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Companies don't spend through all their money because a VC makes them. Companies raise VC when they see the need to spend lots of money. The aspersion on all s

by emmett 15y ago

Companies don't spend through all their money because a VC makes them. Companies raise VC when they see the need to spend lots of money. The aspersion on all startups that have raised financing as likely to be unscrupulous and play fast and loose with ethics is pretty uncalled for. Because, of course venture backed startups do those things, but so do bootstrapped startups. You know what usually causes it? Desperation that you're going to fail. Bootstrapped startups can fail too, and often do. They usually just don't get big enough for anyone to notice first. Finally there's this idea of an "acquisition graveyard". While it's true that acquisitions often go south, when they succeed the results can be great. Take Siri, for example, where the product reaches tens of millions more people than they ever would have on their own. It seems like what DHH really objects to is taking chances, where you run the risk of failure for higher reward. And it's his right to go for the lower risk option. Raising money and doing acquisitions are just risky, not bad.

anon808 15y ago
"Companies don't spend through all their money because a VC makes them." Not sure about your experience, but from what I've seen that's exactly the case. I was director of finance of a startup that raised (and burned) $30M+ from several 'tier A' VCs. I was in the board meetings where the VC partners and board members wanted that money spent. You don't hit home runs without swinging.
- tptacek 15y ago
  In the late '90s I was a founder at a company that raised VC; the VC-led board changed us from a multicast software product company to competing with Akamai (heh). Go big or ("and", really) go home.
- AznHisoka 15y ago
  It does make sense. Why would they give you lots of money if you're going to keep it in the bank?
  - tptacek 15y ago
    The point isn't that "pressure to spend the money" (or, more broadly, that "the runway is 18 months whether you get $3MM or $15MM) is unintuitive. It's intuitively obvious, you're right. The point DHH is making is that people don't really think through the implications of that logic.
- DanielRibeiro 15y ago
  Not sure about your experience Well it is not like it is a secret, right? http://news.ycombinator.com/user?id=emmett http://news.ycombinator.com/user?id=emmett http://www.crunchbase.com/company/justintv http://www.crunchbase.com/company/justintv http://www.crunchbase.com/person/emmett-shear http://www.crunchbase.com/person/emmett-shear
tptacek 15y ago
It doesn't matter whether VC's motivate the moon-shot business model or simply enable companies to try it. Either way: a VC investment usually implies a moon-shot. We've had numerous articles, many of them by VC's, explaining the economics here. VC's need their investments to wrap up within a specific time frame. Near the beginning of the time frame, VC's resist liquidity. Near the end of the time frame, VC's push for liquidity. The companies that hit the moon pay for the ones that don't. Nobody is taking VC at gunpoint, so bickering over whether the founders are the ones begging to get to the moon or the VC's are pushing them to go there is besides the point. Either way, customers are strapping themselves in alongside the company for the ride.
- emmett 15y ago
  Right, I think we're in agreement. VC backed companies are usually shooting for fast growth. If you hitch your wagon to a VC backed company, you might be getting in early on the very first Google ad buys when they were underpriced. Then again, it might fail. But "Keep in mind that VC companies tend to go big or bust, with large rewards in success and none in failure" wouldn't make such an eye-catching headline.
  - tptacek 15y ago
    They're virtually always shooting for fast growth, and have to, to work with VC economics. There are exceptions, but they seem to fit a pattern of "person we believe can hit the moon repeatedly has developed a weird fetish for counter service peanut butter & jelly sandwich shops". Actuarially speaking, you are not getting in early on the next big thing. You're one of a cohort of 10 in which 9 are expected to fail; indeed, in which all 10 are being pressured to make longshot bets that hasten failure, because the worst case for the VC actually isn't "company goes out of business".
    - Alex3917 15y ago
      "All 10 are being pressured to make longshot bets that hasten failure" Failing fast isn't necessarily a bad thing. I'm sure there are many companies that have gone out of business because they took VC and tried to grow too fast, but what percentage is that really? When bootsrapping you often don't even know if the business will be viable for a couple years, which IMHO is a vastly worse situation to be in.
dkrich 15y ago
Lost in this argument is any consideration of whether the VC money is necessary for growth. I took DHH's argument to be that the award of VC money is what's celebrated instead of accomplishing the task of building a successful business. While I certainly agree that there are several cases of startups taking VC money and becoming acquired or building huge, lasting businesses, it is tough to produce much evidence that that route has a high expected value. I would also say that based upon my own interactions with hopeful entrepreneurs, WAY too many are asking questions centered on raising investment cash instead of doing the hard stuff like building and selling.
twainer 15y ago
I disagree that one cannot distinguish between the likely ethics of a bootstrap or VC-funded startup. Logically, when a business has its own customers as the only means of support, there is a greater symbiotic relationship - sustained by age-old notions of fair exchange. I work hard to give my customer what they need so that they continue to sustain my business. A big side effect is ethical behavior. The entities most capable of unfair or exploitative behavior are those who no longer need value that relationship to their customer. Yes, in one case this applies to companies close to failure - no matter their funding source. But as noted elsewhere, the acceptance of investor money adds many layers and new definitions to what 'failure' is. Failure is no longer just 'going out of business' - it morphs to mean things like not having hit a number, not having made money fast enough, being pushed out of a job because people have lost faith in you, etc. The options for failure proliferate in an investor-funded corporation. It's that same irony when a Fortune 500 firm makes a nice profit but the stock tanks because they didn't make as much as someone thought they should. Profit = success in the natural world; but somehow it gets turned around to equal failure - oftentimes costing real people their real jobs and costing companies real value of their shares that they could use to conduct real business. So, as investor-funded companies are allowed only a small number of ways to define success, they are always closer to failure, and are forever more aware of the benefits of unethical behavior - especially when that behavior is so well-shielded by the corporate veil.

