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> For years I've been telling founders that the surest route to success is to be the cockroaches of the corporate world. This has always seemed incompatible wi

> For years I've been telling founders that the surest route to success is to be the cockroaches of the corporate world. This has always seemed incompatible with the VC model, which involves raising a ton of money, putting the company on an 18 month clock, spending the money so you can hit key milestones, and then raising even more money when the clock runs out. I have heard of a few companies that were on the VC track, raised money, and stayed frugal. But my impression is that investors want to see you swing for the fences, which involves spending all the money they invested, and fast. How common is it for startups to buck this trend?

jmathai 4y ago
You shouldn't need VC to start (maybe ever) and probably shouldn't be thinking about it until you've got some traction and customer validation - which can take some time.
- actionfromafar 4y ago
  It depends on what you want to do. Some things can take too much time without investors, like building new kinds of nuclear reactors.
danpalmer 4y ago
Uncommon. You're right. This advice just doesn't work for most startups. If you're pre-seed stage, in Silicon Valley, and the founders have a "good" background (the right companies, knowing the right people, etc), then sure you might raise a small round. If you're any later than that, or anywhere else in the world, you need results, and results don't come as easily in a recession.
- fortuealex 4y ago
  Eh, it depends. Depending on your segment it may be easier to sell products in a recession. Tools which cut cost and are below a certain monthly spend actually become easier. Hiring is MUCH MUCH easier. Raising money is harder.
dahfizz 4y ago
Once you've taken VC money, its growth at all costs. Where "growth" is defined by inflating valuation, not necessarily "real" growth of the company. If you want to be frugal and grow responsibly, you have to do it without VC money.
- gnicholas 4y ago
  So is this something PG wrote before YC was so deep in the VC ecosystem, and that's why it makes sense for him to have said? What would he have advised a startup to do back then, after raising a $2M round? Would he have told them to keep their burn rate low enough to stay default-alive? What would he say now?
  - waprin 4y ago
    If you compare the pg essays from 2000-2010 to 2010-now, there's a very noticeable shift in tone on this exact topic, even moreso if you zoom out of pg and consider YC messaging then and now. Tons of old pg essays sound straight from something like Indie Hackers or Microconf with their "avoid raising VC money" angle. He even literally predicts the death of VC in web SaaS, saying "investors aren't worth the trouble": http://www.paulgraham.com/divergence.html http://www.paulgraham.com/divergence.html . His YC cofounder Jessica Livingston wrote a book "Founders at Work" and about half the founders in the book are bootstrappers (DHH, Joel Spolosky, Craigslist). The other half are mostly founders recounting horror stories of interacting with VCs. Compare that to modern YC where there are videos where they say _everyone_ should consider applying to YC with the _only_ exception being people that want to bootstrap. Modern Startup School says: "Without startup funding the vast majority of startups will die." (https://www.ycombinator.com/library/4A-a-guide-to-seed-fundraising https://www.ycombinator.com/library/4A-a-guide-to-seed-fundr...). There's something very important to note which is that YC did not change the deal from 125k for 7% to 500k for 7%. It's still 125k for 7% plus 375k worth of equity on your next raise. Which only makes sense if there is a next raise. So obviously they discourage bootstrapping since their whole model has been built around you raising at least one more round after YC. Seems a pretty simple case of "follow the incentives." YC basically became more of a traditional VC over time. And I think pg was still closer to a founder in the early 2000s, from a founder perspective, it's more of a set of tradeoffs whether you should bootstrap or seek VC. But from a VC's perspective, obviously they want you to seek VC since they can't get involved if you bootstrap and bootstrapped startups won't get the outsized returns they need. My opinion is, pg is a smart guy, there's still a ton of wisdom to learn from in his essays, but as with every other person on the planet, consider their motivation and incentives for telling you what they're telling you.
babyshake 4y ago
You might be able to raise seed money from VCs and not swing for the fences. If they are good VCs, they aren't depending on their seed investments to all necessarily pan out within a few years, if there is good reason to be more frugal. Series A+ is a different story.
