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> Lessons Learned: Build a Very Fundable Startup > Every founder should learn from this disastrous scenario the importance of building a very healthy, fundable

> Lessons Learned: Build a Very Fundable Startup > Every founder should learn from this disastrous scenario the importance of building a very healthy, fundable startup. A healthy, vibrant startup draws more investors during fundraising. The competition gives founders the leverage to negotiate for more founder-friendly terms. Healthy startups get better valuations, better terms, and raise funds with much less effort. Hmm. The lesson I learn from that is to bootstrap/self-fund, rather than get investment in the first place.

aetherspawn 3y ago
Yeah I have a small business and I sway strongly towards being contempt with letting the business grow at its own rate. No, it won’t have a 1 bil payout, but you make your own rules and you’ll get a healthy cash out from the dividends after only 1 year or so. It also forces you to keep pivoting and finding a cash cow rather than assuming your initial plan was any good. We’re on like plan #10 now and in hindsight if we went with any of our original plans we’d still be burning money whereas current plan was profitable after just 1 month once we figured it out.
- wdh505 3y ago
  Contempt is not equal to content. I think autocorrect got you
- gnicholas 3y ago
  > No, it won’t have a 1 bil payout Does anything have a $1B payout for the founder? I guess there are a few companies that achieve this, but it takes only a modicum of humility to realize you're not likely to be one of the most successful founders this decade.
  - DaiPlusPlus 3y ago
    Even if anyone gets a cool $1b, the IRS is going to come for a good chunk of that...
    - choppaface 3y ago
      IRS takes less than 50%.
      - willcipriano 3y ago
        A lot of this confusion is people talking past eachother. For most people the level of governmental entity taxing them isn't the concern, its the amount of tax the government in general demands in particular contrasted with the level of service provided. Add up the IRS cut, state and local, gas tax, sales tax, fees to use services already paid for with taxes and are basically required for life in the US (road tolls, document fees, vehicle registration fees, public transit fares, etc), costs for compliance with laws like hiring someone to help you file taxes or taking a day off work to renew your driver's license, higher costs for goods and services due to monopolies granted by government (drug patents where the same drug costs a quarter of what it does in the US everywhere else the world, higher than otherwise internet fees paid to entities like Comcast who are granted monopolies, hospitals that are expensive due to monopolies granted by certificates of need, etc), inflation caused by money printing to pay for foreign wars without broad popular support, housing that is more expensive due to policies that benefit homeonwers at the expense of those without assets etc, etc. Its way more than half of your productivity that is taken, if you are productive and earn wages. Those earning capital gains are hit about half as hard, another happy little accident that benefits primarily the wealthy and powerful to add to my list above. Oh and the best part, after paying those taxes for decades once you get sick, all of the sudden, the government and the medical industrial complex doesn't have the money to help you. You get to live in a cardboard box under a overpass.
        pc86 3y ago
        You're making a comment about people "talking past each other" and yet you're talking about gas tax and sales tax in relation to business acquisitions and venture capital payouts.
    - gnicholas 3y ago
      Yep, although the qualified small business stock exemption comes in handy if/when that happens. You get to exempt a percentage of the gain of the sale of your stock, and if you roll over the gain into other QSBS (by investing in startups, for example), you can defer the non-exempted portion.
  - dr_dshiv 3y ago
    > modicum of humility = turnoff for investors. They only care for chances at homeruns — singles and doubles are not welcome. You’d better swing for the fences, because that’s the purpose of VC. (This is my understanding, not my endorsement. Please correct as needed)
    - coldtea 3y ago
      >= turnoff for investors Given the situation described in TFA, that's just as well.
    - hnbad 3y ago
      No, that seems about right. Traditionally investors prefer investing in a number of moonshots with the hopes that one of them succeeds to such an extreme that it pays for the losses on the rest. There are even some investors known to invest in direct competitors to hedge their bets. The question only seems to be whether this strategy still works in a higher interest rate environment. As I understand it this development mostly stems from it being more profitable to invest with a low ROI (or a low probability of a high ROI) than to keep the money in the bank.
