5 ms·

if you have a product thats selling so well, is growing organically, and is already build...why would you ever consider outside funding?

pwelch 14y ago
Could not have said it better myself. It kind of makes me like a product more.
deleted 14y ago
[deleted]
petenixey 14y ago
We seldom acknowledge it but I think the truth of the matter is that a lot of people become entrepreneurs because they want the recognition, the fame and the status. As silly as it is, taking VC money gives you that in a way that is much harder to achieve with actual tangible success. You might be killing it with your product but carefully explaining your company metrics to someone over dinner is seldom more impactful than saying you took $10M from Andreeson-Horrowitz. This is not entirely unreasonable as most people realise they are unable to judge the success or otherwise of early stage companies (even VCs struggle). Telling someone you were invested in by a great VC tells them that someone who knows their stuff things you're great. It's a marquee endorsement. If you'd asked me whether I wanted the status I'd have always said yes. At the same time though I never acknowledged it in my life-calculations. I always wondered why I gambled on a big outcome when I knew a smaller outcome would (financially speaking) make me very, very happy. I doubt there are many people who can point to the happiness bump from the second $30M. Acknowledging that recognition was one of my goals made it all of a sudden easier to rationalise decisions that, while optimal for my investors were actually totally sub-optimal for my personal financial utility. One of those decisions may well be having investors in the first place.
- yesimahuman 14y ago
  This is a really interesting point. To give an example, one of my friends in that scene thinks that 37signals is probably "not doing that well." I can only guess this is because they aren't raising tons of VC and having their name plastered all over TC.
  - jcampbell1 14y ago
    Your friend is simply wrong. I think buying a house in italy and commissioning a custom super car is evidence that he doesn't know what he is talking about. http://www.autoblog.com/2010/09/07/pagani-zonda-hh-commissioner-revealed-as-30-year-old-chicago-sof/ http://www.autoblog.com/2010/09/07/pagani-zonda-hh-commissio...
    - jsprinkles 14y ago
      That means DHH is doing well, and has little to do with 37signals.
      - miles 14y ago
        Sorry to post this here, but jsprinkles' profile is empty. @jsprinkles: do you have a blog or website? Really enjoyed your xip.io comments (http://news.ycombinator.com/item?id=4082017 http://news.ycombinator.com/item?id=4082017) and would like to keep up with your adventures. On a related note, it would be nice if HN had RSS feeds for specific user submissions and comments.
        jsprinkles 14y ago
        I prefer to stay semi-anonymous, but a few people know who I am (it wouldn't be rocket science to deduce). When I posted under my real name folks I did not know would come up to me at conferences and argue with me about things I had said on Hacker News. People tend to get offended by my remarks because I disagree with a lot of this culture, so it's also easier to just keep that separate from my career. Thank you for the kind words.
- sayemm 14y ago
  Fund-raising is only a means to an end. And sometimes it's an excellent way to scale a business after the business has been figured out. But taking VC money just because it makes you feel cool and high-status is a terrible risk-reward decision. You're trading the next 4+ years of your life and a huge chunk of your company's value for bullshit short-term prestige. I think entrepreneurs should always maintain a tunnel-visioned focus on hard results and performance, if you absolutely kill it and dominate your market, everything else will follow. Fame, recognition, and status are for tech scenesters and bloggers - not startup founders. Startups are the ultimate test of your inner scorecard - http://therealfoxyroxy.wordpress.com/2009/07/11/an-inner-scorecard/ http://therealfoxyroxy.wordpress.com/2009/07/11/an-inner-sco...
- mattgreenrocks 14y ago
  Just wanted to say thanks for commenting. I realized I probably wouldn't be happy accepting a large buyout if I were to strike it rich. The journey really is the reward.
brlewis 14y ago
If there's a big player that might jump into your space with a bigger marketing budget, and you know how to use money to accelerate your growth before that happens, it makes sense to take money.
bri3d 14y ago
To some, I think it's like getting into an elite school - with similar effect. You're paying out quite a bit of your company, in most cases, and getting some capital in return. But what you're also buying into with your equity is a large network of alumni and connections. In addition, just like how some (silly, IMO) companies hire Ivy League grads because they've passed someone else's rigorous selection process, getting funded by an A-list VC proves to some that your company has chops. So for many founders, trading equity for VC investment is also a hedge for the future - a glowing resume item useful for driving business or acquisition at this or the next venture. Personally, I think the more early-stage-successful companies stand on their own merit rather than buying into the "old boy's" VC club, the better. I think more weight has been placed on VC selection than is reasonable of late, both in M+A and the tech media. The more successful companies buck this trend, the more likely non-VC companies are to get considered for acquisition down the road, and the more likely said companies are to be able to drum up press for an IPO, as well.