tempsy 4y ago
Budgeting for 18 months of runway doesn't mean "waste money on frivolous things as fast as possible"
- mach1ne 4y ago
  Not on all cases, but I personally know one startup where the VC told the investors to hire as many people as possible, regardless of whether they were actually needed. This anecdote seems to ring true with what I hear elsewhere.
  - slap_shot 4y ago
    I think you might have conflated a few things: No VC is telling companies to just to wastefully hire people they don't need. That wastes money and creates friction and bigger problems inside of a company. They do tell you to hire aggressively, and you often present them with a model that shows _how_ you will use the money you raise, and sometimes you hire too many people on accident. But no VC is pounding their fists on the table telling founders to explicitly go hire people that aren't needed. That's directly against the interest of both the founder and the investor.
kneebonian 4y ago
That was the way in the days of negative interest rates, and cheap and easy money. We are headed for the greatest contraction of capital since the great depression soon[1], and that will no longer occur. 1. According to Zeihan, who points out that with the retirement of the boomers their 401k accounts that have been funding all this money are going to get cashed out and withdrawn, reducing the amount of money for lending, leading to an overall capital contraction.
varelse 4y ago
[dead]
reidjs 4y ago
What is the difference between a startup and a business nowadays? I can start a business without an investment round, but not a startup? Is it a startup if it involves tech, a business if not? What if they use SOME tech, but not necessarily innovative tech? Or is this one of those 'you know it when you see it' kind of things? Has the term startup become a buzzword like "optimize" or "synergy"? Seriously asking, not being snarky. edit: thank you, for the responses that clarifiesthe distinction
- tiledjinn 4y ago
  Scale and speed of scale. Planning for fast growth. Most small businesses do not plan to grow very quickly.
  - praptak 4y ago
    Also the dual is true - bigger risk of failure is acceptable. Normal business investor typically cares between bankruptcy and having merely poor RoI. Startup incubators would rather have their 999 startups go broke and the 1000th become "next Google" than have average RoI on all 1000.
- gnicholas 4y ago
  According to PG, a startup is a company designed to grow fast. [1] Again, this is a bit at odds with the advice to be frugal. It's not that you can't do both, it's that you have to strike a balance because they are in many ways at the opposite ends of a spectrum. 1: http://www.paulgraham.com/growth.html http://www.paulgraham.com/growth.html
  - throwaway29812 4y ago
    Right, and most often that growth is tied to a digital product that can scale to infinity with little additional capital needed.
- gopalv 4y ago
  > I can start a business without an investment round, but not a startup? The answer around me seems to be that a startup comes out of an idea without the capital worked out. That the equity they have to offer is worth nothing, unless they execute the plan with money they don't have. If you have the capital worked out, you can go ahead into the business phase of the process right away, where profitability is king and there's no plan needed to answer the "how to raise more?" question. A lot of what we associate with startups is the justifications towards raising and a lot of what we see from a "business" is geared towards margins. For instance, better margins by extracting more profits on a lower revenue is better for one, but looks bad for the other.
jrvarela56 4y ago
I've heard more startups taking this route after the new YC deal. 500k buys a lot of ramen.
- gnicholas 4y ago
  Yeah, I know of some that have pivoted at least once and are still alive and kicking. I wonder how YC thought through the costs/benefits of increasing the invested amount so much.
  - jrvarela56 4y ago
    I would assume they did by using their data on how companies progressed, raised money, hired and died/exited.
zachthewf 4y ago
The difference is pre versus post PMF. When you start your startup, you are by definition pre-PMF. There is only a weak relationship between what you spend and what comes out the other side. Once you're post-PMF this changes and you may need to jack up the spending in order to grow as quickly as possible. Lots of companies screw this up and scale up spending when they're pre-PMF. In 2021 those companies could keep raising, but now they're probably going to die.
- gnicholas 4y ago