    - highwaylights 3y ago
      That’s the model essentially. Makes a lot of sense too. Anyone can get S&P 500 returns with little to no risk. That’s not to say they won’t lose money but it’ll be market returns either way, will be very liquid, and readily transparent to the holder. Given the risk involved in early stage investment the maths just don’t make sense for an investor to shoot for anything short of the moon. tldr; Seed funding / early stage investing is closer to lottery tickets and Vegas than to your 401k.
      - godzillabrennus 3y ago
        There are motivations beyond return. Alignment of capital with values to support a team/product/service that you believe will help in a manner you care about.
        3y ago
  - coldtea 3y ago
    >Does anything have a $1B payout for the founder? Instagram perhaps? Also, an IPO?
  - zer00eyz 3y ago
    >> Does anything have a $1B payout for the founder? WhatsApp likely did. Minecraft as well.
- fakedang 3y ago
  > No, it won’t have a 1 bil payout, but you make your own rules and you’ll get a healthy cash out from the dividends after only 1 year or so. Actually, it just might. RightNow was a bootstrapped startup back in the dotcom heydays, which managed a 9 digit exit after selling to Oracle. Midjourney is a unicorn without a cent of VC funding. Zapier raised just $2m, and they only got into YC on their second try. The old maxim of "build something people want" is crap honestly - it's more appropriately worded as "build something people will pay for".
  - agentgumshoe 3y ago
    Which... Is the same maxim still
    - fakedang 3y ago
      Nope. A lot of people and businesses "want" something. But they're barely ready to pay a reasonable market rate it. Whether it be a $2 pm SaaS or a $100m blockbuster drug compound. They would still want it though, if they got the drug compound at a heavy discount, or the SaaS for free. And they'll keep telling you they want something that does exactly what those products do.
  - aetherspawn 3y ago
    There are two ways to do this. Build something that a lot of people will pay a small amount for, or in my experience the better self bootstrapping business is to build something that a few people will pay a LOT for (a super niche product).
- offices 3y ago
  >It also forces you to keep pivoting and finding a cash cow rather than assuming your initial plan was any good. Formative experience: working at a startup, coming upon a fundamental technical problem that will prevent delivery of any of our revenue generating projects & realising that anyone who has spent a meaningful amount of time working on the software would notice the same problem. Noticing nobody else has brought it up.
  - mooreds 3y ago
    Wow, quite a quandry. What did you do?
    - throwaway2203 3y ago
      Super curious as well
      - offices 3y ago
        It's not that exciting - I was already halfway out the door for unrelated reasons. It's a problem that almost any company in that space shares. It's made me put a strong premium on working for companies that sell a real product for real money, today.
  - grvdrm 3y ago
    I feel you. In a similar experience now. Valuation (I’m told) depends on ARR. Company not really set up to generate meaningful ARR from its core business. I keep hearing “it will get better” but as far as I see, the problem is squarely at the top and some specific deputies. So, why do I keep hearing that? It sounds like very poorly messaged religion some days.
- elif 3y ago
  Never say never. I worked for MailChimp who never touched investor money, never gave out any stock to any employees (not even key engineering staff), each founder retained 50%, and they turned down multiple $1b+ offers until finally accepting $12b from Intuit.
  - ta1243 3y ago
    That "plucky founder becoming billionaire" thing reminds me a little of Whatsapp, which sold for $19b (although I believe did have Venture Capital) https://www.flyertalk.com/forum/travel-technology/952359-thoughts-about-my-free-iphone-app-whatsapp.html https://www.flyertalk.com/forum/travel-technology/952359-tho... Especially this post from Jan Koum: i'll tell you all a funny story which has to do with flyertalk: i am actually flying to Barcelona for MWC right now using the M&M miles award ticket (i am posting this from LH455 flight)... i obviously got these tickets many months ago - i prefer to fly using miles when i can to save company money. as you know, award ticket inventory is limited and last minute changes are nearly impossible... and this is where it gets cute: we announced the deal with Facebook on wednesday after the market closed. during the process, we realized there was a chance we might not be able to get the deal wrapped up and signed on wednesday and it could delay. when the risk of the delay became real, i said: "if we don't get it done on wednesday, it probably wont get done. i have tickets on thursday to fly out to Barcelona which i bought with miles and they are not easily refundable or even possible to change. this has to be done by wednesday or else!!!" ...and so one of the biggest deals in tech history had to be scheduled around my M&M award ticket