its_so_on 14y ago
because there are six hundred million people worldwide in your target audience, you have convinced 10,000 of them to pay you, and all told you need to spend $5 on a new customer, and make $10 from a customer in a year. What, do you expect to grow organically from 10k users one year to 40k, then 160k, then 640k, and so on, hoping the market stays EXACTLY THE SAME FOR THE NEXT 8 YEARS? (Oh and you can't spend anything on development because you're rolling all the gross profit into reaching new customers.) Or, you know, do you want to speed up the process and try to get as much of the six hundred million this year as you can, while the iron is hot - and stay ahead of your competition, who will be vc-backed?
- joshuahedlund 14y ago
  You may have a general point, but there's a couple orders of magnitude difference between 10,000 (your example) and 8 million (the company we're discussing).
  - its_so_on 14y ago
    Fair enough. Though I do think that 10k is less of a sure thing than 8 million customers. The latter proves the model a lot more efficiently, and probably gives enough data for a better overview of the market. In my example, you're actually asking the VC to speculate on what you say is the size of the market. Sure you can grow from 10k to 30k easily. The question is the size of the market you're trying to get them to invest into. Whereas, at 8 million, the question is, do you really have a model that you've proven? Or, have you been spending more on getting the customers than you can ever hope to get from them? (wihout mentioning any names!) If you're doing a good job being competitive and ensuring high customer satisfaction, it's hard to see how you can quickly grow organically from 8m to a size of market of 700m (say), if that is the size of your market, in just a couple of years. I mean, you have to be providing these customers something, and at a competitive rate. that has to cost you money. no business just explodes without any marketing or other costs to a size of 700m (say). This is where VC money comes in. in the concrete example of an 8million user organization, it would be impressive of them to get to 9m, 11m, 12.1m, 13.1m year-over-year all organically. It would be impressive of them to, profitably, get to 20m from 8m in 10 years, all organically. If, however, the size of the market is more like 200m, this is a good place for VC money instead of that 10-year plan!! Especially if competition might end up better-funded. (also see my cousin comment here - http://news.ycombinator.com/item?id=4085660 http://news.ycombinator.com/item?id=4085660)
clarky07 14y ago
Generally I wouldn't want to, but one possible reason is to take some money off the table. Just sell part (non-controlling) of your stake to have FU money personally. You don't want to sell the company, but you might want the life-changing amount of money that says you don't ever have to work again. That can be done by selling part of the company to another investor.
- pcopley 14y ago
  Can someone with VC experience (on either side of the table) explain what part of an investment goes into the founder's pocket? Does it change with each deal or is there a standard percentage? Obviously a $10MM investment does not equate to a $10MM deposit in the founder's personal bank account, but at what point is the founder no longer expected to live on Ramen?
  - clarky07 14y ago
    I don't have first hand experience, but from what I've read I think it changes with each deal. For example, Rovio just did a deal where they took almost all of the cash out. They are very profitable so they don't need the money, but they wanted to cash out some. I think most deals are the opposite of this, with not very much being taken out.
- muellerwolfram 14y ago
  But is selling a part of your company really the only way to get some FU money, if the company is doing really good and is highly profitable? can't they payout the profits as some sort of dividends. (Not claiming that this particular company has a lot of profits, the question is more meant to be general. lets take rovio as an example maybe)
  - clarky07 14y ago
    Of course. But profits from say a year or two aren't going to be nearly as high as selling off 25% of the company for example. To take this way past reasonable, consider Instagram. If they could convince someone to give them 250 Million for 25% of their company instead of selling the entire company, that would be huge FU money and they could keep running their company, while evening maintaining a majority stake. I could see that as a very tempting option. Also, it allows the founders to diversify a bit. Consider that these people are multi-millionaires on paper, you wouldn't generally recommend they put all of their money into one investment, even if it is their own company.