  Pre-PMF companies need to experiment and nail down their PMF. So what should they be spending on, and what shouldn't they be spending on? I assume conference booths fall into the latter category. Is there anything other than product dev and design that falls into the former? Where does marketing land, in order to make sure enough people are in the funnel to be able to meaningfully experiment and gather data?
  - wefarrell 4y ago
    Relationship building is pretty important pre PMF, especially for industries with larger contracts and longer sales cycles.
  - zachthewf 4y ago
    IMO sales and marketing expenses should be minimal—essentially limited to testing different channels to see if they work. I'm sure this depends on the business but I'd say if you need a lot of marketing spend in order to experiment it's a sign that you may not be enough of an expert on where to find your customers and you either need to find a way to gain that expertise or pivot to an area where you already have it.
a_c 4y ago
IMO start up or not depends on growth, growth in terms of learning the product/industry. Many VC funded companies achieve growth by throwing money on to problem, which works. But if you manage to out learn your competitors while still staying alive, essentially being cockroach, it is still start up.
O__________O 4y ago
VC care about three things: percentage of ownership, growth, and a liquidity event. If a startup doesn’t need the capital to grow, they’re not likely to take on VC funds. If they do, the startup will need to sell equity, which based on funding round have norms based on equity given for capital received. If the startup is frugal with the capital, but still manages to hit growth targets and reach an acceptable liquidity event for the VC, then any unspent capital would only add to the valuation of the company. Is that common, no, but it does happen; if it does, generally means founders gave up equity unnecessarily. Regardless, VC measure ROI on capital invested in the startup not if the capital they invested was spent by the startup.
im_down_w_otp 4y ago
We've bucked this trend at auxon.io, and for the large part it has been stalwartly supported by our investors. Quality pre-seed and seed stage investors seem to have a different mantra than is being expressed here. Though I've certainly encountered investors who typify the criticism here. However, what I heard a lot of from our investors is something more akin to, "The biggest killer of startups is premature scale." Somewhat amusingly now that the capital environment has shifted dramatically, we have investors coming around who used to give us side-eye for being discerning and fastidious (and also our investing resources early to acquire government & adjacent customers), but now they treat us like secret geniuses or something. Because we have a reasonably stable baseline to build from. We're aligned with key markets that continue to spend money even during down markets and recessions. Not to mention we're also not in crisis having to massively disrupt progress and morale by laying off a bunch of people (in fact we're hiring, though still judiciously of course), which is HUGE since team and execution is everything.
dheera 4y ago
You can also just not take VC money. There are a couple of ways to do this: (a) Work at a big co, save a boatload of money, quit after a few years, and then fund it yourself without the bullshit coffee chats* and 18-month clock. (b) Work somewhere that has good work-life balance, pays you enough, is okay with you spending your free time doing something that doesn't compete with the company, and then build it on the side until it makes enough money to replace your day job, and only then quit your day job. * There are good VCs out there, but 95% of VCs will waste your time, and you'll have to wade through them in your search for funding. The amount of coffee chats you'll go through will literally destroy your company because you won't have time to do real work.
jm20 4y ago
This is easy enough to understand when you decouple “success” vs “VC success”. If you survive as a business long enough you’ll be successful almost by default. It might not be the next Facebook, but it should net you a nice life. However, a long-lived, yet non-home-run business is actually a negative in a VC portfolio. Because of the nature of VC, they need big wins to give returns to their fund investors. Their model intentionally decreases average success probability for a business as a filtering mechanism to find big wins as quickly as possible, so they can provide those returns to their own investors on an acceptable timeline.
dang 4y ago
Scott and I were part of the cockroach batch (W09). There's a (little) bit more detail here: https://news.ycombinator.com/item?id=25382902 https://news.ycombinator.com/item?id=25382902
majani 4y ago
You can push back in the early stages before >50% board dilution (and this is who pg assumes is his audience), but typically founders are very willing participants in all the spending

