5 ms·

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 wan

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.
  - dasil003 4y ago
    Also worth noting the 14 year tech bull run and ever increasing amounts of capital looking for a return. In 2000-2010 it was in many ways easier to bootstrap as everything was smaller, complexity was less with simpler browsers and no smart phones, UX expectations were less, and salaries for software engineers were more in line with average professional salaries. Not that I disagree with your assessment on pg's incentives and YC's change in position over time, but the environment for software startups is also materially different now that affect you whether you take VC money or not.
    - waprin 4y ago
      I'd argue the exact opposite. Key costs like hosting are way cheaper, back then you probably had to rack server in a data center, now you can deploy a free/cheap PaaS with a free/cheap database while you find PMF. Marketing is way cheaper, social media is a grind but it's a game you can play to acquire users/customers for _free_. There's more stuff going on online, more people, more businesses, more everything. Think about the entire "creator economy", other bootstrappers, Shopify sites, etc. Yeah some stuff has gotten harder, more platforms, higher UX standards. But on the whole I'd rather bootstrap in 2023 then 2010. Check in with me in a year though.
      - logifail 4y ago
        > Key costs like hosting are way cheaper, back then you probably had to rack server in a data center, now you can deploy a free/cheap PaaS with a free/cheap database while you find PMF. Back in the day I have delivered several different cheap 1U rackmount servers to data centres. Once took one - using public transport - to whatever suitable spot in the Docklands in East London. Travelling on the DLR with a server under one arm was a a memorable experience. Long story short: you can do a lot from a $1000 server, if you put your mind to it. Yet these days it seems PaaS is better, (over-)paying GCP/AWS/Azure, while you grope around to find a product that will sell for $$$ before your cloud credits run out?
      - bluedino 4y ago
        Back in 2009 I had a dedicated server for $89/month It wasn't the greatest thing in the world, but it was dual-core, 2GB RAM, 160GB HD. I ran a small forum, email server, and a couple buddies used it for shells and running whatever PHP apps they wanted. An $80 Linode these days only has 16GB and 320GB.
artemonster 4y ago
Sounds like a pyramid with extra steps
- deleted 4y ago
  [deleted]
- bloodyplonker22 4y ago
  To a cynical curmudgeon, it is a pyramid scheme for 100% of startups. To normal people, it is a pyramid scheme when you have a company like Theranos, which represents a very small percentage of dishonest founders in technology, overall.
- longcrab 4y ago
  A ziggurat?
  - artemonster 4y ago
    We NEED more of those
    - fakedang 4y ago
      Summon more Ziggurats
JumpCrisscross 4y ago
> its growth at all costs If you’ve taken VC, you had a bad VC. Otherwise, this misconstrues most VCs’ advice in a downturn, which is to prioritise staying alive.
- TAForObvReasons 4y ago
  The key phrase is "in a downturn". When it is not a downturn, VCs encourage startups to grow at all costs. And it's extremely difficult to change course. VCs can change advice overnight but companies don't have that flexibility
  - JumpCrisscross 4y ago
    > When it is not a downturn, VCs encourage startups to grow at all costs The defining difference between a startup and small business is scaling potential. If you can’t grow, you shouldn’t take VC.
    - TAForObvReasons 4y ago
      Bootstrapped small businesses can have the same scaling potential as startups. They just value sustainable growth over business fragility. It seems foolish during summers but that mentality allows bootstrapped businesses to survive winters in a way that startups can't.
      - JumpCrisscross 4y ago
        > small businesses can have the same scaling potential as startups Usually not. Most small businesses have geographic limits to their scaling potential. That said, yes, there are niches where small businesses will beat a start-up competitor, at least in the short run.
    - codegeek 4y ago
      I think you are missing the bigger point. VC money puts pressure to grow at any cost and very quickly. That takes away the freedom founders/teams could have to do a few things at a different pace and more sustainably which can still lead to scaling. VC = fast or die. No middle ground. But there are ways to scale even without that level of pressure but VC doesn't allow that.
efficax 4y ago
sometimes this is true but not always, there are smart and patient vcs who trust their founders
auggierose 4y ago
Maybe that's what the VCs want, but you don't have to do what they say. It is your company, after all.
- gnicholas 4y ago
  That's an interesting question. If you are dead set on being frugal and don't need help from your investors (in the form of introductions, etc.), then you could draw a line in the sand and refuse to cross it. If things don't go well, it would probably be hard to raise money for a future startup, due to the reputational damage of not having followed the VC playbook. If things go fine, the VCs would probably say you could have grown even faster by spending faster. And what's considered a 'fine' outcome for you (selling for $15M with 1/3 for you) is not considered 'fine' for a VC whose model requires bigger wins — even if they take much longer.

