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The Fatal Pinch

paulgraham.com

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Re: The Fatal Pinch

#61

Post by danieltillett »

jdoliner wrote: post #51
danieltillett wrote: post #48

Isn't the problem that the founders have to spend like drunken sailors to show "traction" to have any chance of getting more funding while their investors give them so little money that the runway is then incredibly short? There is very little room for error here.

Why would you have to "spend like drunken sailors" to show traction? I think you make a much more compelling for having traction if you can continue to grow while spending like a sober sailor.

Of course it is better if you can hit a 30% a month growth rate while living like a Scottish widow, the problem is that this is very difficult (impossible) to do. Something has to give here - investors either accept lower growth rates or they accept the need to put in more money.

Re: The Fatal Pinch

#63

Post by tptacek »

danieltillett wrote: post #58
tptacek wrote: post #54

Earlier quoted context omitted.

This is a meme about the evils of venture capitalists, that their expectations are so uncalibrated that it's more important to act the part than it is to play the part. It might even be true in a lot of cases, but that doesn't make the strategy any sounder, right? You should just write off those investors. (My take on this is very secondhand, unless you count experience from 1999.)

It certainly doesn't make the strategy any sounder, but why are highly intellegent founders who have far more to lose than any investor getting caught in this pinch? This seems to be the missing question from Paul's post. Edit. Changed how to who :)

Founders aren't entitled to investor money.

Investors are looking for a particular curve. The slow burn, 7-figure exit that founders want is almost useless to VCs. The model requires that the winners pay for the losers. The VC has a finite number of at-bats every year, and each one needs to potentially be an out-of-the-park home run. A company that deliberately bunts is costing the VC an opportunity to recoup their losses on failures, which is the majority of their portfolio.

Founders like to kid themselves about this, but if they raise from a big institutional VC and plan on sitting on the money or executing on a "safe" 1.5-2x model, they're the ones being deceptive.

Safe, conservative plans are awesome. That's why companies should bootstrap.

There's a difference though between swinging for the fences and throwing money away.

Re: The Fatal Pinch

#64

Post by njyx »

danielweber wrote: post #59

They'll all lose their jobs eventually, along with all the time they expended on this doomed company They were getting paid, right? I'm not losing time I work at a company that will eventually fail.

I think it assumes you want to be a part of something which makes a long term impact. If you just want a pay check, you probably aren't at a startup (or at least not for the right reason).

Re: The Fatal Pinch

#65

Post by feverishaaron »

AndrewKemendo wrote: post #60

There are a handful of companies that can't reasonably expect to make money for the first year or two, because what they're building takes so long. So if someone starts a company that is in this category, is it just dead in the water if the founders aren't already rich/connected?

I know of a company that thought they would be in this category. They ended up raising a very large seed round (1MM+) from a VC and pre-negotiating a follow-on of equal size, should they need it. That way the expectation was set from the beginning that this company might take some time to build out their product and see traction.

It's smart, because the discount for the follow-on was pre-negotiated, so investors get perhaps a more favorable discount if the company is a run-away success, and the entrepreneurs were able to buy peace of mind, and could count on the money regardless of macro-economic forces.

Re: The Fatal Pinch

#66

Post by itazula »

jdoliner wrote: post #43

> I try to resist coining phrases Is this because you feel it's pretentious to do so? I feel like having a concise name for a concept is one of the most important steps to broad understanding of it and always try to come up with good names for concepts that I want to be able to talk to people about. You might be doing us a bit of a disservice by resisting this.

"Survival of the fittest" is an example of a coined phrase gone wrong, wherein a sound bite subsumes what it is supposed to only represent.

Re: The Fatal Pinch

#67

Post by tptacek »

AndrewKemendo wrote: post #60

There are a handful of companies that can't reasonably expect to make money for the first year or two, because what they're building takes so long. So if someone starts a company that is in this category, is it just dead in the water if the founders aren't already rich/connected?

Isn't this just another way to say that a capital-intensive business requires lots of capital?

Re: The Fatal Pinch

#68

Post by raymondgh »

Does anyone have tips for quickly and responsibly finding a spot on the slippery slope of consulting? We have found our few distractions so far to be too distracting.

Re: The Fatal Pinch

#70

Post by _sentient »

AndrewKemendo wrote: post #60

There are a handful of companies that can't reasonably expect to make money for the first year or two, because what they're building takes so long. So if someone starts a company that is in this category, is it just dead in the water if the founders aren't already rich/connected?

I don't think so. Being rich/connected is great, but there's a third option: Show early traction.

Absent other advantages, you will need to get to product-market fit pretty quickly if you want to survive.

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