jmathai 4y ago

You shouldn't need VC to start (maybe ever) and probably shouldn't be thinking about it until you've got some traction and customer validation - which can take some time.

actionfromafar 4y ago
It depends on what you want to do. Some things can take too much time without investors, like building new kinds of nuclear reactors.

danpalmer 4y ago

Uncommon. You're right. This advice just doesn't work for most startups. If you're pre-seed stage, in Silicon Valley, and the founders have a "good" background (the right companies, knowing the right people, etc), then sure you might raise a small round. If you're any later than that, or anywhere else in the world, you need results, and results don't come as easily in a recession.

fortuealex 4y ago
Eh, it depends. Depending on your segment it may be easier to sell products in a recession. Tools which cut cost and are below a certain monthly spend actually become easier. Hiring is MUCH MUCH easier. Raising money is harder.

dahfizz 4y ago

Once you've taken VC money, its growth at all costs. Where "growth" is defined by inflating valuation, not necessarily "real" growth of the company. If you want to be frugal and grow responsibly, you have to do it without VC money.

gnicholas 4y ago
So is this something PG wrote before YC was so deep in the VC ecosystem, and that's why it makes sense for him to have said? What would he have advised a startup to do back then, after raising a $2M round? Would he have told them to keep their burn rate low enough to stay default-alive? What would he say now?
- waprin 4y ago
  If you compare the pg essays from 2000-2010 to 2010-now, there's a very noticeable shift in tone on this exact topic, even moreso if you zoom out of pg and consider YC messaging then and now. Tons of old pg essays sound straight from something like Indie Hackers or Microconf with their "avoid raising VC money" angle. He even literally predicts the death of VC in web SaaS, saying "investors aren't worth the trouble": http://www.paulgraham.com/divergence.html http://www.paulgraham.com/divergence.html . His YC cofounder Jessica Livingston wrote a book "Founders at Work" and about half the founders in the book are bootstrappers (DHH, Joel Spolosky, Craigslist). The other half are mostly founders recounting horror stories of interacting with VCs. Compare that to modern YC where there are videos where they say _everyone_ should consider applying to YC with the _only_ exception being people that want to bootstrap. Modern Startup School says: "Without startup funding the vast majority of startups will die." (https://www.ycombinator.com/library/4A-a-guide-to-seed-fundraising https://www.ycombinator.com/library/4A-a-guide-to-seed-fundr...). There's something very important to note which is that YC did not change the deal from 125k for 7% to 500k for 7%. It's still 125k for 7% plus 375k worth of equity on your next raise. Which only makes sense if there is a next raise. So obviously they discourage bootstrapping since their whole model has been built around you raising at least one more round after YC. Seems a pretty simple case of "follow the incentives." YC basically became more of a traditional VC over time. And I think pg was still closer to a founder in the early 2000s, from a founder perspective, it's more of a set of tradeoffs whether you should bootstrap or seek VC. But from a VC's perspective, obviously they want you to seek VC since they can't get involved if you bootstrap and bootstrapped startups won't get the outsized returns they need. My opinion is, pg is a smart guy, there's still a ton of wisdom to learn from in his essays, but as with every other person on the planet, consider their motivation and incentives for telling you what they're telling you.

babyshake 4y ago

You might be able to raise seed money from VCs and not swing for the fences. If they are good VCs, they aren't depending on their seed investments to all necessarily pan out within a few years, if there is good reason to be more frugal. Series A+ is a different story.

tempsy 4y ago

Budgeting for 18 months of runway doesn't mean "waste money on frivolous things as fast as possible"

mach1ne 4y ago
Not on all cases, but I personally know one startup where the VC told the investors to hire as many people as possible, regardless of whether they were actually needed. This anecdote seems to ring true with what I hear elsewhere.
- slap_shot 4y ago
  I think you might have conflated a few things: No VC is telling companies to just to wastefully hire people they don't need. That wastes money and creates friction and bigger problems inside of a company. They do tell you to hire aggressively, and you often present them with a model that shows _how_ you will use the money you raise, and sometimes you hire too many people on accident. But no VC is pounding their fists on the table telling founders to explicitly go hire people that aren't needed. That's directly against the interest of both the founder and the investor.

kneebonian 4y ago

That was the way in the days of negative interest rates, and cheap and easy money. We are headed for the greatest contraction of capital since the great depression soon[1], and that will no longer occur. 1. According to Zeihan, who points out that with the retirement of the boomers their 401k accounts that have been funding all this money are going to get cashed out and withdrawn, reducing the amount of money for lending, leading to an overall capital contraction.

varelse 4y ago

[dead]

reidjs 4y ago

What is the difference between a startup and a business nowadays? I can start a business without an investment round, but not a startup? Is it a startup if it involves tech, a business if not? What if they use SOME tech, but not necessarily innovative tech? Or is this one of those 'you know it when you see it' kind of things? Has the term startup become a buzzword like "optimize" or "synergy"? Seriously asking, not being snarky. edit: thank you, for the responses that clarifiesthe distinction

tiledjinn 4y ago
Scale and speed of scale. Planning for fast growth. Most small businesses do not plan to grow very quickly.
- praptak 4y ago
  Also the dual is true - bigger risk of failure is acceptable. Normal business investor typically cares between bankruptcy and having merely poor RoI. Startup incubators would rather have their 999 startups go broke and the 1000th become "next Google" than have average RoI on all 1000.
gnicholas 4y ago
According to PG, a startup is a company designed to grow fast. [1] Again, this is a bit at odds with the advice to be frugal. It's not that you can't do both, it's that you have to strike a balance because they are in many ways at the opposite ends of a spectrum. 1: http://www.paulgraham.com/growth.html http://www.paulgraham.com/growth.html
- throwaway29812 4y ago
  Right, and most often that growth is tied to a digital product that can scale to infinity with little additional capital needed.
gopalv 4y ago
> I can start a business without an investment round, but not a startup? The answer around me seems to be that a startup comes out of an idea without the capital worked out. That the equity they have to offer is worth nothing, unless they execute the plan with money they don't have. If you have the capital worked out, you can go ahead into the business phase of the process right away, where profitability is king and there's no plan needed to answer the "how to raise more?" question. A lot of what we associate with startups is the justifications towards raising and a lot of what we see from a "business" is geared towards margins. For instance, better margins by extracting more profits on a lower revenue is better for one, but looks bad for the other.

jrvarela56 4y ago

I've heard more startups taking this route after the new YC deal. 500k buys a lot of ramen.

