7 ms·

Raise less, build more

166 points by trohan 3y ago

binbag 3y ago
It's mad that this even needs said. A company's aim should be to be sustainable and profitable, not to be a receptacle for capital. Some companies need external capital to get to that point, particularly hardware or those operating in slow-adopting markets. If you don't need it, don't take it.
- alex_lav 3y ago
  Yeah sometimes it becomes clear founders forget the purpose of a company is to make money/turn a profit and not just to repeatedly raise money and be famous. I have worked at a company that forgot this. It feels kind of surreal sometimes.
  - gabereiser 3y ago
    You mean like Founder’s Syndrome [1]? Yeah, it’s exactly like that… [1] https://en.wikipedia.org/wiki/Founder's_syndrome https://en.wikipedia.org/wiki/Founder's_syndrome
    - reducesuffering 3y ago
      Does that happen sometimes? Surely. But more often than not, founder led companies who have personal attachment to the outcomes deliver far better than some self-interested, career stepping-stone, decision-by-committee corporate blob. See Nvidia, Facebook, Stripe, and Tesla compared to Intel, IBM, GM, and PayPal.
      - gabereiser 3y ago
        Not arguing that at all. I fully agree. There are a lot of smaller startups that fail to get past the “tribe” level due to founder’s syndrome though, among many other factors. It just reminded me of that right off the bat.
  - jandrese 3y ago
    That's one view of what a company should do. Another is that it should become famous enough to attract the attention of a FAANG and get bought out ASAP, making the founders multimillionaires before they turn 30. It's the techbro lottery. Many will play, few will win.
    - deleted 3y ago
      [deleted]
    - quickthrower2 3y ago
      The company is the product kind of thing. More like flipping real estate.
      - deleted 3y ago
        [deleted]
  - nicbou 3y ago
    Surreal indeed. It blows my mind to see investors repeatedly try to propel the same business model (like electric scooter sharing) far past the point of reason. The founders can surprisingly turn around, start something else, and get showered with money again. It feels completely disconnected from reality, a very abstract way of thinking about money and business.
- JohnFen 3y ago
  A couple of lifetimes ago, a business mentor of mine taught me a truth that has served me very well. There is a correct amount of money for starting a business, and it's probably less than you think it is. Too much money in a startup tends to gum up the works and can kill a business just as dead as not having enough. If you have too much money, you're not only going to blow it on things that don't matter, but when you do, you're likely to do so in a way that incurs ongoing costs. Things like leasing fancier offices than you need (or, in some cases, leasing any office space at all), hiring more people than you need, etc. As he put it, if you're starting a business and aren't worrying about how you're covering your expenses next quarter, you probably have too much money.
  - jdjdie 3y ago
    Plus you will tend to take committing decisions like hiring, location, or business goals that will limit how much you explore alternative paths. Having a team to manage forces you to find problems they can solve, which is not necessarily where the money is. You have a css/js developer? Ok I have to find frontend tasks now. Etc
  - samtho 3y ago
    To add on, a company who spends a lot of money on frivolous things or over-hires will need to pay the internal cost of downsizing when the time inevitably comes. That means layoffs, fewer employee benefits for those still employed, and general tightening of the belt. There is a huge cost when you let go of people who would otherwise be kept on payroll if you could continue to pay them. You will get fewer internal referrals to new hires and remaining staff become less engaged in their work. There is additional long lasting damage to your staff as a whole who survived the layoff this time. The culture at the company shifts and never fully recovers. I don’t think businesses always fully appreciate the long term cost and damage layoffs do to small and medium sized companies, but see headcount reduction as a simple way to reduce its own costs.
  - nicbou 3y ago
    Perhaps all that money distorts the reality your business operates in and makes you blind to problems you should be solving. It's a bit like having your parents paying all your bills. You might never develop the skills and spending habits that befits your real budget.
Animats 3y ago
Short version: "A large, poorly performing fund (1.5x) pays its GPs dramatically more than a smaller, higher performing (4x) fund."
- mfitton 3y ago
