Build a Business, Not an Exit Strategy
melanie.io
Build a Business, Not an Exit Strategy
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Re: Build a Business, Not an Exit Strategy
#2I don't think there's a real formula that will allow you to calculate the expected value as there's so many other variables that come into play.
A lot of it comes down to the founder(s) personality, their immediate network, and the true need in the market for their business/idea.
That said, this is exactly the way I've felt about most startups. You're making a time machine for people's Twitter? That's not a billion or even million dollar idea. If you can figure out how to generate revenue it's a small business at best.
Thanks Melanie. This article was a breath of fresh air.
Re: Build a Business, Not an Exit Strategy
#3This post is based on so many false assumptions that it's meaningless. Most small business owners/bootstrappers are NOT millionaires, most are just barely scraping by. Less than 3% of small businesses make $250K or more in profit.
(http://voices.washingtonpost.com/plum-line/2010/09/boehner_c...)
So if you consider "failure to make over $250K" as failure, 97% of small businesses are failing.
Re: Build a Business, Not an Exit Strategy
#4As with all things, it's not so black and white. I know it's popular to hate on venture funding here on HN, but the industry exists for a reason. There are certain business models that only work at scale, and in the meantime must be supported by VC cash. For bootstrapped revenue-generating companies, VC funding can be the difference between lifestyle business and IPO. Congratulations to the OP for building a profitable business, but let's keep in mind there are many paths to success.
Re: Build a Business, Not an Exit Strategy
#5As with all things, it's not so black and white. I know it's popular to hate on venture funding here on HN, but the industry exists for a reason. There are certain business models that only work at scale, and in the meantime must be supported by VC cash. For bootstrapped revenue-generating companies, VC funding can be the difference between lifestyle business and IPO. Congratulations to the OP for building a profitab…
I don't think it's popular to hate on VC on HN. Sure there are a small number of people who are bitter who speak out against it but I think most people on here are totally for VC funding.
Re: Build a Business, Not an Exit Strategy
#6This post is based on so many false assumptions that it's meaningless. Most small business owners/bootstrappers are NOT millionaires, most are just barely scraping by. Less than 3% of small businesses make $250K or more in profit. ( http://voices.washingtonpost.com/plum-line/2010/09/boehner_c... ) So if you consider "failure to make over $250K" as failure, 97% of small businesses are failing.
I think you may have missed the point here. Her point was that there are way more revenue generating businesses that have become successful without VC funding than those that have taken VC funding. Granted the successful VC funded companies will almost always be more successful due to the very nature of VC.
Furthermore, most small businesses are local service based businesses. The average for profitable web small businesses is probably quite a bit higher than those as you have access to a much much larger market.
Re: Build a Business, Not an Exit Strategy
#7This post is based on so many false assumptions that it's meaningless. Most small business owners/bootstrappers are NOT millionaires, most are just barely scraping by. Less than 3% of small businesses make $250K or more in profit. ( http://voices.washingtonpost.com/plum-line/2010/09/boehner_c... ) So if you consider "failure to make over $250K" as failure, 97% of small businesses are failing.
That is a fair point. However, even if you adjust the assumptions for expected value to be 3% (vs 25%, which is what I use), it is still an expected value of $43,000, over 14x greater than that of your average "I want to be the next Instagram" app. I wanted to use 2 hypothetical examples with some reasonable assumptions just to show the staggering difference in probabilities of each scenario.
Re: Build a Business, Not an Exit Strategy
#8I love this. It sets a realistic expectation for the vast majority of entrepreneurs. Odds are, you're not getting VC funding. If you want to be an entrepreneur, which should mean you are inherently risk adverse, get to revenue/profitability/CF positive as quickly as possible. Again, with the odds of landing VC funding so low, if landing VC funding is the foundation of your business plan, odds are you are fucked and so is your business.
I own a B2B SaaS company that only took $20K from an accelerator, and we have just recently hit $1M ARR. Outside of the $20K, we did it through blood, sweat and tears. No angel money, no VC money. Not that I'm opposed to outside money, but I liked the challenge of CF financing a company (wasn't always easy), but our initial product fills a niche and doesn't ramp up to the $100M in 5 years that gets the VCs' investment weenies going. Instead of spending the potential enormous amount of time that it could take to raise money, we decided to just build a business. And we are doing that shit...
Re: Build a Business, Not an Exit Strategy
#9Although I am not going to fault the conclusion, there are a number of questionable assumptions in this analysis.
One is that the expected value of an effort is not the probability of trying times the expected value of succeeding. Multiplying by 1% since only 1% of companies raise VC funds is not relevant. The correct proportion should be the percentage of companies that try to raise VC funds which are successful. Say this is 10%.
Two is that you are not going to spend the 10 years used for comparison trying and failing to raise VC funding. After 6 months you should give up, and spend the next 9.5 years trying to build a small business (expected value = (90% chance of failing to raise VC funding) * (9.5years/10years)* $356.4k ~ $305k).
Three is that the expected value of an exit is not the probability of a minimum exit cutoff times that exit value. There is a power law distribution to success, so the expected value of an exit is much higher than $100M * 2%. I'll be lazy and guess that the expected value is 3x higher due to the power law distribution of success (I imagine 3x is grossly underestimating here).
This makes the expected value of the VC success $3.3k * 10x * 3x ($100k) + the expected value that you give up on VC funding and start a small business ($305k), or approximately $405k. Not nearly so obvious a choice as painted in this blog post.
Re: Build a Business, Not an Exit Strategy
#10Hear hear. I've been saying a similar thing for a long time.
If the business is so great why sell? The act of selling implies you think it's worth less than what someone else is willing to pay which is dishonest. If you thought it was worth more you wouldn't sell (under most situations, there are always exceptions).
Why shouldn't a VC hold on to the great business they've built for the sake of future cash flow? A great business should be able to get funding.
It also drives the wrong behavior. Instead of building a real business that lasts better build the appearance of a business that will fetch a good price. Such and such multiple of sales (what about profit? future cash flow?). Such and such many users (who may never pay you a cent). This behavior doesn't stop at the first exit, it perpetuates throughout the lifetime of many public companies; focus on looking good rather than being good.
I always thought the original purpose of the stock market was for companies to raise money to go after bigger things- it seems the purpose today is to "exit".
EDIT with another thought: To me, build a business vs. build an exit strategy should be orthogonal to VC vs. bootstrap. You can bootstrap and work towards an IPO and you should be able to VC without selling the business. I think everyone would benefit from a frame of mind that is about building successful, sustainable, long lasting businesses.