    - ComputerGuru 3y ago
      Hilarious because they probably had much more than the cost of a first class business ticket in the not-even-under-lock-and-key petty cash drawer in the next room. But good for him!
  - santoshalper 3y ago
    It definitely happens, it will generally mature more slowly. Not that there is anything wrong with that. I find the pace of bootstrapped companies healthier and more sane.
- weinzierl 3y ago
  Be aware of the story of Dr. Janet an Dr. James Baker, the founders of Dragon Naturally Speaking, which has been discussed here several times. They seemingly did everything right and still go screwed in the end.
  - n2d4 3y ago
    What they did wrong was accepting an all-shares transaction in the acquiring company. Those come with risks, and sometimes the risk is that the company goes bankrupt a year later and you'll be left with nothing. My understanding is that they were badly advised by Goldman Sachs. Still, "doing the right thing" sometimes includes ignoring bad advice.
    - weinzierl 3y ago
      The way I see it is that they did not stand a chance and for me the moral of the story is that if you are not screwed by investors you can very well get screwed by someone else.
bionsystem 3y ago
It's still better to have 10% of a billion rather than 100% of a million. It's just that "valuation" is only one of the metrics that really matters, and selling your equity has to be done progressively and by reading the small prints in every file. It's sad that startup founders have become so good at raising money that they forget that a path to profitability + understanding the actual financials (beyond just valuation) matters.
- brycelarkin 3y ago
  I’d rather take 100% of a million than Fan Duels’ 0% of half a billion.
- RowanH 3y ago
  It's just what are the odds of 10% of a billion vs 100% of a million. Without any statistics at all to back this comment, I bet there are a magnitures more software companies out there that have made people 100% of a million, vs 10% of a billon. You're talking such a small pool (which might seem large in HN terms) when in reality there's an incredible number of small software companies globally. Of course not discouraging anyone from shooting for the moon.
  - swiftcoder 3y ago
    You can also earn 100% of a million in a few years by punching the clock in a 9-5 in the big tech side of the industry. Even at that level of expected returns, startups are extremely risky investments...
  - bluedino 3y ago
    > I bet there are a magnitures more software companies out there that have made people 100% of a million, vs 10% of a billon. After we signed with a vendor, the owner took us out on his boat one weekend. As we walked through the harbor he pointed out all the other boats owned by competitors and other companies in the same industry. "This is Supercom's boat, this boat is owned by the person that started Megacom, and that's Supercom's old boat and now it's owned by the Digicom guy..."
  - 3y ago
ENGNR 3y ago
So true. There’s only so many things you can master at once. Better to master making a product people will pay for, than playing the VC game for the first time when they’ve already mastered the rules
whiplash451 3y ago
That's not super useful advice for founders who (really) need some investment from the get go. The lesson would rather be: don't raise so much at the seed stage. Google got started with a $100K grant. FanDuel raised $400M in four years [1] And it looks like one of the the FanDuel founders did it again [2] This is reckless and should be a massive red flag for new joiners. [1] https://en.wikipedia.org/wiki/FanDuel https://en.wikipedia.org/wiki/FanDuel [2] https://futurescot.com/fanduel-co-founder-secures-largest-uk-seed-funding-round-for-startup-venture/ https://futurescot.com/fanduel-co-founder-secures-largest-uk...
- earnesti 3y ago
  The general lesson is: be smart. Also, taking funding with really bad terms might make sense sometimes. However quite rarely. The other viewpoint is, that typically at funded startups founders get some salary. You can view it also as an another job.
- LudwigNagasena 3y ago
  So they raised $416M and sold for $465M. That's 12% ROI. The investors could just buy normal stocks and get similar returns in a year. I don't think there is anything remarkable about this case. It's not like they got a $100K grant and received nothing from a $500M sale.