  Isn't this flawed, though? If a venture company has a billion dollars in LP funding secured, then instead of having that 1 1 billion fund, they could have ten of the 100 million funds listed in the article. Sure, it's more work, but it's also, hypothetically, a vastly larger return, both for GPs and LPs. Not to mention, doing the billion dollar, lower-returning fund makes VC less attractive to the LPs that put up most of the money, as they're paying more in management fees for a lesser return. It seems to me that funds getting larger is driven by a flawed expectation from VCs that large funds will perform as well as small funds, not based on a cynical extraction of money from their LPs, but maybe I'm mistaken.
- nemothekid 3y ago
  Wouldn't getting 50% on a billion be a harder problem than getting 300% on 100MM.
  - lmm 3y ago
    > Wouldn't getting 50% on a billion be a harder problem than getting 300% on 100MM. Seems unlikely. Does whatever you were doing with the 100MM really scale that badly?
    - timfsu 3y ago
      When it comes to investing in startups, I think the answer is yes, because there are presumably a limited number of winners
    - darkerside 3y ago
      You found 5 unicorns. Can it really be that hard to find 45 more???
djbusby 3y ago
In observing 100s of deals, advisor to dozens of early stage businesses I'd add: So many folk show up asking to raise because they only see how their company can work "at scale". They have forgotten to do things that don't scale. It's like they skip problem-market fit, jump way past MVP (but still call it that) and almost have to raise - then try to force the market to exist. Many (most?) of these companies I've seen could have started with a smaller fit. That could test the market theory for cheap (Lean) - cheap in terms of time and money. If the fit is good one ends up with a small business with medium good margin - and a way better idea of what the scaled up universe looks like. Much easier to raise when you've got a) solid foundation and b) actual unit economics. However, now the raise is on real numbers - so less likely to be the crazy raise one could do on dreams alone. Like, do you want a 0.01% chance to raise money or a 2% chance to build a business that keeps you and a few others well paid and perhaps out of the rat-race.
- coding123 3y ago
  That sounds like what magic leap was - it will only work if everyone has one. Doesn't matter if 10 people are not interested. You convince everyone to buy one when everyone else has to have one. But how do you get it so that everyone else has one first?
- quickthrower2 3y ago
  > So many folk show up asking to raise because they only see how their company can work "at scale" Maybe that is the optimum way to get investment? Like how coders at an interview could talk about how they solve business problems with simple solutions, but instead need to talk about how they have kubernetes and microservices experience, know Martin Fowler's patterns inside out, can recite what the L in SOLID means, etc.
  - morelisp 3y ago
    The L in SOLID is the only useful letter for building simple solutions.
- bsder 3y ago
  > Like, do you want a 0.01% chance to raise money or a 2% chance to build a business that keeps you and a few others well paid and perhaps out of the rat-race. Or, you do a raise; it keeps you out of the rat race for a couple years; and you move on when it implodes. The problem VCs are having right now is that people have figured them out. If I have a business which can throw off cash, I don't need VCs unless I have a competitor I need to outrun. If I don't have a business which will get to cash, it's fine to take VC money to leave them holding the bag if I never find a "real" market.
bjornsing 3y ago
> A typical venture fund has a 2% management fee… > A $100M fund which does 4x earns the GPs $80M ($in carry, plus $20M in management fees) Nope. 2% of $100M is $2M, not $20M. > A $1B fund which does 1.5x earns the GPs $300M ($100M in carry, plus $200M in management fees) Nope.
- trohan 3y ago
  Management Fee are paid annually, and typically for 10 years if not more. It's 2M x 10 years (for each year of the funds life). Ditto for 20M (x 10 years)
  - bjornsing 3y ago
    Good point!
duxup 3y ago
Generally shouldn’t the motivation to fund the “right” amount be with the VCs? Founders are going to ask for whatever they can right? But VCs don’t seem to be interested in funding less… Whatever magical market forces that might change how funding works, they don’t seem to be at play.
- HWR_14 3y ago
  Well, founders have to give up equity to ask get more money from VCs. So, in theory, they should want to raise the least among of money at the highest valuation to keep the most amount of their company.
- tzhenghao 3y ago