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.
- dasil003 4y ago
  Also worth noting the 14 year tech bull run and ever increasing amounts of capital looking for a return. In 2000-2010 it was in many ways easier to bootstrap as everything was smaller, complexity was less with simpler browsers and no smart phones, UX expectations were less, and salaries for software engineers were more in line with average professional salaries. Not that I disagree with your assessment on pg's incentives and YC's change in position over time, but the environment for software startups is also materially different now that affect you whether you take VC money or not.
  - waprin 4y ago
    I'd argue the exact opposite. Key costs like hosting are way cheaper, back then you probably had to rack server in a data center, now you can deploy a free/cheap PaaS with a free/cheap database while you find PMF. Marketing is way cheaper, social media is a grind but it's a game you can play to acquire users/customers for _free_. There's more stuff going on online, more people, more businesses, more everything. Think about the entire "creator economy", other bootstrappers, Shopify sites, etc. Yeah some stuff has gotten harder, more platforms, higher UX standards. But on the whole I'd rather bootstrap in 2023 then 2010. Check in with me in a year though.
    - logifail 4y ago
      > Key costs like hosting are way cheaper, back then you probably had to rack server in a data center, now you can deploy a free/cheap PaaS with a free/cheap database while you find PMF. Back in the day I have delivered several different cheap 1U rackmount servers to data centres. Once took one - using public transport - to whatever suitable spot in the Docklands in East London. Travelling on the DLR with a server under one arm was a a memorable experience. Long story short: you can do a lot from a $1000 server, if you put your mind to it. Yet these days it seems PaaS is better, (over-)paying GCP/AWS/Azure, while you grope around to find a product that will sell for $$$ before your cloud credits run out?
    - bluedino 4y ago
      Back in 2009 I had a dedicated server for $89/month It wasn't the greatest thing in the world, but it was dual-core, 2GB RAM, 160GB HD. I ran a small forum, email server, and a couple buddies used it for shells and running whatever PHP apps they wanted. An $80 Linode these days only has 16GB and 320GB.

artemonster 4y ago

Sounds like a pyramid with extra steps

deleted 4y ago
[deleted]
bloodyplonker22 4y ago
To a cynical curmudgeon, it is a pyramid scheme for 100% of startups. To normal people, it is a pyramid scheme when you have a company like Theranos, which represents a very small percentage of dishonest founders in technology, overall.
longcrab 4y ago
A ziggurat?
- artemonster 4y ago
  We NEED more of those
  - fakedang 4y ago
    Summon more Ziggurats

JumpCrisscross 4y ago

> its growth at all costs If you’ve taken VC, you had a bad VC. Otherwise, this misconstrues most VCs’ advice in a downturn, which is to prioritise staying alive.

TAForObvReasons 4y ago
The key phrase is "in a downturn". When it is not a downturn, VCs encourage startups to grow at all costs. And it's extremely difficult to change course. VCs can change advice overnight but companies don't have that flexibility
- JumpCrisscross 4y ago
  > When it is not a downturn, VCs encourage startups to grow at all costs The defining difference between a startup and small business is scaling potential. If you can’t grow, you shouldn’t take VC.
  - TAForObvReasons 4y ago
    Bootstrapped small businesses can have the same scaling potential as startups. They just value sustainable growth over business fragility. It seems foolish during summers but that mentality allows bootstrapped businesses to survive winters in a way that startups can't.
    - JumpCrisscross 4y ago
      > small businesses can have the same scaling potential as startups Usually not. Most small businesses have geographic limits to their scaling potential. That said, yes, there are niches where small businesses will beat a start-up competitor, at least in the short run.
  - codegeek 4y ago
    I think you are missing the bigger point. VC money puts pressure to grow at any cost and very quickly. That takes away the freedom founders/teams could have to do a few things at a different pace and more sustainably which can still lead to scaling. VC = fast or die. No middle ground. But there are ways to scale even without that level of pressure but VC doesn't allow that.

efficax 4y ago

sometimes this is true but not always, there are smart and patient vcs who trust their founders

auggierose 4y ago

Maybe that's what the VCs want, but you don't have to do what they say. It is your company, after all.

gnicholas 4y ago
That's an interesting question. If you are dead set on being frugal and don't need help from your investors (in the form of introductions, etc.), then you could draw a line in the sand and refuse to cross it. If things don't go well, it would probably be hard to raise money for a future startup, due to the reputational damage of not having followed the VC playbook. If things go fine, the VCs would probably say you could have grown even faster by spending faster. And what's considered a 'fine' outcome for you (selling for $15M with 1/3 for you) is not considered 'fine' for a VC whose model requires bigger wins — even if they take much longer.