  - agentgumshoe 3y ago
    ROI depends on whether the company is profitable going forward too I'd imagine...
    - pc86 3y ago
      Why would that matter? The investors got their cash and walked.
  - blantonl 3y ago
    This was almost loss transaction. That 12% ROI easily got eaten up in fees.
gadders 3y ago
Also, avoid that VC/Shareholder and blacklist them.
- sokoloff 3y ago
  Why? If VCs invested $416M across 2009 (starting with the Series A) through 2017 and the company sold for $465M in mid-2018, how much value increase over the funding amounts did the company generate via its employees? The Series E itself was 2/3 of the total funding and was about 3 years before acquisition. If we assume all of the investments happened 3 years before (rather than ranging from 3 years to almost 11 years, that's a return of under 4% per year. Investors in Fan Duel would have been just about as well off to pay down their mortgage at nearly historic low mortgage rates rather than invest in risky startups. If I invest $400M in your company and you sell it for $400M, I think we can all agree that you should get your paycheck for the time you worked at the company, but you didn't create any value from the company. That failure to create value on the part of FanDuel isn't anyone's "fault" per-se, but it's also not something that means that an equity payday has been earned by anyone.
  - longcrab 3y ago
    As far as I remember, there was debate around that valuation. "Early investors filed suit in New York against FanDuel's board for breach of fiduciary duty in allegedly undervaluing FanDuel to enrich themselves." ( FanDuel Wikipedia ) There was some unusual relationships in the deal, and the valuation of the company post-purchase was dramatically larger. Not sure if suit is public, but article: "The new lawsuit claims that the board – which allegedly included only one independent director and six directors tied to KKR and Shamrock – priced the value of FanDuel’s stake in the merged company at about $559 million. That number, the suit alleges, was no coincidence. Under FanDuel’s operative bylaws, preferred shareholders were due to receive all of the first $559 million from any merger."[1] [1] https://www.reuters.com/article/us-otc-fanduel/fanduel-founders-spin-juicy-tale-in-suit-against-kkr-shamrock-the-funds-have-a-different-story-idUSKCN20K38Z https://www.reuters.com/article/us-otc-fanduel/fanduel-found... ( "juicy tale?" )
    - 3y ago
coldtea 3y ago
Dunno, the lesson I've learned is "have your lawyers look at it, and don't fucking give the VCs full priority" would also have worked.
mattmaroon 3y ago
That’s like reading an article about domestic abuse, and deciding that one should just never be in a relationship because that could happen.
codegeek 3y ago
The summary is "When the FanDuel founders raised funds, two key investors received a liquidation preference that entitled them to the first $559M in an acquisition. Founders and employees would be paid only if the acquisition exceeded $559M. Because the Paddy Power Betfair was for just $465M, the founders received nothing" Also they raised over 400M in funding. If you exit with 465M with 400 million raised in funding AND liquidation preference entitles investors to first $559M in an aquisition, of course you are going to get nothing. The question is why they raised 400M in funding and could only exit for 465M. This tells me it was a failed business.
- pc86 3y ago
  Honestly $400M in funding with only a preference of $559M seems pretty reasonable as far as the VC world goes. That's a 39% return, which yeah is a lot, but we're also talking about half a billion dollars and when your entire business model is built on looking for 10X or 100X returns, a .39X guarantee isn't out of this world crazy. Especially when the actual exit was about half that return.
  - thelastparadise 3y ago
    Yeah basically the investors let them larp as businessmen and they churned the investment capital and produced a bunch of hot air and imposed opportunity cost on the investors. The bottom line is these guys were not profitable. But the investors got very lucky to not see -100% return.
  - vidarh 3y ago
    The last round was also 3 years prior, so the amortised yearly return was definitely not something their investors had any reason to cheer about. From their point of view this was a failed opportunity. People forget that VC funds also aren't great business for the partners without carry (you get a management fee that keeps the light on, but you make your profit largely from a proportion of returns of the fund above some threshold; on top of that, in many funds you're required to lock up a significant chunk of your own cash as well, so poor returns both means you earn less and means your own investments return less), and a return like that likely would have had a seriously negative impact on their carry.

