5 ms·

> VCs should be far far more critical about the companies that they invest in, that the path to break even is clear Or should they? My impression is that many

by brazzy 12y ago

> VCs should be far far more critical about the companies that they invest in, that the path to break even is clear Or should they? My impression is that many VCs are seeing bigger gains in shooting for $100mm+ acquisitions by Google/Facebook/Apple/Microsoft and cutting their losses on startups that don't make it, rather than trying to build sustainable businesses. Hence, our very own pg's "Startup = Growth" essay: http://www.paulgraham.com/growth.html http://www.paulgraham.com/growth.html Hence, the rumors that some VCs actively discourage startups from making any revenue at all (let alone profits), since those could act as anchors that drag down the acquisition valuation.

jacquesm 12y ago
> Hence, the rumors that some VCs actively discourage startups from making any revenue at all (let alone profits), since those could act as anchors that drag down the acquisition valuation. That's totally bonkers. But it's also 'rumors', do you have concrete examples?
- brazzy 12y ago
  No examples (it's hardly something they'd be talking about openly). This article spells it out pretty explicitly (with at least one named source) and is probably where I got the idea from: http://bits.blogs.nytimes.com/2012/04/29/disruptions-with-no-revenue-an-illusion-of-value/ http://bits.blogs.nytimes.com/2012/04/29/disruptions-with-no...
- bhouston 12y ago
  I was told this. The idea is you can make up any numbers regarding future revenues and it is hard to dispute when you haven't implemented any serious conversions, but as soon as you show what your true conversion rate is, it becomes possible to make projections.
  - mcguire 12y ago
    Many years ago, I watched a TV interview with an Austin startup who said things like, "We can't tell anyone what we are actually doing, because some larger company will jump in and take over our market." That was the moment when I said, "We're done here." I'm suddenly having that same feeling. If you had solid examples, I'd probably have more than just a feeling.
  - silverbax88 12y ago
    No one should ever invest in a company without knowing an accurate projection. People who do this are just playing the lottery.
    - eru 12y ago
      Yes. But being on the other end of such a deal is like running the lottery.
- pbreit 12y ago
  It's not bonkers at all. A) investors/acquirers would rather see green fields and b) energy/resources diverted to revenue which would have been more valuably utilized for growth.
sillysaurus3 12y ago
I was about to write a comment similar to yours, but after re-reading http://paulgraham.com/swan.html http://paulgraham.com/swan.html I'm less convinced. In particular: There's no correlation between the percentage of startups that raise money and the metric that does matter financially, whether that batch of startups contains a big winner or not. Except an inverse one. That's the scary thing: fundraising is not merely a useless metric, but positively misleading. [...] We can afford to take at least 10x as much risk as Demo Day investors. And since risk is usually proportionate to reward, if you can afford to take more risk you should. What would it mean to take 10x more risk than Demo Day investors? We'd have to be willing to fund 10x more startups than they would. Which means that even if we're generous to ourselves and assume that YC can on average triple a startup's expected value, we'd be taking the right amount of risk if only 30% of the startups were able to raise significant funding after Demo Day. In this model, the VC's willingness to make risky investments becomes a kind of "thermometer" for whether an opportunity exists for an investor to win big. In fact, pg seems to be saying, "If VCs are investing in all of the startups, then that probably means there aren't any big winners seeking investment." If that's true, and if VCs are investing in every startup, then it's likely that all of those VCs are going to lose. Whereas if VCs are only investing in 30% of the startups, then it's more likely that a selective investor can win big by investing in one of the 70% of risky companies that other investors aren't willing to go near.
Zigurd 12y ago
> Hence, the rumors that some VCs actively discourage startups from making any revenue at all (let alone profits), since those could act as anchors that drag down the acquisition valuation. That should come with a "don't try this at home, kids" warning. I've seen a case where an entrepreneur and his angel investors have a joint delusion about being able to pull that off even though those Tier Zero potential acquirers have no idea they even exist. He could have had a novel product in commerce two years ago but he would rather not have to answer for sales numbers meanwhile. There are some cases where that's a rational plan. But not many.
S4M 12y ago
>Hence, the rumors that some VCs actively discourage startups from making any revenue at all (let alone profits), since those could act as anchors that drag down the acquisition valuation. I am not familiar with the funded startups/VC/acquisition ecosystem, so can you explain how a startup that is having revenue would drag down the acquisition valuation? Is it because it would drag down the acquisition price of the other startups that don't have revenue?
- potatolicious 12y ago
  Usually chasing revenue means charging for things - removing free and instituting freemium in its place, for example. Generally speaking chasing revenue means pissing off some portion of your user base (i.e., the people who had no intention to ever pay you), and in doing so limiting your growth rate. Valuation is deeply linked to growth rate and user base in this crazy industry of ours, so "we have X committed, paying users" is worth less than "we have 100X actives!!!!11one".
  - S4M 12y ago
    > Usually chasing revenue means charging for things - removing free and instituting freemium in its place, for example. Generally speaking chasing revenue means pissing off some portion of your user base (i.e., the people who had no intention to ever pay you), and in doing so limiting your growth rate. Not sure I agree. You can give for free a limited version of your product and charge something for a better version, or you can use the freemium model.
    - potatolicious 12y ago
      Yes, and the company that doesn't have to care about revenue can just give the entire thing away for free and get users to sing their praises. They will grow faster than you. This is why the "no-revenue" play works (well, until it stops working).
- brazzy 12y ago
  No, the idea is that revenue provides something to run numbers on to arrive at a validation. Call it an anchor or a sanity check: the idea is that it limits the acquisition validation. Whereas, it is argued in the article I probably got the idea from (http://bits.blogs.nytimes.com/2012/04/29/disruptions-with-no-revenue-an-illusion-of-value/ http://bits.blogs.nytimes.com/2012/04/29/disruptions-with-no... ), having no revenue means the only limit is your ability to excite the acquirer with "growth potential" or "strategic value".

