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Dear Startups: Here’s How to Stay Alive

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Re: Dear Startups: Here’s How to Stay Alive

#21

You know what kind of companies generally survive? Companies that make more money than they spend. I know, duh, right? If you make more than you spend, you get to stay alive for a long time. If you don’t, you have to get money from someone else to keep going. And, as I just said, that’s going to be way harder now. I’m embarrassed writing this because it is so flipping simple, yet it is amazing to me how many entrepre…

A company that raises millions of dollars of equity funding to try to corner a market is not a "small business", and it's certainly not a smaller business for having non-trivial revenues so that any follow-on rounds are reinvested in expansion rather than survival.

> to try to corner a market

The author's point seems to be - don't try to corner the market, the days of us investing in 5% success rate "moonshots" that do corner the market is over because that 5% is now down to 0.5%, and easy liquidity events such as IPOs and acquisitions are getting harder to come by. Just make a decent product and swim along with all the other little fishes because we don't want any risky market-cornering equity on our balance sheet given the current exit environment.

Re: Dear Startups: Here’s How to Stay Alive

#22

You know what kind of companies generally survive? Companies that make more money than they spend. I know, duh, right? If you make more than you spend, you get to stay alive for a long time. If you don’t, you have to get money from someone else to keep going. And, as I just said, that’s going to be way harder now. I’m embarrassed writing this because it is so flipping simple, yet it is amazing to me how many entrepre…

Couple of points.

First, The idea of risk-reward trade-off is stupid. (This is demonstrated in my footnote.)[1]

Second: startups aren't startups because they have a high risk of failure. Simply because they expect to be much bigger in 24 months than they are today.

Someone making an app they want to sell on Android and iOS for $2 to all of the people who use smart phones is not a "small business", it's a startup. Why? Because there are 3 billion people on mobile phones.

At Internet-scale, there's really nothing between the two. There's no such thing as a mom and pop mobile game. Doesn't exist. If it's a mobile game, everyone can play it. Either you're in business around it or you aren't.

if you're in business on the world stage, you're not a small business, you're a startup. the only thing that matters is whether you would like to address the world's population or not.

i.e. whether you're "trying" (to hyper-grow.)

If you're trying to be much bigger later than you are now (by many orders of magnitude) then you're a startup. By the same token, anyone who has a plan to eventually make a million of anything is a startup. doesn't matter where you are today.

-

[1] You can show yourself that risk/reward is not true. Suppose that I transport from the future to today the entire faculty of MIT and Cal Tech, who know all of the major technology breakthroughs that have happened between our time and theirs. It stands to reason that they are worth more the farther from the future you transport them. 12 months is worth less than 24 months is less than 72 months is a lot less than 70 years.

Does it stand to reason that the more value they're bringing with themselves, the higher the risk of failure?

No, of course not. It's just objectively higher value. So stop talking about risk/reward, I've just proven that it doesn't exist. The only thing that matters is the value you're bringing to the table. You don't automatically run a higher risk of failure if you bring the world $1 billion of value versus bringing the world $100,000 of value. Doesn't exist. No law makes this the case. Zuckerberg didn't suddenly increase his risk by 1,000,000 when he decided to target a million times as many people (the world's population versus Harvard's student body). It's just false. You don't need to go through a million zuckerbergs to get another facebook. You don't even have to go through fifty thousand of them. You just need people targeting the world's population who know what they're doing. This is why VC works.

Re: Dear Startups: Here’s How to Stay Alive

#23

You know what kind of companies generally survive? Companies that make more money than they spend. I know, duh, right? If you make more than you spend, you get to stay alive for a long time. If you don’t, you have to get money from someone else to keep going. And, as I just said, that’s going to be way harder now. I’m embarrassed writing this because it is so flipping simple, yet it is amazing to me how many entrepre…

"If you show revenue, people will ask 'HOW MUCH?' and it will never be enough. The company that was the 100xer, the 1000xer is suddenly the 2x dog. But if you have NO revenue, you can say you're pre-revenue! You're a potential pure play... It's not about how much you earn, it's about how much you're worth. And who is worth the most? Companies that lose money!" https://www.youtube.com/watch?v=BzAdXyPYKQo

Out of every scene in those two seasons, no sentiment captured what I've witnessed in startups as precisely as this one. Straight up perfect. I wonder who was the main advisor for that speech (this was pre-Dick Costolo, I believe).