aetherspawn 3y ago

Yeah I have a small business and I sway strongly towards being contempt with letting the business grow at its own rate. No, it won’t have a 1 bil payout, but you make your own rules and you’ll get a healthy cash out from the dividends after only 1 year or so. It also forces you to keep pivoting and finding a cash cow rather than assuming your initial plan was any good. We’re on like plan #10 now and in hindsight if we went with any of our original plans we’d still be burning money whereas current plan was profitable after just 1 month once we figured it out.

wdh505 3y ago
Contempt is not equal to content. I think autocorrect got you
gnicholas 3y ago
> No, it won’t have a 1 bil payout Does anything have a $1B payout for the founder? I guess there are a few companies that achieve this, but it takes only a modicum of humility to realize you're not likely to be one of the most successful founders this decade.
- DaiPlusPlus 3y ago
  Even if anyone gets a cool $1b, the IRS is going to come for a good chunk of that...
  - choppaface 3y ago
    IRS takes less than 50%.
    - willcipriano 3y ago
      A lot of this confusion is people talking past eachother. For most people the level of governmental entity taxing them isn't the concern, its the amount of tax the government in general demands in particular contrasted with the level of service provided. Add up the IRS cut, state and local, gas tax, sales tax, fees to use services already paid for with taxes and are basically required for life in the US (road tolls, document fees, vehicle registration fees, public transit fares, etc), costs for compliance with laws like hiring someone to help you file taxes or taking a day off work to renew your driver's license, higher costs for goods and services due to monopolies granted by government (drug patents where the same drug costs a quarter of what it does in the US everywhere else the world, higher than otherwise internet fees paid to entities like Comcast who are granted monopolies, hospitals that are expensive due to monopolies granted by certificates of need, etc), inflation caused by money printing to pay for foreign wars without broad popular support, housing that is more expensive due to policies that benefit homeonwers at the expense of those without assets etc, etc. Its way more than half of your productivity that is taken, if you are productive and earn wages. Those earning capital gains are hit about half as hard, another happy little accident that benefits primarily the wealthy and powerful to add to my list above. Oh and the best part, after paying those taxes for decades once you get sick, all of the sudden, the government and the medical industrial complex doesn't have the money to help you. You get to live in a cardboard box under a overpass.
      - pc86 3y ago
        You're making a comment about people "talking past each other" and yet you're talking about gas tax and sales tax in relation to business acquisitions and venture capital payouts.
  - gnicholas 3y ago
    Yep, although the qualified small business stock exemption comes in handy if/when that happens. You get to exempt a percentage of the gain of the sale of your stock, and if you roll over the gain into other QSBS (by investing in startups, for example), you can defer the non-exempted portion.
- dr_dshiv 3y ago
  > modicum of humility = turnoff for investors. They only care for chances at homeruns — singles and doubles are not welcome. You’d better swing for the fences, because that’s the purpose of VC. (This is my understanding, not my endorsement. Please correct as needed)
  - coldtea 3y ago
    >= turnoff for investors Given the situation described in TFA, that's just as well.
  - hnbad 3y ago
    No, that seems about right. Traditionally investors prefer investing in a number of moonshots with the hopes that one of them succeeds to such an extreme that it pays for the losses on the rest. There are even some investors known to invest in direct competitors to hedge their bets. The question only seems to be whether this strategy still works in a higher interest rate environment. As I understand it this development mostly stems from it being more profitable to invest with a low ROI (or a low probability of a high ROI) than to keep the money in the bank.
  - highwaylights 3y ago
    That’s the model essentially. Makes a lot of sense too. Anyone can get S&P 500 returns with little to no risk. That’s not to say they won’t lose money but it’ll be market returns either way, will be very liquid, and readily transparent to the holder. Given the risk involved in early stage investment the maths just don’t make sense for an investor to shoot for anything short of the moon. tldr; Seed funding / early stage investing is closer to lottery tickets and Vegas than to your 401k.
    - godzillabrennus 3y ago
      There are motivations beyond return. Alignment of capital with values to support a team/product/service that you believe will help in a manner you care about.
      - 3y ago
- coldtea 3y ago
  >Does anything have a $1B payout for the founder? Instagram perhaps? Also, an IPO?
- zer00eyz 3y ago
  >> Does anything have a $1B payout for the founder? WhatsApp likely did. Minecraft as well.
fakedang 3y ago