  VCs aren't always the best capital allocators - a lot has succumbed to the money management + fees disease. They push you to raise more, force you to hire and burn when you really shouldn't / haven't figured out product market fit yet. > Whatever magical market forces that might change how funding works, they don’t seem to be at play. I think money is scarcer these days, and founders who are constantly being burned by VCs will think twice about riding the big VC train in the coming years. As a founder myself who work crazy hours getting the business going, it's painful / bad optics to see full time VCs doing weekend Vegas trips, browse art galleries on weekday afternoons and fine dining every couple of days, knowing I've sold a chunk of my / my team's hard earned equity on that bs. Of course there are great VCs, and some businesses needing to be VC backed, but oh boy, are there really bad apples out there.
  - bratbag 3y ago
    If someone has given you money to build a business, why is their weekend anything to do with you?
- tootie 3y ago
  VC economics is different than a thriving business. They generally want 10x or nothing. Having a 2x or 3x business is enough to make a founder wealthy and fulfilled but VCs won't be interested.
thsksbd 3y ago
Who thought it was a play on the unix utils "less" and "more"?
- deleted 3y ago
  [deleted]
dougSF70 3y ago
This is us! I couldn't learn the rules of the game "how to raise from VC funds" so we built profitable scalable software-led business...took us a few pivots but here we are.
pcmaffey 3y ago
This is really nothing new for founders, who have always, generally speaking, wanted to optimize for control. And this path maximizes optionality. Hell even pg promoted the idea of raising a small seed and getting to profitability. The problem is most early stage VCs don’t play this way. Their game is all about “selling” their investment to the next round up of VCs, who have a specific playbook for what that looks like. Rarely is that aligned with what makes most sense for your company. Maybe in a post-boom era that’s going to change. Regardless, this blog post isn’t for founders. It’s for other VCs. So good for Terrence Rohan to try and evangelize the idea a little to the fast follow crowd.
pedalpete 3y ago
I was caught up in the scale mentality and corrected by a friend who is an excellent CFO. We looked at the finances for our company, and the way he laid it out was that we only need a very few number of customers, relative to market size, to be profitable. That's default alive. Ignore growth beyond that number, just get to that number. Then look at growth past that. I had modelled growth directly, and because we're in subscription hardware, there is a scaling cost. If you want to add more customers, you have to keep building more hardware, which introduces a cost. My takeaway when forecasting is figure out your default alive state and how to get there. Once you're there, then you can look at growth. Another way to look at it is your company is like a person dying in a hospital, and you're the doctor. You're not going to give them a work-out program and tell them to go to crossfit to get big and strong, you're going to figure out how you can keep them alive and get them out of the hospital. Once they are well, then you can get into the strength (building) stuff. Everyday until you are profitable, your company is dying. So what are you doing to save it?
- nicbou 3y ago
  This is how I understand business, being a small scale kind of guy. But how does it align with the prevalent business model of supercharging growth with capital? These companies are unprofitable and not default alive, but if you can keep pumping them until they become profitable, they survive.
  - taneq 3y ago
    It doesn’t, because “venture capital backed hyper growth startup” isn’t a business model, it’s a pyramid scheme. The survival of the business after IPO is irrelevant.
    - monissiddiqui 3y ago
      Increase value for the shareholders taken to it's logical extreme. Just gotta increase the perceived value to the potential bagholders so the current bagholders can wipe themselves clean.
    - 3y ago
BLanen 3y ago
> A large, poorly performing fund (1.5x) pays its GPs dramatically more than a smaller, higher performing (4x) fund. Stunningly, the large fund GPs would earn dramatically more on simple management fees alone (i.e. even if the fund was 0x, the GPs earn $200M). Granted, the $1B fund may have more GPs, but the payout differential is eye opening. I've been re-reading this for the last 10 minutes and this is not an explanation for why the large fund would perform worse, which is what I was promised. Is this an incentives argument? The large fund GPs are not incentivized enough because they earn a lot anyway? But their collective performance IS(supposedly, under a meritocracy) the funds returns and they would earn $600 million in carry if they would 4x. This just doesn't explain WHY large funds supposedly do worse than small funds, just that supposedly they do.