Re: Dear Startups: Here’s How to Stay Alive

#24
post #8

I think the startup world has become somewhat of a fork of how real companies should be built. Over the last few years companies have been investing into "scaling" and getting traction with no real revenue to substantiate any of the growth. That to me is backwards, and why those startups are fearing for their lives now. Companies should be built with revenue (and profit) in mind, and in most cases those are the ones…

Scaling without revenue makes sense if you're in an industry with strong network externalities or large economies of scale. In those cases, expensive customer acquisition is okay because customers have a very high lifetime value. During the "unicorn boom", I think we all had this belief that network externalities were very common in tech - a belief driven by the rise of facebook, google, and others. But now we're rea…

Great points. I would add that during the "unicorn boom", we also had the belief that proprietary tech would protect the market position of a large, low-profit companies, giving them time to monetize.

It now seems that we may have overvalued this effect. In fact, startups can grow quickly because new tech makes the first mover advantage tenuous; why should the effect that allowed us to climb the mountain now prevent others from doing the same?

Re: Dear Startups: Here’s How to Stay Alive

#25
post #11

Earlier quoted context omitted.

Doesn't matter what they're called. If you're running a startup right now and have the option to be profitable vs pursue expensive growth, OP says now is the time to choose profitability. The funding climate has changed and hence risk/reward ratio needs to be recalibrated. Whether this climate change is real or not is maybe up for debate but I'd guess that in most cases profitability is not orthogonal to growth. As a…

When did the funding market change?

Q4 2015.

Re: Dear Startups: Here’s How to Stay Alive

#26
post #8

I think the startup world has become somewhat of a fork of how real companies should be built. Over the last few years companies have been investing into "scaling" and getting traction with no real revenue to substantiate any of the growth. That to me is backwards, and why those startups are fearing for their lives now. Companies should be built with revenue (and profit) in mind, and in most cases those are the ones…

Scaling without revenue makes sense if you're in an industry with strong network externalities or large economies of scale. In those cases, expensive customer acquisition is okay because customers have a very high lifetime value. During the "unicorn boom", I think we all had this belief that network externalities were very common in tech - a belief driven by the rise of facebook, google, and others. But now we're rea…

How can you calculate lifetime value without revenue?

Re: Dear Startups: Here’s How to Stay Alive

#29
post #20

What? One of the advice is to get cash flow positive with the money you already have. Isn't that basic knowledge? You can't spend more than you have and you only ask for other people's money when you don't need it. Idk, maybe this is an american thing, with all the capital you have but here (Portugal) you can't get series A funding without being at least cash flow positive, no way.

The American VC market has been saturated and everyone with a spare dollar has been throwing cash into the market trying to find the next Google/Facebook/Twitter. A lot of institutional money started looking at the VC market as a way to maintain a 7-10% rate of return when traditional investment vehicles started going sideways.

You could get funding for a portable neighborhood pony washing service if you built an iPhone app backed by an AWS service and called it Uber for Pony Washers (or some such)if you looked hard enough.

As the article points out, this is changing. The boom part of the boom-bust equation is starting to flatline with IPOs happening less frequently and for less money and the institutional investors who get in later in the game to buy out the initial VCs being more gun shy about investing.

Net result for the market? Startups need to focus on being a functioning business generating positive cash flow rather than a money pit that occasionally generates a lottery ticket. Not everyone will succeed, but the changing economic climate will push a lot of the fair weather pony washing app founders out and leave the more seriously business minded people which should result in a new wave of solid companies capable of handling more strenuous economic conditions.

Re: Dear Startups: Here’s How to Stay Alive

#30

You know what kind of companies generally survive? Companies that make more money than they spend. I know, duh, right? If you make more than you spend, you get to stay alive for a long time. If you don’t, you have to get money from someone else to keep going. And, as I just said, that’s going to be way harder now. I’m embarrassed writing this because it is so flipping simple, yet it is amazing to me how many entrepre…

"If you show revenue, people will ask 'HOW MUCH?' and it will never be enough. The company that was the 100xer, the 1000xer is suddenly the 2x dog. But if you have NO revenue, you can say you're pre-revenue! You're a potential pure play... It's not about how much you earn, it's about how much you're worth. And who is worth the most? Companies that lose money!" https://www.youtube.com/watch?v=BzAdXyPYKQo

I just hope that market adjustment will leave less of this shit around.
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