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One of my favorite pg essays of all time. Loved this: "Almost every company needs some amount of funding to get started. But startups often raise money even wh

One of my favorite pg essays of all time. Loved this: "Almost every company needs some amount of funding to get started. But startups often raise money even when they are or could be profitable. It might seem foolish to sell stock in a profitable company for less than you think it will later be worth, but it's no more foolish than buying insurance. Fundamentally that's how the most successful startups view fundraising. They could grow the company on its own revenues, but the extra money and help supplied by VCs will let them grow even faster." Took me awhile to realize this as a founder. Profitability is a great goal (and makes the business very "real" by cutting away vanity metrics), but self-funding growth from profitability pretty much guarantees you are locked into a relatively slow growth rate. pg's simple charts show why being locked into a lower growth rate could mean being blown away by your competitors.

FredBrach 14y ago
One of my favorite pg essays of all time. Same here. I figured out that one can turn into an optimization problem her user satisfaction and that it was key to get a successful product and then key for the company, but it's even funnier: can be turned into an optimization problem the whole process of founding a company. Definitely awesome.
bavidar 14y ago
This is a tough sell to young entrepreneurs. Its hard for them to understand that buy giving away some portion now will make their equity more valuable when they are able to scale to mass market.
- zachalexander 14y ago
  It is, but I am being sold. Until this past week or so I've been highly skeptical of VC funding and much more inclined towards bootstrapping. I love that DHH video someone else posted in this thread. I think it's silly to focus on users and vanity metrics if you don't have a clear business model (even if it's not implemented immediately). But this essay makes an amazing case for why outside funding is helpful, even crucial. And it's encouraging that he's emphasizing revenues, not just users. I'm also encouraged because I was at the YC event at MIT this Wednesday, and didn't hear anything (even when I asked directly) about investor drama.
  - seiji 14y ago
    Drama is for the internet. Real life is for getting shit done.
erichocean 14y ago
self-funding growth from profitability pretty much guarantees you are locked into a relatively slow growth rate That's an unwarranted assumption. Part of designing a startup business model is organizing growth so that you are unconstrained, so that more input produces greater output, earlier -- whether it's capital, users, employees, or support. All it takes is for one component of your business to not scale and you won't hit your growth numbers despite the brilliance of every other part. Capital is just one of the areas you have to look at. Amazon is a decent example. Bezos chose books because it was (a) accessible (catalogs existed), and (b) he got 6 months to pay back booksellers, which meant he could afford to grow the more he sold, by using the money owed to the booksellers as float. Startups would do well to evaluate all possible constraints on growth, capital and otherwise. Many times small tweaks to how you sell your product (or what product you sell) can produce large variations in the amount and timing of capital needed. Here's an example: do you have customers pay for the first 30 days up front, with an option to cancel within that time? Or do you charge your customers after the first 30 days are up? Now, you'd think the latter would always be better for "growth", because it involves a weaker commitment -- no money changes hands early. But it also has a huge capital cost differential, if the service costs a substantial amount of money to deliver. In order to grow the latter model, you'll have to obtain more and more capital over time as you grow. But if you do the former, you can "fund" your company's growth off of its earlier growth. Although this might impact growth negatively, by turning away customers that "won't pay" for the first 30 days up front, but who would have become customers the other way. So which is better? It really depends. If your growth rate is already 7% with the pay-up-front model, that's better IMO than getting, say, an 8% growth rate with the pay-after model. The latter will require raising increasingly greater amounts of capital, despite the fact that it's growing "faster" initially, ultimately hurting your growth or wiping out your equity, or both. Both approaches will still have their "S" curves end up at the same place (the market size doesn't change), but let's be blunt here: no company can catches up to 7% growth, so wasting your equity on 8% growth just makes you poorer, and the VCs richer. Sustainable growth is just as important, and treating capital as something you "have to" raise is exactly what VCs want you to think, since, hey, that's what they sell. Venture capital is a financial tool, not the only (real) way to capitalize a startup during and after growth.
- 14y ago
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dizzystar 14y ago
One of my favorite pg essays of all time. Loved this QTF. Reading this article made me smile.

FredBrach 14y ago

One of my favorite pg essays of all time. Same here. I figured out that one can turn into an optimization problem her user satisfaction and that it was key to get a successful product and then key for the company, but it's even funnier: can be turned into an optimization problem the whole process of founding a company. Definitely awesome.

bavidar 14y ago

This is a tough sell to young entrepreneurs. Its hard for them to understand that buy giving away some portion now will make their equity more valuable when they are able to scale to mass market.

zachalexander 14y ago
It is, but I am being sold. Until this past week or so I've been highly skeptical of VC funding and much more inclined towards bootstrapping. I love that DHH video someone else posted in this thread. I think it's silly to focus on users and vanity metrics if you don't have a clear business model (even if it's not implemented immediately). But this essay makes an amazing case for why outside funding is helpful, even crucial. And it's encouraging that he's emphasizing revenues, not just users. I'm also encouraged because I was at the YC event at MIT this Wednesday, and didn't hear anything (even when I asked directly) about investor drama.
- seiji 14y ago
  Drama is for the internet. Real life is for getting shit done.

erichocean 14y ago

self-funding growth from profitability pretty much guarantees you are locked into a relatively slow growth rate That's an unwarranted assumption. Part of designing a startup business model is organizing growth so that you are unconstrained, so that more input produces greater output, earlier -- whether it's capital, users, employees, or support. All it takes is for one component of your business to not scale and you won't hit your growth numbers despite the brilliance of every other part. Capital is just one of the areas you have to look at. Amazon is a decent example. Bezos chose books because it was (a) accessible (catalogs existed), and (b) he got 6 months to pay back booksellers, which meant he could afford to grow the more he sold, by using the money owed to the booksellers as float. Startups would do well to evaluate all possible constraints on growth, capital and otherwise. Many times small tweaks to how you sell your product (or what product you sell) can produce large variations in the amount and timing of capital needed. Here's an example: do you have customers pay for the first 30 days up front, with an option to cancel within that time? Or do you charge your customers after the first 30 days are up? Now, you'd think the latter would always be better for "growth", because it involves a weaker commitment -- no money changes hands early. But it also has a huge capital cost differential, if the service costs a substantial amount of money to deliver. In order to grow the latter model, you'll have to obtain more and more capital over time as you grow. But if you do the former, you can "fund" your company's growth off of its earlier growth. Although this might impact growth negatively, by turning away customers that "won't pay" for the first 30 days up front, but who would have become customers the other way. So which is better? It really depends. If your growth rate is already 7% with the pay-up-front model, that's better IMO than getting, say, an 8% growth rate with the pay-after model. The latter will require raising increasingly greater amounts of capital, despite the fact that it's growing "faster" initially, ultimately hurting your growth or wiping out your equity, or both. Both approaches will still have their "S" curves end up at the same place (the market size doesn't change), but let's be blunt here: no company can catches up to 7% growth, so wasting your equity on 8% growth just makes you poorer, and the VCs richer. Sustainable growth is just as important, and treating capital as something you "have to" raise is exactly what VCs want you to think, since, hey, that's what they sell. Venture capital is a financial tool, not the only (real) way to capitalize a startup during and after growth.

14y ago

deleted 14y ago

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dizzystar 14y ago

One of my favorite pg essays of all time. Loved this QTF. Reading this article made me smile.