- ytoawwhra92 3y ago
  High return investment opportunities are limited in number and amount of cash which can be deployed into them. As cash under management grows a higher percentage of it gets invested into lower return investment opportunities which are better than risk-free rate, reducing the overall performance of the fund (relative, not absolute). Hypothetical: consider 100 startups each looking for $10m investment. One will return 10x while the others will return 1.5x. A fund with $50m invests in the 10xer and 4 1.5xers, total return is $160m, or 3.2x. A fund with $1,000m invests in all of them, total return is $1,585m, or 1.52x (the max absolute return). Also an incentive issue; suppose the $1,000m fund missed the 10x and instead only made 99 investments, total return is still $1,495m, or 1.495x - very close to max possible in this scenario. Not really fair to compare performance between funds with such dramatic differences in cash under management IMO.
  - BLanen 3y ago
    >High return investment opportunities are limited in number and amount of cash which can be deployed into them. As cash under management grows a higher percentage of it gets invested into lower return investment opportunities which are better than risk-free rate, reducing the overall performance of the fund (relative, not absolute). Larger funds supposedly being more risk averse COULD be a reason for less yield but it might as well on average yield MORE. All you said is just hypothetical. And again, the article frames it as an incentives issue, which it isn't. >Not really fair to compare performance between funds with such dramatic differences in cash under management IMO. This literally makes no sense at all. OF COURSE you can compare them and you should. If I have a billion dollars to invest I could invest it all in one fund or I could spread it out of a thousand small funds. It makes no sense to NOT compare them. Is a dollar from a small fund's return different than a large funds? No.
lordofmoria 3y ago
One aspect of this that I don’t hear often is that growing more slowly allows you to actually have a chance at testing profitability and making adjustments in business model to achieve profitability as you grow. People assume that profitability is perfectly predictable in a spreadsheet - anyone who has run a business for any sustained amount of time knows how false that is. Sure, if you run a SaaS, the margins may be so large that you can hand-wave profitability and probably be ok. But remember, your first super productive workers are not the ones who are are around 5 years later. Your first smart and capable customers are not your average customer 5 years down the line. If you are pursuing revenue growth at any cost, you could end up with a lot of revenue and no hope at being profitable. Spreadsheets and fancy decks can be made to convincingly present whatever story you want to tell, regardless of reality - look at Uber/Lyft. When you look at how the public markets are punishing this now, it seems obvious, but when you’re smaller and gunning for your next round, it’s probably the furthest from your mind.
jongjong 3y ago
I launched my new startup as a cryptocurrency which uses profits to buy-back (and burn) tokens. That way everyone in the community has an incentive to drive profitability as it directly determines the market price of tokens. If people don't like where things are going, they can just dump the token, nobody is locked in for any period of time, everyone can see how the tokens are allocated and all individual trades are public (though pseudo-anonymous) on our community DEX. I launched it last week and raised about $1000. One entire THOUSAND dollars! Anyway in spite of all the psyops and gov officials conspiring against this asset class, I find this model far superior than the contrived VC model which makes all participants feel like they're playing a very long game of musical chairs on a global scale... No thank you. Not that I could even get my foot in the door in the first place. That model is not just flawed, it's literally impossible. Unfortunately I can't promote it to US citizens due to regulatory environment so I can't discuss it here.
- Woshiwuja 3y ago
  i doubt discussing something is promoting it tbf
agnosticmantis 3y ago
How about when a competitor uses VC money to gain market share by “selling” dollars for 90 cents to customers? It’s hard to become profitable in such a market when the competitors are burning cash to gain market share. Isn’t that how Amazon, PayPal, Uber, etc. grew to their current scale and killed the competition?
Jagah 3y ago
[flagged]
benjaminwootton 3y ago
I agree with every word of the post, but it doesn’t consider the elephant in the room which is the VC incentive. Their business model rapid scale and increased ownership.
clocot 3y ago
[dead]