pwelch 14y ago

Could not have said it better myself. It kind of makes me like a product more.

deleted 14y ago

[deleted]

petenixey 14y ago

We seldom acknowledge it but I think the truth of the matter is that a lot of people become entrepreneurs because they want the recognition, the fame and the status. As silly as it is, taking VC money gives you that in a way that is much harder to achieve with actual tangible success. You might be killing it with your product but carefully explaining your company metrics to someone over dinner is seldom more impactful than saying you took $10M from Andreeson-Horrowitz. This is not entirely unreasonable as most people realise they are unable to judge the success or otherwise of early stage companies (even VCs struggle). Telling someone you were invested in by a great VC tells them that someone who knows their stuff things you're great. It's a marquee endorsement. If you'd asked me whether I wanted the status I'd have always said yes. At the same time though I never acknowledged it in my life-calculations. I always wondered why I gambled on a big outcome when I knew a smaller outcome would (financially speaking) make me very, very happy. I doubt there are many people who can point to the happiness bump from the second $30M. Acknowledging that recognition was one of my goals made it all of a sudden easier to rationalise decisions that, while optimal for my investors were actually totally sub-optimal for my personal financial utility. One of those decisions may well be having investors in the first place.

yesimahuman 14y ago
This is a really interesting point. To give an example, one of my friends in that scene thinks that 37signals is probably "not doing that well." I can only guess this is because they aren't raising tons of VC and having their name plastered all over TC.
- jcampbell1 14y ago
  Your friend is simply wrong. I think buying a house in italy and commissioning a custom super car is evidence that he doesn't know what he is talking about. http://www.autoblog.com/2010/09/07/pagani-zonda-hh-commissioner-revealed-as-30-year-old-chicago-sof/ http://www.autoblog.com/2010/09/07/pagani-zonda-hh-commissio...
  - jsprinkles 14y ago
    That means DHH is doing well, and has little to do with 37signals.
    - miles 14y ago
      Sorry to post this here, but jsprinkles' profile is empty. @jsprinkles: do you have a blog or website? Really enjoyed your xip.io comments (http://news.ycombinator.com/item?id=4082017 http://news.ycombinator.com/item?id=4082017) and would like to keep up with your adventures. On a related note, it would be nice if HN had RSS feeds for specific user submissions and comments.
      - jsprinkles 14y ago
        I prefer to stay semi-anonymous, but a few people know who I am (it wouldn't be rocket science to deduce). When I posted under my real name folks I did not know would come up to me at conferences and argue with me about things I had said on Hacker News. People tend to get offended by my remarks because I disagree with a lot of this culture, so it's also easier to just keep that separate from my career. Thank you for the kind words.
sayemm 14y ago
Fund-raising is only a means to an end. And sometimes it's an excellent way to scale a business after the business has been figured out. But taking VC money just because it makes you feel cool and high-status is a terrible risk-reward decision. You're trading the next 4+ years of your life and a huge chunk of your company's value for bullshit short-term prestige. I think entrepreneurs should always maintain a tunnel-visioned focus on hard results and performance, if you absolutely kill it and dominate your market, everything else will follow. Fame, recognition, and status are for tech scenesters and bloggers - not startup founders. Startups are the ultimate test of your inner scorecard - http://therealfoxyroxy.wordpress.com/2009/07/11/an-inner-scorecard/ http://therealfoxyroxy.wordpress.com/2009/07/11/an-inner-sco...
mattgreenrocks 14y ago
Just wanted to say thanks for commenting. I realized I probably wouldn't be happy accepting a large buyout if I were to strike it rich. The journey really is the reward.

brlewis 14y ago

If there's a big player that might jump into your space with a bigger marketing budget, and you know how to use money to accelerate your growth before that happens, it makes sense to take money.