> No, it won’t have a 1 bil payout, but you make your own rules and you’ll get a healthy cash out from the dividends after only 1 year or so. Actually, it just might. RightNow was a bootstrapped startup back in the dotcom heydays, which managed a 9 digit exit after selling to Oracle. Midjourney is a unicorn without a cent of VC funding. Zapier raised just $2m, and they only got into YC on their second try. The old maxim of "build something people want" is crap honestly - it's more appropriately worded as "build something people will pay for".
- agentgumshoe 3y ago
  Which... Is the same maxim still
  - fakedang 3y ago
    Nope. A lot of people and businesses "want" something. But they're barely ready to pay a reasonable market rate it. Whether it be a $2 pm SaaS or a $100m blockbuster drug compound. They would still want it though, if they got the drug compound at a heavy discount, or the SaaS for free. And they'll keep telling you they want something that does exactly what those products do.
- aetherspawn 3y ago
  There are two ways to do this. Build something that a lot of people will pay a small amount for, or in my experience the better self bootstrapping business is to build something that a few people will pay a LOT for (a super niche product).
offices 3y ago
>It also forces you to keep pivoting and finding a cash cow rather than assuming your initial plan was any good. Formative experience: working at a startup, coming upon a fundamental technical problem that will prevent delivery of any of our revenue generating projects & realising that anyone who has spent a meaningful amount of time working on the software would notice the same problem. Noticing nobody else has brought it up.
- mooreds 3y ago
  Wow, quite a quandry. What did you do?
  - throwaway2203 3y ago
    Super curious as well
    - offices 3y ago
      It's not that exciting - I was already halfway out the door for unrelated reasons. It's a problem that almost any company in that space shares. It's made me put a strong premium on working for companies that sell a real product for real money, today.
- grvdrm 3y ago
  I feel you. In a similar experience now. Valuation (I’m told) depends on ARR. Company not really set up to generate meaningful ARR from its core business. I keep hearing “it will get better” but as far as I see, the problem is squarely at the top and some specific deputies. So, why do I keep hearing that? It sounds like very poorly messaged religion some days.
elif 3y ago
Never say never. I worked for MailChimp who never touched investor money, never gave out any stock to any employees (not even key engineering staff), each founder retained 50%, and they turned down multiple $1b+ offers until finally accepting $12b from Intuit.
- ta1243 3y ago
  That "plucky founder becoming billionaire" thing reminds me a little of Whatsapp, which sold for $19b (although I believe did have Venture Capital) https://www.flyertalk.com/forum/travel-technology/952359-thoughts-about-my-free-iphone-app-whatsapp.html https://www.flyertalk.com/forum/travel-technology/952359-tho... Especially this post from Jan Koum: i'll tell you all a funny story which has to do with flyertalk: i am actually flying to Barcelona for MWC right now using the M&M miles award ticket (i am posting this from LH455 flight)... i obviously got these tickets many months ago - i prefer to fly using miles when i can to save company money. as you know, award ticket inventory is limited and last minute changes are nearly impossible... and this is where it gets cute: we announced the deal with Facebook on wednesday after the market closed. during the process, we realized there was a chance we might not be able to get the deal wrapped up and signed on wednesday and it could delay. when the risk of the delay became real, i said: "if we don't get it done on wednesday, it probably wont get done. i have tickets on thursday to fly out to Barcelona which i bought with miles and they are not easily refundable or even possible to change. this has to be done by wednesday or else!!!" ...and so one of the biggest deals in tech history had to be scheduled around my M&M award ticket
  - ComputerGuru 3y ago
    Hilarious because they probably had much more than the cost of a first class business ticket in the not-even-under-lock-and-key petty cash drawer in the next room. But good for him!
- santoshalper 3y ago
  It definitely happens, it will generally mature more slowly. Not that there is anything wrong with that. I find the pace of bootstrapped companies healthier and more sane.
weinzierl 3y ago
Be aware of the story of Dr. Janet an Dr. James Baker, the founders of Dragon Naturally Speaking, which has been discussed here several times. They seemingly did everything right and still go screwed in the end.
- n2d4 3y ago
  What they did wrong was accepting an all-shares transaction in the acquiring company. Those come with risks, and sometimes the risk is that the company goes bankrupt a year later and you'll be left with nothing. My understanding is that they were badly advised by Goldman Sachs. Still, "doing the right thing" sometimes includes ignoring bad advice.
  - weinzierl 3y ago
    The way I see it is that they did not stand a chance and for me the moral of the story is that if you are not screwed by investors you can very well get screwed by someone else.