166 points by trohan 3y ago

It's mad that this even needs said. A company's aim should be to be sustainable and profitable, not to be a receptacle for capital. Some companies need external capital to get to that point, particularly hardware or those operating in slow-adopting markets. If you don't need it, don't take it.

alex_lav 3y ago
Yeah sometimes it becomes clear founders forget the purpose of a company is to make money/turn a profit and not just to repeatedly raise money and be famous. I have worked at a company that forgot this. It feels kind of surreal sometimes.
- gabereiser 3y ago
  You mean like Founder’s Syndrome [1]? Yeah, it’s exactly like that… [1] https://en.wikipedia.org/wiki/Founder's_syndrome https://en.wikipedia.org/wiki/Founder's_syndrome
  - reducesuffering 3y ago
    Does that happen sometimes? Surely. But more often than not, founder led companies who have personal attachment to the outcomes deliver far better than some self-interested, career stepping-stone, decision-by-committee corporate blob. See Nvidia, Facebook, Stripe, and Tesla compared to Intel, IBM, GM, and PayPal.
    - gabereiser 3y ago
      Not arguing that at all. I fully agree. There are a lot of smaller startups that fail to get past the “tribe” level due to founder’s syndrome though, among many other factors. It just reminded me of that right off the bat.
- jandrese 3y ago
  That's one view of what a company should do. Another is that it should become famous enough to attract the attention of a FAANG and get bought out ASAP, making the founders multimillionaires before they turn 30. It's the techbro lottery. Many will play, few will win.
  - deleted 3y ago
    [deleted]
  - quickthrower2 3y ago
    The company is the product kind of thing. More like flipping real estate.
    - deleted 3y ago
      [deleted]
- nicbou 3y ago
  Surreal indeed. It blows my mind to see investors repeatedly try to propel the same business model (like electric scooter sharing) far past the point of reason. The founders can surprisingly turn around, start something else, and get showered with money again. It feels completely disconnected from reality, a very abstract way of thinking about money and business.
JohnFen 3y ago
A couple of lifetimes ago, a business mentor of mine taught me a truth that has served me very well. There is a correct amount of money for starting a business, and it's probably less than you think it is. Too much money in a startup tends to gum up the works and can kill a business just as dead as not having enough. If you have too much money, you're not only going to blow it on things that don't matter, but when you do, you're likely to do so in a way that incurs ongoing costs. Things like leasing fancier offices than you need (or, in some cases, leasing any office space at all), hiring more people than you need, etc. As he put it, if you're starting a business and aren't worrying about how you're covering your expenses next quarter, you probably have too much money.
- jdjdie 3y ago
  Plus you will tend to take committing decisions like hiring, location, or business goals that will limit how much you explore alternative paths. Having a team to manage forces you to find problems they can solve, which is not necessarily where the money is. You have a css/js developer? Ok I have to find frontend tasks now. Etc
- samtho 3y ago
  To add on, a company who spends a lot of money on frivolous things or over-hires will need to pay the internal cost of downsizing when the time inevitably comes. That means layoffs, fewer employee benefits for those still employed, and general tightening of the belt. There is a huge cost when you let go of people who would otherwise be kept on payroll if you could continue to pay them. You will get fewer internal referrals to new hires and remaining staff become less engaged in their work. There is additional long lasting damage to your staff as a whole who survived the layoff this time. The culture at the company shifts and never fully recovers. I don’t think businesses always fully appreciate the long term cost and damage layoffs do to small and medium sized companies, but see headcount reduction as a simple way to reduce its own costs.
- nicbou 3y ago
  Perhaps all that money distorts the reality your business operates in and makes you blind to problems you should be solving. It's a bit like having your parents paying all your bills. You might never develop the skills and spending habits that befits your real budget.