by brazzy 12y ago

jacquesm 12y ago

brazzy 12y ago
No examples (it's hardly something they'd be talking about openly). This article spells it out pretty explicitly (with at least one named source) and is probably where I got the idea from: http://bits.blogs.nytimes.com/2012/04/29/disruptions-with-no-revenue-an-illusion-of-value/ http://bits.blogs.nytimes.com/2012/04/29/disruptions-with-no...
bhouston 12y ago
I was told this. The idea is you can make up any numbers regarding future revenues and it is hard to dispute when you haven't implemented any serious conversions, but as soon as you show what your true conversion rate is, it becomes possible to make projections.
- mcguire 12y ago
  Many years ago, I watched a TV interview with an Austin startup who said things like, "We can't tell anyone what we are actually doing, because some larger company will jump in and take over our market." That was the moment when I said, "We're done here." I'm suddenly having that same feeling. If you had solid examples, I'd probably have more than just a feeling.
- silverbax88 12y ago
  No one should ever invest in a company without knowing an accurate projection. People who do this are just playing the lottery.
  - eru 12y ago
    Yes. But being on the other end of such a deal is like running the lottery.
pbreit 12y ago
It's not bonkers at all. A) investors/acquirers would rather see green fields and b) energy/resources diverted to revenue which would have been more valuably utilized for growth.

sillysaurus3 12y ago

I was about to write a comment similar to yours, but after re-reading http://paulgraham.com/swan.html http://paulgraham.com/swan.html I'm less convinced. In particular: There's no correlation between the percentage of startups that raise money and the metric that does matter financially, whether that batch of startups contains a big winner or not. Except an inverse one. That's the scary thing: fundraising is not merely a useless metric, but positively misleading. [...] We can afford to take at least 10x as much risk as Demo Day investors. And since risk is usually proportionate to reward, if you can afford to take more risk you should. What would it mean to take 10x more risk than Demo Day investors? We'd have to be willing to fund 10x more startups than they would. Which means that even if we're generous to ourselves and assume that YC can on average triple a startup's expected value, we'd be taking the right amount of risk if only 30% of the startups were able to raise significant funding after Demo Day. In this model, the VC's willingness to make risky investments becomes a kind of "thermometer" for whether an opportunity exists for an investor to win big. In fact, pg seems to be saying, "If VCs are investing in all of the startups, then that probably means there aren't any big winners seeking investment." If that's true, and if VCs are investing in every startup, then it's likely that all of those VCs are going to lose. Whereas if VCs are only investing in 30% of the startups, then it's more likely that a selective investor can win big by investing in one of the 70% of risky companies that other investors aren't willing to go near.

Zigurd 12y ago

> Hence, the rumors that some VCs actively discourage startups from making any revenue at all (let alone profits), since those could act as anchors that drag down the acquisition valuation. That should come with a "don't try this at home, kids" warning. I've seen a case where an entrepreneur and his angel investors have a joint delusion about being able to pull that off even though those Tier Zero potential acquirers have no idea they even exist. He could have had a novel product in commerce two years ago but he would rather not have to answer for sales numbers meanwhile. There are some cases where that's a rational plan. But not many.

S4M 12y ago

>Hence, the rumors that some VCs actively discourage startups from making any revenue at all (let alone profits), since those could act as anchors that drag down the acquisition valuation. I am not familiar with the funded startups/VC/acquisition ecosystem, so can you explain how a startup that is having revenue would drag down the acquisition valuation? Is it because it would drag down the acquisition price of the other startups that don't have revenue?

potatolicious 12y ago
Usually chasing revenue means charging for things - removing free and instituting freemium in its place, for example. Generally speaking chasing revenue means pissing off some portion of your user base (i.e., the people who had no intention to ever pay you), and in doing so limiting your growth rate. Valuation is deeply linked to growth rate and user base in this crazy industry of ours, so "we have X committed, paying users" is worth less than "we have 100X actives!!!!11one".
- S4M 12y ago
  > Usually chasing revenue means charging for things - removing free and instituting freemium in its place, for example. Generally speaking chasing revenue means pissing off some portion of your user base (i.e., the people who had no intention to ever pay you), and in doing so limiting your growth rate. Not sure I agree. You can give for free a limited version of your product and charge something for a better version, or you can use the freemium model.
  - potatolicious 12y ago
    Yes, and the company that doesn't have to care about revenue can just give the entire thing away for free and get users to sing their praises. They will grow faster than you. This is why the "no-revenue" play works (well, until it stops working).
brazzy 12y ago
No, the idea is that revenue provides something to run numbers on to arrive at a validation. Call it an anchor or a sanity check: the idea is that it limits the acquisition validation. Whereas, it is argued in the article I probably got the idea from (http://bits.blogs.nytimes.com/2012/04/29/disruptions-with-no-revenue-an-illusion-of-value/ http://bits.blogs.nytimes.com/2012/04/29/disruptions-with-no... ), having no revenue means the only limit is your ability to excite the acquirer with "growth potential" or "strategic value".