bionsystem 3y ago

It's still better to have 10% of a billion rather than 100% of a million. It's just that "valuation" is only one of the metrics that really matters, and selling your equity has to be done progressively and by reading the small prints in every file. It's sad that startup founders have become so good at raising money that they forget that a path to profitability + understanding the actual financials (beyond just valuation) matters.

brycelarkin 3y ago
I’d rather take 100% of a million than Fan Duels’ 0% of half a billion.
RowanH 3y ago
It's just what are the odds of 10% of a billion vs 100% of a million. Without any statistics at all to back this comment, I bet there are a magnitures more software companies out there that have made people 100% of a million, vs 10% of a billon. You're talking such a small pool (which might seem large in HN terms) when in reality there's an incredible number of small software companies globally. Of course not discouraging anyone from shooting for the moon.
- swiftcoder 3y ago
  You can also earn 100% of a million in a few years by punching the clock in a 9-5 in the big tech side of the industry. Even at that level of expected returns, startups are extremely risky investments...
- bluedino 3y ago
  > I bet there are a magnitures more software companies out there that have made people 100% of a million, vs 10% of a billon. After we signed with a vendor, the owner took us out on his boat one weekend. As we walked through the harbor he pointed out all the other boats owned by competitors and other companies in the same industry. "This is Supercom's boat, this boat is owned by the person that started Megacom, and that's Supercom's old boat and now it's owned by the Digicom guy..."
- 3y ago

ENGNR 3y ago

So true. There’s only so many things you can master at once. Better to master making a product people will pay for, than playing the VC game for the first time when they’ve already mastered the rules

whiplash451 3y ago

That's not super useful advice for founders who (really) need some investment from the get go. The lesson would rather be: don't raise so much at the seed stage. Google got started with a $100K grant. FanDuel raised $400M in four years [1] And it looks like one of the the FanDuel founders did it again [2] This is reckless and should be a massive red flag for new joiners. [1] https://en.wikipedia.org/wiki/FanDuel https://en.wikipedia.org/wiki/FanDuel [2] https://futurescot.com/fanduel-co-founder-secures-largest-uk-seed-funding-round-for-startup-venture/ https://futurescot.com/fanduel-co-founder-secures-largest-uk...

earnesti 3y ago
The general lesson is: be smart. Also, taking funding with really bad terms might make sense sometimes. However quite rarely. The other viewpoint is, that typically at funded startups founders get some salary. You can view it also as an another job.
LudwigNagasena 3y ago
So they raised $416M and sold for $465M. That's 12% ROI. The investors could just buy normal stocks and get similar returns in a year. I don't think there is anything remarkable about this case. It's not like they got a $100K grant and received nothing from a $500M sale.
- agentgumshoe 3y ago
  ROI depends on whether the company is profitable going forward too I'd imagine...
  - pc86 3y ago
    Why would that matter? The investors got their cash and walked.
- blantonl 3y ago
  This was almost loss transaction. That 12% ROI easily got eaten up in fees.