Animats 3y ago

Short version: "A large, poorly performing fund (1.5x) pays its GPs dramatically more than a smaller, higher performing (4x) fund."

mfitton 3y ago
Isn't this flawed, though? If a venture company has a billion dollars in LP funding secured, then instead of having that 1 1 billion fund, they could have ten of the 100 million funds listed in the article. Sure, it's more work, but it's also, hypothetically, a vastly larger return, both for GPs and LPs. Not to mention, doing the billion dollar, lower-returning fund makes VC less attractive to the LPs that put up most of the money, as they're paying more in management fees for a lesser return. It seems to me that funds getting larger is driven by a flawed expectation from VCs that large funds will perform as well as small funds, not based on a cynical extraction of money from their LPs, but maybe I'm mistaken.
nemothekid 3y ago
Wouldn't getting 50% on a billion be a harder problem than getting 300% on 100MM.
- lmm 3y ago
  > Wouldn't getting 50% on a billion be a harder problem than getting 300% on 100MM. Seems unlikely. Does whatever you were doing with the 100MM really scale that badly?
  - timfsu 3y ago
    When it comes to investing in startups, I think the answer is yes, because there are presumably a limited number of winners
  - darkerside 3y ago
    You found 5 unicorns. Can it really be that hard to find 45 more???

djbusby 3y ago

In observing 100s of deals, advisor to dozens of early stage businesses I'd add: So many folk show up asking to raise because they only see how their company can work "at scale". They have forgotten to do things that don't scale. It's like they skip problem-market fit, jump way past MVP (but still call it that) and almost have to raise - then try to force the market to exist. Many (most?) of these companies I've seen could have started with a smaller fit. That could test the market theory for cheap (Lean) - cheap in terms of time and money. If the fit is good one ends up with a small business with medium good margin - and a way better idea of what the scaled up universe looks like. Much easier to raise when you've got a) solid foundation and b) actual unit economics. However, now the raise is on real numbers - so less likely to be the crazy raise one could do on dreams alone. Like, do you want a 0.01% chance to raise money or a 2% chance to build a business that keeps you and a few others well paid and perhaps out of the rat-race.

coding123 3y ago
That sounds like what magic leap was - it will only work if everyone has one. Doesn't matter if 10 people are not interested. You convince everyone to buy one when everyone else has to have one. But how do you get it so that everyone else has one first?
quickthrower2 3y ago
> So many folk show up asking to raise because they only see how their company can work "at scale" Maybe that is the optimum way to get investment? Like how coders at an interview could talk about how they solve business problems with simple solutions, but instead need to talk about how they have kubernetes and microservices experience, know Martin Fowler's patterns inside out, can recite what the L in SOLID means, etc.
- morelisp 3y ago
  The L in SOLID is the only useful letter for building simple solutions.
bsder 3y ago
> Like, do you want a 0.01% chance to raise money or a 2% chance to build a business that keeps you and a few others well paid and perhaps out of the rat-race. Or, you do a raise; it keeps you out of the rat race for a couple years; and you move on when it implodes. The problem VCs are having right now is that people have figured them out. If I have a business which can throw off cash, I don't need VCs unless I have a competitor I need to outrun. If I don't have a business which will get to cash, it's fine to take VC money to leave them holding the bag if I never find a "real" market.

bjornsing 3y ago

> A typical venture fund has a 2% management fee… > A $100M fund which does 4x earns the GPs $80M ($in carry, plus $20M in management fees) Nope. 2% of $100M is $2M, not $20M. > A $1B fund which does 1.5x earns the GPs $300M ($100M in carry, plus $200M in management fees) Nope.

trohan 3y ago
Management Fee are paid annually, and typically for 10 years if not more. It's 2M x 10 years (for each year of the funds life). Ditto for 20M (x 10 years)
- bjornsing 3y ago
  Good point!

duxup 3y ago

Generally shouldn’t the motivation to fund the “right” amount be with the VCs? Founders are going to ask for whatever they can right? But VCs don’t seem to be interested in funding less… Whatever magical market forces that might change how funding works, they don’t seem to be at play.

