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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

#191

Post by AstralStorm »

roymurdock wrote: post #105
logicallee wrote: post #91

Earlier quoted context omitted.

I was watching this comment carefully as I thought I might have to delete it (due to people not understanding the arguments therein). It started rising to +2 or +3, so I stopped watching it. Now that I've checked again, I see that a few downvoters got it down to -1. Since it is too late, I am happy to explain the thoughts in the above comment. I studied this area of economics from formal sources as well as having exp…

The risk/reward profile is the foundation of all of modern finance. Risk is defined (in finance) as exposure to volatility. Volatility is measured by calculating the standard deviation of annualized returns on an investment over a given period of time. The longer the time horizon of the investment, the more exposure to unknown and unaccountable variables you face. Ultimately, this is because we do not have perfect in…

Without any kind of actual valuation (tied to revenue) you cannot gauge risk. This is why startups in "pre-revenue" stage are essentially infinite risk.

Reward is also very guessed or estimated or both. So essentially the profile is made out of whole cloth as are valuations.

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

#192

Post by AstralStorm »

dhaivatpandya wrote: post #88
Ftuuky wrote: 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.

There's no inherent reason why being cash flow positive is such an important consideration for a venture capital firm. A startup that's not cash flow positive right now but could be massively so in the future (or, atleast, the market expects it to be massively cash flow positive in the future) is significantly more valuable than a startup that is cash flow positive right now but with not a ton of room for growth. In…

How do you know that it will ever produce returns?

Valuations are made out of belief (whole cloth).

The requirement is not a must, but you should take into account startup's burn rate over funding, which should eventually turn into burn rate over revenue. (without taking extra funding into account)

So, a startup that would have a huge burn rate should be much less valuable, as you're liable to lose money both short and long term. Same as with the bets, taking large bets with long timeframes is more liable to turn you bankrupt (both VC and startup owner) than taking small bets often, since you can back out at any given time. (I'm not talking about motivation, that's a separate thing.)

However, markets are not rational, so startups with high burn rate are considered very valuable for some reason.

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

#193

Post by AstralStorm »

rco8786 wrote: post #79
Ftuuky wrote: 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.

I'd venture to guess that the vast, vast majority of American startups that raise a series A are not cash flow positive.

How about data at series B? A startup should become profitable pretty soon if it really has a handle on the market... If it doesn't after years, it's probably dead even if it's churning through money.

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

#194

Post by gbersac »

joe_fishfish wrote: post #188
cperciva wrote: post #182

Earlier quoted context omitted.

The reason Uber became so successful was because it became cheaper than a cab in most major markets with world class service I'm not sure that "cheaper than a cab" had anything to do with it. You're the first person I've ever heard to cite pricing as a reason why people use Uber; everybody I've spoken to has cited the quality of service as the reason.

In London Uber is far cheaper than black cabs as well as having much, much better service. The better service probably guaranteed them some sort of market share there, but the price has given them a shot at permanent market dominance there too.

Same in Paris.

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

#195

Post by mindcrime »

lmm wrote: post #180
mindcrime wrote: post #44

Earlier quoted context omitted.

The cynical side of me wonders if all this is "helpful advice" from VCs is just designed to bring valuations down to earth. I'm not really into conspiracy theories as a rule, but I will admit to having a similar thought. At the last, I find myself wondering if advice from VC's - especially regarding something like valuation - doesn't inherently tend to be self-serving on their part. Remember, the objectives of a VC a…

That kind of company has no business taking VC money in the first place. A VC shouldn't want to invest in a company that doesn't need VC money, and I'm kind of surprised that they would want to encourage their portfolio to transition into that kind of company - such a company isn't going to be the "home run" that VCs make their money off.

such a company isn't going to be the "home run" that VCs make their money off.

Two thoughts:

1. It might. But it might not do so in the time-frame that VC's typically expect. Since funds tend to be time-boxed, VC's generally need to see not just a specific return, but they need to see it by a certain point in time. The older a given fund is, the more pressure to "do it now".

2. That said, nothing says growth has to be a smooth curve (whether it's linear, exponential, or whatever). You could be on an exponential growth path, slow down to flat, or even shrink, due to external macro-economic factors, or strategy, or whatever, then ramp back up again later and "go exponential" when things change.

and I'm kind of surprised that they would want to encourage their portfolio to transition into that kind of company

3. Well if the alternative is going out of business and resulting in a valuation of 0 for everybody involved, almost any alternative is better. I see it not as a call to give up on being a "home run" but as a call to batten down the hatches, hunker down, weather the storm, and then adapt as circumstances change.

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

#196

Post by jacalata »

lmm wrote: post #178
jacalata wrote: post #146

Earlier quoted context omitted.

Well, the original comment was "10% of earners" and I'd bet that smartphone penetration is higher among earners (eg 20% of Americans are under 14, 0% of them are earners and ??~10% of them have a smartphone). So you could perhaps push it up to more like 1/3 earners use iOS, which is starting to be a healthy potential market share.

> 20% of Americans are under 14, 0% of them are earners and ??~10% of them have a smartphone OT but 10%? I'd've guessed at least twice that.

I just made it up, I don't even know anyone under 14.

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

#197

Post by zan2434 »

Based on the rest of the comments here deriding the growth over revenue strategy I think it's very important to bring up that risk is proportional to reward, and by definition any business that can be cash flow positive early on is unlikely to be very risky - and thereby not really what VCs are in this business for.

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

#198

Post by lmm »

mindcrime wrote: post #195
lmm wrote: post #180

Earlier quoted context omitted.

That kind of company has no business taking VC money in the first place. A VC shouldn't want to invest in a company that doesn't need VC money, and I'm kind of surprised that they would want to encourage their portfolio to transition into that kind of company - such a company isn't going to be the "home run" that VCs make their money off.

such a company isn't going to be the "home run" that VCs make their money off. Two thoughts: 1. It might. But it might not do so in the time-frame that VC's typically expect. Since funds tend to be time-boxed, VC's generally need to see not just a specific return, but they need to see it by a certain point in time. The older a given fund is, the more pressure to "do it now". 2. That said, nothing says growth has to b…

> 3. Well if the alternative is going out of business and resulting in a valuation of 0 for everybody involved, almost any alternative is better. I see it not as a call to give up on being a "home run" but as a call to batten down the hatches, hunker down, weather the storm, and then adapt as circumstances change.

VCs hate having "zombies" in their portfolio though, no? So I'd expect them to encourage companies to keep going for it, and may the strongest survive.

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

#199

Post by rco8786 »

AstralStorm wrote: post #193
rco8786 wrote: post #79

Earlier quoted context omitted.

I'd venture to guess that the vast, vast majority of American startups that raise a series A are not cash flow positive.

How about data at series B? A startup should become profitable pretty soon if it really has a handle on the market... If it doesn't after years, it's probably dead even if it's churning through money.

That might become the norm for the next few years in a slower VC market. But, at least in SV and NYC, it's been pretty common to raise multiple rounds before profitability.

Companies can choose to not be profitable on purpose though, by re-investing revenues back into the business. Heck, Amazon's basically never turned a profit.

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

#200

Post by josephcooney »

rokhayakebe wrote: post #125
lowglow wrote: post #63

Earlier quoted context omitted.

I've called these the 10% startups. They typically only serve people in the top ~10% of earners in the US.

Most lawyers serve the top 10%, yet they are here in good and bad times.

I misread this as 'lawmakers', but your sentence still seemed correct either way.
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