gadders 3y ago

Also, avoid that VC/Shareholder and blacklist them.

sokoloff 3y ago
Why? If VCs invested $416M across 2009 (starting with the Series A) through 2017 and the company sold for $465M in mid-2018, how much value increase over the funding amounts did the company generate via its employees? The Series E itself was 2/3 of the total funding and was about 3 years before acquisition. If we assume all of the investments happened 3 years before (rather than ranging from 3 years to almost 11 years, that's a return of under 4% per year. Investors in Fan Duel would have been just about as well off to pay down their mortgage at nearly historic low mortgage rates rather than invest in risky startups. If I invest $400M in your company and you sell it for $400M, I think we can all agree that you should get your paycheck for the time you worked at the company, but you didn't create any value from the company. That failure to create value on the part of FanDuel isn't anyone's "fault" per-se, but it's also not something that means that an equity payday has been earned by anyone.
- longcrab 3y ago
  As far as I remember, there was debate around that valuation. "Early investors filed suit in New York against FanDuel's board for breach of fiduciary duty in allegedly undervaluing FanDuel to enrich themselves." ( FanDuel Wikipedia ) There was some unusual relationships in the deal, and the valuation of the company post-purchase was dramatically larger. Not sure if suit is public, but article: "The new lawsuit claims that the board – which allegedly included only one independent director and six directors tied to KKR and Shamrock – priced the value of FanDuel’s stake in the merged company at about $559 million. That number, the suit alleges, was no coincidence. Under FanDuel’s operative bylaws, preferred shareholders were due to receive all of the first $559 million from any merger."[1] [1] https://www.reuters.com/article/us-otc-fanduel/fanduel-founders-spin-juicy-tale-in-suit-against-kkr-shamrock-the-funds-have-a-different-story-idUSKCN20K38Z https://www.reuters.com/article/us-otc-fanduel/fanduel-found... ( "juicy tale?" )
  - 3y ago

coldtea 3y ago

Dunno, the lesson I've learned is "have your lawyers look at it, and don't fucking give the VCs full priority" would also have worked.

mattmaroon 3y ago

That’s like reading an article about domestic abuse, and deciding that one should just never be in a relationship because that could happen.

codegeek 3y ago

The summary is "When the FanDuel founders raised funds, two key investors received a liquidation preference that entitled them to the first $559M in an acquisition. Founders and employees would be paid only if the acquisition exceeded $559M. Because the Paddy Power Betfair was for just $465M, the founders received nothing" Also they raised over 400M in funding. If you exit with 465M with 400 million raised in funding AND liquidation preference entitles investors to first $559M in an aquisition, of course you are going to get nothing. The question is why they raised 400M in funding and could only exit for 465M. This tells me it was a failed business.

pc86 3y ago
Honestly $400M in funding with only a preference of $559M seems pretty reasonable as far as the VC world goes. That's a 39% return, which yeah is a lot, but we're also talking about half a billion dollars and when your entire business model is built on looking for 10X or 100X returns, a .39X guarantee isn't out of this world crazy. Especially when the actual exit was about half that return.
- thelastparadise 3y ago
  Yeah basically the investors let them larp as businessmen and they churned the investment capital and produced a bunch of hot air and imposed opportunity cost on the investors. The bottom line is these guys were not profitable. But the investors got very lucky to not see -100% return.
- vidarh 3y ago
  The last round was also 3 years prior, so the amortised yearly return was definitely not something their investors had any reason to cheer about. From their point of view this was a failed opportunity. People forget that VC funds also aren't great business for the partners without carry (you get a management fee that keeps the light on, but you make your profit largely from a proportion of returns of the fund above some threshold; on top of that, in many funds you're required to lock up a significant chunk of your own cash as well, so poor returns both means you earn less and means your own investments return less), and a return like that likely would have had a seriously negative impact on their carry.