HWR_14 3y ago
Well, founders have to give up equity to ask get more money from VCs. So, in theory, they should want to raise the least among of money at the highest valuation to keep the most amount of their company.
tzhenghao 3y ago
VCs aren't always the best capital allocators - a lot has succumbed to the money management + fees disease. They push you to raise more, force you to hire and burn when you really shouldn't / haven't figured out product market fit yet. > Whatever magical market forces that might change how funding works, they don’t seem to be at play. I think money is scarcer these days, and founders who are constantly being burned by VCs will think twice about riding the big VC train in the coming years. As a founder myself who work crazy hours getting the business going, it's painful / bad optics to see full time VCs doing weekend Vegas trips, browse art galleries on weekday afternoons and fine dining every couple of days, knowing I've sold a chunk of my / my team's hard earned equity on that bs. Of course there are great VCs, and some businesses needing to be VC backed, but oh boy, are there really bad apples out there.
- bratbag 3y ago
  If someone has given you money to build a business, why is their weekend anything to do with you?
tootie 3y ago
VC economics is different than a thriving business. They generally want 10x or nothing. Having a 2x or 3x business is enough to make a founder wealthy and fulfilled but VCs won't be interested.

thsksbd 3y ago

Who thought it was a play on the unix utils "less" and "more"?

deleted 3y ago
[deleted]

dougSF70 3y ago

This is us! I couldn't learn the rules of the game "how to raise from VC funds" so we built profitable scalable software-led business...took us a few pivots but here we are.

pcmaffey 3y ago

This is really nothing new for founders, who have always, generally speaking, wanted to optimize for control. And this path maximizes optionality. Hell even pg promoted the idea of raising a small seed and getting to profitability. The problem is most early stage VCs don’t play this way. Their game is all about “selling” their investment to the next round up of VCs, who have a specific playbook for what that looks like. Rarely is that aligned with what makes most sense for your company. Maybe in a post-boom era that’s going to change. Regardless, this blog post isn’t for founders. It’s for other VCs. So good for Terrence Rohan to try and evangelize the idea a little to the fast follow crowd.

pedalpete 3y ago

I was caught up in the scale mentality and corrected by a friend who is an excellent CFO. We looked at the finances for our company, and the way he laid it out was that we only need a very few number of customers, relative to market size, to be profitable. That's default alive. Ignore growth beyond that number, just get to that number. Then look at growth past that. I had modelled growth directly, and because we're in subscription hardware, there is a scaling cost. If you want to add more customers, you have to keep building more hardware, which introduces a cost. My takeaway when forecasting is figure out your default alive state and how to get there. Once you're there, then you can look at growth. Another way to look at it is your company is like a person dying in a hospital, and you're the doctor. You're not going to give them a work-out program and tell them to go to crossfit to get big and strong, you're going to figure out how you can keep them alive and get them out of the hospital. Once they are well, then you can get into the strength (building) stuff. Everyday until you are profitable, your company is dying. So what are you doing to save it?

nicbou 3y ago
This is how I understand business, being a small scale kind of guy. But how does it align with the prevalent business model of supercharging growth with capital? These companies are unprofitable and not default alive, but if you can keep pumping them until they become profitable, they survive.
- taneq 3y ago
  It doesn’t, because “venture capital backed hyper growth startup” isn’t a business model, it’s a pyramid scheme. The survival of the business after IPO is irrelevant.
  - monissiddiqui 3y ago
    Increase value for the shareholders taken to it's logical extreme. Just gotta increase the perceived value to the potential bagholders so the current bagholders can wipe themselves clean.
  - 3y ago

BLanen 3y ago

> A large, poorly performing fund (1.5x) pays its GPs dramatically more than a smaller, higher performing (4x) fund. Stunningly, the large fund GPs would earn dramatically more on simple management fees alone (i.e. even if the fund was 0x, the GPs earn $200M). Granted, the $1B fund may have more GPs, but the payout differential is eye opening. I've been re-reading this for the last 10 minutes and this is not an explanation for why the large fund would perform worse, which is what I was promised. Is this an incentives argument? The large fund GPs are not incentivized enough because they earn a lot anyway? But their collective performance IS(supposedly, under a meritocracy) the funds returns and they would earn $600 million in carry if they would 4x. This just doesn't explain WHY large funds supposedly do worse than small funds, just that supposedly they do.