gnicholas 4y ago
Yeah, I know of some that have pivoted at least once and are still alive and kicking. I wonder how YC thought through the costs/benefits of increasing the invested amount so much.
- jrvarela56 4y ago
  I would assume they did by using their data on how companies progressed, raised money, hired and died/exited.

zachthewf 4y ago

The difference is pre versus post PMF. When you start your startup, you are by definition pre-PMF. There is only a weak relationship between what you spend and what comes out the other side. Once you're post-PMF this changes and you may need to jack up the spending in order to grow as quickly as possible. Lots of companies screw this up and scale up spending when they're pre-PMF. In 2021 those companies could keep raising, but now they're probably going to die.

gnicholas 4y ago
Pre-PMF companies need to experiment and nail down their PMF. So what should they be spending on, and what shouldn't they be spending on? I assume conference booths fall into the latter category. Is there anything other than product dev and design that falls into the former? Where does marketing land, in order to make sure enough people are in the funnel to be able to meaningfully experiment and gather data?
- wefarrell 4y ago
  Relationship building is pretty important pre PMF, especially for industries with larger contracts and longer sales cycles.
- zachthewf 4y ago
  IMO sales and marketing expenses should be minimal—essentially limited to testing different channels to see if they work. I'm sure this depends on the business but I'd say if you need a lot of marketing spend in order to experiment it's a sign that you may not be enough of an expert on where to find your customers and you either need to find a way to gain that expertise or pivot to an area where you already have it.

a_c 4y ago

IMO start up or not depends on growth, growth in terms of learning the product/industry. Many VC funded companies achieve growth by throwing money on to problem, which works. But if you manage to out learn your competitors while still staying alive, essentially being cockroach, it is still start up.

O__________O 4y ago

VC care about three things: percentage of ownership, growth, and a liquidity event. If a startup doesn’t need the capital to grow, they’re not likely to take on VC funds. If they do, the startup will need to sell equity, which based on funding round have norms based on equity given for capital received. If the startup is frugal with the capital, but still manages to hit growth targets and reach an acceptable liquidity event for the VC, then any unspent capital would only add to the valuation of the company. Is that common, no, but it does happen; if it does, generally means founders gave up equity unnecessarily. Regardless, VC measure ROI on capital invested in the startup not if the capital they invested was spent by the startup.

im_down_w_otp 4y ago

We've bucked this trend at auxon.io, and for the large part it has been stalwartly supported by our investors. Quality pre-seed and seed stage investors seem to have a different mantra than is being expressed here. Though I've certainly encountered investors who typify the criticism here. However, what I heard a lot of from our investors is something more akin to, "The biggest killer of startups is premature scale." Somewhat amusingly now that the capital environment has shifted dramatically, we have investors coming around who used to give us side-eye for being discerning and fastidious (and also our investing resources early to acquire government & adjacent customers), but now they treat us like secret geniuses or something. Because we have a reasonably stable baseline to build from. We're aligned with key markets that continue to spend money even during down markets and recessions. Not to mention we're also not in crisis having to massively disrupt progress and morale by laying off a bunch of people (in fact we're hiring, though still judiciously of course), which is HUGE since team and execution is everything.

dheera 4y ago

You can also just not take VC money. There are a couple of ways to do this: (a) Work at a big co, save a boatload of money, quit after a few years, and then fund it yourself without the bullshit coffee chats* and 18-month clock. (b) Work somewhere that has good work-life balance, pays you enough, is okay with you spending your free time doing something that doesn't compete with the company, and then build it on the side until it makes enough money to replace your day job, and only then quit your day job. * There are good VCs out there, but 95% of VCs will waste your time, and you'll have to wade through them in your search for funding. The amount of coffee chats you'll go through will literally destroy your company because you won't have time to do real work.

jm20 4y ago

This is easy enough to understand when you decouple “success” vs “VC success”. If you survive as a business long enough you’ll be successful almost by default. It might not be the next Facebook, but it should net you a nice life. However, a long-lived, yet non-home-run business is actually a negative in a VC portfolio. Because of the nature of VC, they need big wins to give returns to their fund investors. Their model intentionally decreases average success probability for a business as a filtering mechanism to find big wins as quickly as possible, so they can provide those returns to their own investors on an acceptable timeline.

dang 4y ago

Scott and I were part of the cockroach batch (W09). There's a (little) bit more detail here: https://news.ycombinator.com/item?id=25382902 https://news.ycombinator.com/item?id=25382902

majani 4y ago

You can push back in the early stages before >50% board dilution (and this is who pg assumes is his audience), but typically founders are very willing participants in all the spending