by emmett 15y ago

anon808 15y ago

"Companies don't spend through all their money because a VC makes them." Not sure about your experience, but from what I've seen that's exactly the case. I was director of finance of a startup that raised (and burned) $30M+ from several 'tier A' VCs. I was in the board meetings where the VC partners and board members wanted that money spent. You don't hit home runs without swinging.

tptacek 15y ago
In the late '90s I was a founder at a company that raised VC; the VC-led board changed us from a multicast software product company to competing with Akamai (heh). Go big or ("and", really) go home.
AznHisoka 15y ago
It does make sense. Why would they give you lots of money if you're going to keep it in the bank?
- tptacek 15y ago
  The point isn't that "pressure to spend the money" (or, more broadly, that "the runway is 18 months whether you get $3MM or $15MM) is unintuitive. It's intuitively obvious, you're right. The point DHH is making is that people don't really think through the implications of that logic.
DanielRibeiro 15y ago
Not sure about your experience Well it is not like it is a secret, right? http://news.ycombinator.com/user?id=emmett http://news.ycombinator.com/user?id=emmett http://www.crunchbase.com/company/justintv http://www.crunchbase.com/company/justintv http://www.crunchbase.com/person/emmett-shear http://www.crunchbase.com/person/emmett-shear

tptacek 15y ago

It doesn't matter whether VC's motivate the moon-shot business model or simply enable companies to try it. Either way: a VC investment usually implies a moon-shot. We've had numerous articles, many of them by VC's, explaining the economics here. VC's need their investments to wrap up within a specific time frame. Near the beginning of the time frame, VC's resist liquidity. Near the end of the time frame, VC's push for liquidity. The companies that hit the moon pay for the ones that don't. Nobody is taking VC at gunpoint, so bickering over whether the founders are the ones begging to get to the moon or the VC's are pushing them to go there is besides the point. Either way, customers are strapping themselves in alongside the company for the ride.

emmett 15y ago
Right, I think we're in agreement. VC backed companies are usually shooting for fast growth. If you hitch your wagon to a VC backed company, you might be getting in early on the very first Google ad buys when they were underpriced. Then again, it might fail. But "Keep in mind that VC companies tend to go big or bust, with large rewards in success and none in failure" wouldn't make such an eye-catching headline.
- tptacek 15y ago
  They're virtually always shooting for fast growth, and have to, to work with VC economics. There are exceptions, but they seem to fit a pattern of "person we believe can hit the moon repeatedly has developed a weird fetish for counter service peanut butter & jelly sandwich shops". Actuarially speaking, you are not getting in early on the next big thing. You're one of a cohort of 10 in which 9 are expected to fail; indeed, in which all 10 are being pressured to make longshot bets that hasten failure, because the worst case for the VC actually isn't "company goes out of business".
  - Alex3917 15y ago
    "All 10 are being pressured to make longshot bets that hasten failure" Failing fast isn't necessarily a bad thing. I'm sure there are many companies that have gone out of business because they took VC and tried to grow too fast, but what percentage is that really? When bootsrapping you often don't even know if the business will be viable for a couple years, which IMHO is a vastly worse situation to be in.

dkrich 15y ago

Lost in this argument is any consideration of whether the VC money is necessary for growth. I took DHH's argument to be that the award of VC money is what's celebrated instead of accomplishing the task of building a successful business. While I certainly agree that there are several cases of startups taking VC money and becoming acquired or building huge, lasting businesses, it is tough to produce much evidence that that route has a high expected value. I would also say that based upon my own interactions with hopeful entrepreneurs, WAY too many are asking questions centered on raising investment cash instead of doing the hard stuff like building and selling.

twainer 15y ago

I disagree that one cannot distinguish between the likely ethics of a bootstrap or VC-funded startup. Logically, when a business has its own customers as the only means of support, there is a greater symbiotic relationship - sustained by age-old notions of fair exchange. I work hard to give my customer what they need so that they continue to sustain my business. A big side effect is ethical behavior. The entities most capable of unfair or exploitative behavior are those who no longer need value that relationship to their customer. Yes, in one case this applies to companies close to failure - no matter their funding source. But as noted elsewhere, the acceptance of investor money adds many layers and new definitions to what 'failure' is. Failure is no longer just 'going out of business' - it morphs to mean things like not having hit a number, not having made money fast enough, being pushed out of a job because people have lost faith in you, etc. The options for failure proliferate in an investor-funded corporation. It's that same irony when a Fortune 500 firm makes a nice profit but the stock tanks because they didn't make as much as someone thought they should. Profit = success in the natural world; but somehow it gets turned around to equal failure - oftentimes costing real people their real jobs and costing companies real value of their shares that they could use to conduct real business. So, as investor-funded companies are allowed only a small number of ways to define success, they are always closer to failure, and are forever more aware of the benefits of unethical behavior - especially when that behavior is so well-shielded by the corporate veil.