ytoawwhra92 3y ago
High return investment opportunities are limited in number and amount of cash which can be deployed into them. As cash under management grows a higher percentage of it gets invested into lower return investment opportunities which are better than risk-free rate, reducing the overall performance of the fund (relative, not absolute). Hypothetical: consider 100 startups each looking for $10m investment. One will return 10x while the others will return 1.5x. A fund with $50m invests in the 10xer and 4 1.5xers, total return is $160m, or 3.2x. A fund with $1,000m invests in all of them, total return is $1,585m, or 1.52x (the max absolute return). Also an incentive issue; suppose the $1,000m fund missed the 10x and instead only made 99 investments, total return is still $1,495m, or 1.495x - very close to max possible in this scenario. Not really fair to compare performance between funds with such dramatic differences in cash under management IMO.
- BLanen 3y ago
  >High return investment opportunities are limited in number and amount of cash which can be deployed into them. As cash under management grows a higher percentage of it gets invested into lower return investment opportunities which are better than risk-free rate, reducing the overall performance of the fund (relative, not absolute). Larger funds supposedly being more risk averse COULD be a reason for less yield but it might as well on average yield MORE. All you said is just hypothetical. And again, the article frames it as an incentives issue, which it isn't. >Not really fair to compare performance between funds with such dramatic differences in cash under management IMO. This literally makes no sense at all. OF COURSE you can compare them and you should. If I have a billion dollars to invest I could invest it all in one fund or I could spread it out of a thousand small funds. It makes no sense to NOT compare them. Is a dollar from a small fund's return different than a large funds? No.

lordofmoria 3y ago

One aspect of this that I don’t hear often is that growing more slowly allows you to actually have a chance at testing profitability and making adjustments in business model to achieve profitability as you grow. People assume that profitability is perfectly predictable in a spreadsheet - anyone who has run a business for any sustained amount of time knows how false that is. Sure, if you run a SaaS, the margins may be so large that you can hand-wave profitability and probably be ok. But remember, your first super productive workers are not the ones who are are around 5 years later. Your first smart and capable customers are not your average customer 5 years down the line. If you are pursuing revenue growth at any cost, you could end up with a lot of revenue and no hope at being profitable. Spreadsheets and fancy decks can be made to convincingly present whatever story you want to tell, regardless of reality - look at Uber/Lyft. When you look at how the public markets are punishing this now, it seems obvious, but when you’re smaller and gunning for your next round, it’s probably the furthest from your mind.

jongjong 3y ago

I launched my new startup as a cryptocurrency which uses profits to buy-back (and burn) tokens. That way everyone in the community has an incentive to drive profitability as it directly determines the market price of tokens. If people don't like where things are going, they can just dump the token, nobody is locked in for any period of time, everyone can see how the tokens are allocated and all individual trades are public (though pseudo-anonymous) on our community DEX. I launched it last week and raised about $1000. One entire THOUSAND dollars! Anyway in spite of all the psyops and gov officials conspiring against this asset class, I find this model far superior than the contrived VC model which makes all participants feel like they're playing a very long game of musical chairs on a global scale... No thank you. Not that I could even get my foot in the door in the first place. That model is not just flawed, it's literally impossible. Unfortunately I can't promote it to US citizens due to regulatory environment so I can't discuss it here.

Woshiwuja 3y ago
i doubt discussing something is promoting it tbf

agnosticmantis 3y ago

How about when a competitor uses VC money to gain market share by “selling” dollars for 90 cents to customers? It’s hard to become profitable in such a market when the competitors are burning cash to gain market share. Isn’t that how Amazon, PayPal, Uber, etc. grew to their current scale and killed the competition?

Jagah 3y ago

[flagged]

benjaminwootton 3y ago

I agree with every word of the post, but it doesn’t consider the elephant in the room which is the VC incentive. Their business model rapid scale and increased ownership.

clocot 3y ago

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