bri3d 14y ago

To some, I think it's like getting into an elite school - with similar effect. You're paying out quite a bit of your company, in most cases, and getting some capital in return. But what you're also buying into with your equity is a large network of alumni and connections. In addition, just like how some (silly, IMO) companies hire Ivy League grads because they've passed someone else's rigorous selection process, getting funded by an A-list VC proves to some that your company has chops. So for many founders, trading equity for VC investment is also a hedge for the future - a glowing resume item useful for driving business or acquisition at this or the next venture. Personally, I think the more early-stage-successful companies stand on their own merit rather than buying into the "old boy's" VC club, the better. I think more weight has been placed on VC selection than is reasonable of late, both in M+A and the tech media. The more successful companies buck this trend, the more likely non-VC companies are to get considered for acquisition down the road, and the more likely said companies are to be able to drum up press for an IPO, as well.

its_so_on 14y ago

because there are six hundred million people worldwide in your target audience, you have convinced 10,000 of them to pay you, and all told you need to spend $5 on a new customer, and make $10 from a customer in a year. What, do you expect to grow organically from 10k users one year to 40k, then 160k, then 640k, and so on, hoping the market stays EXACTLY THE SAME FOR THE NEXT 8 YEARS? (Oh and you can't spend anything on development because you're rolling all the gross profit into reaching new customers.) Or, you know, do you want to speed up the process and try to get as much of the six hundred million this year as you can, while the iron is hot - and stay ahead of your competition, who will be vc-backed?

joshuahedlund 14y ago
You may have a general point, but there's a couple orders of magnitude difference between 10,000 (your example) and 8 million (the company we're discussing).
- its_so_on 14y ago
  Fair enough. Though I do think that 10k is less of a sure thing than 8 million customers. The latter proves the model a lot more efficiently, and probably gives enough data for a better overview of the market. In my example, you're actually asking the VC to speculate on what you say is the size of the market. Sure you can grow from 10k to 30k easily. The question is the size of the market you're trying to get them to invest into. Whereas, at 8 million, the question is, do you really have a model that you've proven? Or, have you been spending more on getting the customers than you can ever hope to get from them? (wihout mentioning any names!) If you're doing a good job being competitive and ensuring high customer satisfaction, it's hard to see how you can quickly grow organically from 8m to a size of market of 700m (say), if that is the size of your market, in just a couple of years. I mean, you have to be providing these customers something, and at a competitive rate. that has to cost you money. no business just explodes without any marketing or other costs to a size of 700m (say). This is where VC money comes in. in the concrete example of an 8million user organization, it would be impressive of them to get to 9m, 11m, 12.1m, 13.1m year-over-year all organically. It would be impressive of them to, profitably, get to 20m from 8m in 10 years, all organically. If, however, the size of the market is more like 200m, this is a good place for VC money instead of that 10-year plan!! Especially if competition might end up better-funded. (also see my cousin comment here - http://news.ycombinator.com/item?id=4085660 http://news.ycombinator.com/item?id=4085660)

clarky07 14y ago

Generally I wouldn't want to, but one possible reason is to take some money off the table. Just sell part (non-controlling) of your stake to have FU money personally. You don't want to sell the company, but you might want the life-changing amount of money that says you don't ever have to work again. That can be done by selling part of the company to another investor.

pcopley 14y ago
Can someone with VC experience (on either side of the table) explain what part of an investment goes into the founder's pocket? Does it change with each deal or is there a standard percentage? Obviously a $10MM investment does not equate to a $10MM deposit in the founder's personal bank account, but at what point is the founder no longer expected to live on Ramen?
- clarky07 14y ago
  I don't have first hand experience, but from what I've read I think it changes with each deal. For example, Rovio just did a deal where they took almost all of the cash out. They are very profitable so they don't need the money, but they wanted to cash out some. I think most deals are the opposite of this, with not very much being taken out.
muellerwolfram 14y ago
But is selling a part of your company really the only way to get some FU money, if the company is doing really good and is highly profitable? can't they payout the profits as some sort of dividends. (Not claiming that this particular company has a lot of profits, the question is more meant to be general. lets take rovio as an example maybe)
- clarky07 14y ago
  Of course. But profits from say a year or two aren't going to be nearly as high as selling off 25% of the company for example. To take this way past reasonable, consider Instagram. If they could convince someone to give them 250 Million for 25% of their company instead of selling the entire company, that would be huge FU money and they could keep running their company, while evening maintaining a majority stake. I could see that as a very tempting option. Also, it allows the founders to diversify a bit. Consider that these people are multi-millionaires on paper, you wouldn't generally recommend they put all of their money into one investment, even if it is their own company.