the funding comes with aggressive growth targets - you're expected to grow far faster after getting all the money injected than before. For a lot of businesses, there's no particularly good ideas for stimulating growth except "hire more" and "acquire other companies". The question becomes "how many people do you need to hire to hit X growth target", not "is X a reasonable growth target at all", or "are more people really necessary". While this can work out for the right business, I think a lot of business are just naturally built around smaller problems, better tackled by a smaller, more agile team. With a huge problem you can effectively break it into a bunch of smaller problems, and still have tonnes of people working on it effectively without too much communication/coordination overhead. You're a huge company, but it's basically a bunch of loosely coupled small teams, each with a lot of autonomy, and few cross-team dependencies. That scales, but you need huge problem(s). If you have a smaller problem (like most startups), lots of people is just too many cooks in the kitchen, people's responsibilities overlap too much, every decision becomes a group decision, and there's lots of cross-team dependencies. This leads to massive planning cycles, everything locked down waterfall-style 3-6 months in advance, etc. Very inefficient, can no longer react quickly to change, all agility lost, and leaner startups eat your lunch.
deleted 5y ago
[deleted]

by yashap 5y ago

ganeshkrishnan 5y ago

element.ai?

yashap 5y ago
Hootsuite, though I’m sure many startups have similar stories.
- ido 5y ago
  I've worked in a bunch of companies that experienced similar (in %) growth & similar results.
- altdataseller 5y ago
  Not sure if you still have shares but heard they are doing an IPO so you might get a small windfall?
  - yashap 5y ago
    :crossed_fingers:

chii 5y ago

> 1000 people got less done, with a lot less agility, than the 150. too many chefs, not enough cooks.

ido 5y ago
Even if they are cooks, it's not easy to parallelize every problem. If the money is mostly used to pay for massive infrastructure - e.g. google, fb, etc buying lots of servers and other equipment investment or king/supercell spending on user acquisition (=advertisement) you can spend practically as much money as you can raise into it. But if your costs are mostly salaries putting a lot more people to work is a hard problem to solve. I'm currently running a startup with 6 employees (myself included) and if i get some extra money i can easily grow to 8 and immediately find plenty for the new people to do. But if you give me $Xm and i can/should suddenly grow to 30 people I'm going to have a hard time putting them all to use. I may eventually get to it but I can't start hiring them today because they will just idle or do unimportant work until I figure that out. Beyond that, even if you do have a good use of 5x as many people productivity grows in sublinearly to the number of employees due to communication overhead. So even a well run company (which the above example was not) will probably get less per-person out of 1000 people than out of 150.

gonehome 5y ago

Is it possible to take the money and just not do any of that? Just increase your runway? I’d guess it’s socially impossible even if it’d be legally allowed. PG alludes to this idea with the treasury comment, but I really wonder about it. Maybe your investors would hate you, but it’d be a pretty comfortable move.

ido 5y ago
I don't know the answer but I think investors at the very least expect you to invest the money they give you, not just keep it for a rainy day. I don't know how much leverage they will have to make you spend it.
- usrusr 5y ago
  I'm another poster completely devoid of actual knowledge (old Paul Graham posts are the fanfic corner of hn, right?) I'd expect that to be part of the standard threat models that a fund would have prefab contract modules for. Founders still have 50+1? (otherwise it's clear what would happen) Include module "contingency stake transfer agreement" or something like that. But it won't come to that, I'd expect GP's "socially impossible" to work well enough. Particularly when there actually is something in the contracts, that something will never be tested.
yashap 5y ago
I’ve never been a founder or a VC, so I don’t really know, but happy to speculate :) I’d imagine it depends on the company, and “how are you going to spend the money” is something you’d discuss with VCs before the investment goes through. I think the strong majority of the time, VCs want you to pump the money into the business to drive immediate hyper growth. They want to identify businesses that can soak up VC money and make good use of it … like Google, FB, etc. Most companies can’t, the money drives just moderate growth and a lot of inefficiency, but they want to do this test to see if they’ve struck gold. If you agree to do this, then don’t, new CEO time. But I think there’s some companies that are clearly big, long term product bets. Where they know the runway has to be long, and years of product development has to happen before major growth. For example, I’m guessing if you’re a series A investor in something like CockroachDB, Tesla, SpaceX, you’re a bit more “yeah, take your time, spend this over 5+ years.” But that’s an anomaly, not the norm.

qwertyuiop_ 5y ago

500 of those hires sure as hell are MBAs

yashap 5y ago
I'd think more in the range of ~10 MBA hires. Middle management definitely grew a lot, but most were not MBAs. Lots of new positions were created that didn't really need to exist. In more "lean startup mode", if you have an idea for a creative way to grow, existing employee(s) just start trying it, and if it works really well but is making those employees too busy/overworked, then you hire for it. If it doesn't work, you stop doing it. But in "pumped full of VC $$$" mode, you never test the idea out, you just hire someone new to do it, which is often a mistake. Also, on top of totally new roles, there was a lot of duplication of roles. Think multiple departments hiring email marketing teams, while before there was just a single email marketing person for the whole company, that sort of thing. Lots of things that used to be a single person, and were doing fine that way, became a team or multiple teams, each with their own manager.
bsder 5y ago
If I'm not being cynical--sales and marketing. Building out a marketing organization is expensive in terms of manpower and money. Not everything can be bootstrapped. Enterprise sales, in particular, is expensive, slow, and annoying and needs a marketing organization dedicated to it. It's rare that you can pour money to hyper-activate the technical side of things. However, normally you can do that on the sales and marketing side.

mytailorisrich 5y ago

> Not out of laziness, just too many people for the size of the business problem That sounds like a very common pattern: Got money so go on a hiring frenzy even if there isn't an actual and well-defined need for that. One cause I think is that this is very good for careers: You hire below you, you expand your 'empire', and you become a much more senior and powerful employee as a consequence while projecting an image of impressive company growth.

yashap 5y ago
A major cause is just the nature of a big VC round, too. In my experience (and I think generally?), the funding comes with aggressive growth targets - you're expected to grow far faster after getting all the money injected than before. For a lot of businesses, there's no particularly good ideas for stimulating growth except "hire more" and "acquire other companies". The question becomes "how many people do you need to hire to hit X growth target", not "is X a reasonable growth target at all", or "are more people really necessary". While this can work out for the right business, I think a lot of business are just naturally built around smaller problems, better tackled by a smaller, more agile team. With a huge problem you can effectively break it into a bunch of smaller problems, and still have tonnes of people working on it effectively without too much communication/coordination overhead. You're a huge company, but it's basically a bunch of loosely coupled small teams, each with a lot of autonomy, and few cross-team dependencies. That scales, but you need huge problem(s). If you have a smaller problem (like most startups), lots of people is just too many cooks in the kitchen, people's responsibilities overlap too much, every decision becomes a group decision, and there's lots of cross-team dependencies. This leads to massive planning cycles, everything locked down waterfall-style 3-6 months in advance, etc. Very inefficient, can no longer react quickly to change, all agility lost, and leaner startups eat your lunch.

deleted 5y ago

[deleted]