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The Fatal Pinch

paulgraham.com

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131–140 of 208 posts

Re: The Fatal Pinch

#131

Post by jseliger »

LukeFitzpatrick wrote: post #82

I agree with this article. Founders overspend once they get their first initial investment, and rely on the next investment too much. Founders should be paying more attention to burn and churn rates. I once saw one of my best friends fail his first startup. They had a kickass programming team, received investment and did a bunch of things wrong. 1) Spent the whole investment on Founders salaries. They had 4 tech prog…

Founders overspend once they get their first initial investment

Interestingly enough, Joel Spolsky wrote about this danger in http://www.joelonsoftware.com/articles/VC.html , where he discusses the relationship between revenue, PR, fundraising, and code. Any of those can get wonky if one substantially outpaces the others.

Re: The Fatal Pinch

#132

Post by jameshart »

to3m wrote: post #83
michaelhoffman wrote: post #11

Earlier quoted context omitted.

The numbers refer to pre-decimalization British currency. To convert to modern currency: £19 19s 6d = £19.975 £20 0s 6d = £20.025

Wikipedia has a few pages about the various systems of this kind: http://en.wikipedia.org/wiki/Pre-decimal_currency . Difficult to fathom why the fashion for these passed, because such systems provide so many advantages. A good example is the Spanish system of division into 34, which permits straightforward further division into not only 2 but also 17 pieces - a case very difficult to handle with the modern restricti…

It saddens me in some ways that the UK currency decimalized before mass computerization of record-keeping took off. I think I would have liked to have lived in a world where database currency columns needed to support pounds, shillings and pence (keeping in mind that pence could be divided into quarters, of course).

Re: The Fatal Pinch

#133

Post by danieltillett »

patio11 wrote: post #121
danieltillett wrote: post #62

Earlier quoted context omitted.

If you can become profitable without raising funds then why raise funds?

A very commonly heard refrain in the Valley is some variant of: "Would you rather own 100% of a company worth $1 million or 40% of a company worth $200 million?" Money is used to purchase acceleration. It's not totally crazy, although it implies very different trade offs as compared to running one's own business without investors.

The problem here is risk is ignored. If I were to rephrase the question as "Would you rather own 100% of a company with a 50% chance of success or 40% of $200 million company with a 1% of success?" then the answer we get is very different.

Re: The Fatal Pinch

#134

Post by danieltillett »

frandroid wrote: post #115
danieltillett wrote: post #62

Earlier quoted context omitted.

If you can become profitable without raising funds then why raise funds?

It's a question of speed. Do you take your 1) $100K annual profits and re-invest them in one new market every year, slowly growing every year? Or 2) you take $2M in funding and expand worldwide. The thing is, if you hit on a good idea, you want to do #2, because if you don't, someone else will take $2M in funding to copy your product and go to 20 markets in 2 years.

True if you choose a market that has such need for speed. Lots of markets are not like this and they have the added advantage that VC's won't put money into them.

Re: The Fatal Pinch

#135

Post by danieltillett »

jseliger wrote: post #131
LukeFitzpatrick wrote: post #82

I agree with this article. Founders overspend once they get their first initial investment, and rely on the next investment too much. Founders should be paying more attention to burn and churn rates. I once saw one of my best friends fail his first startup. They had a kickass programming team, received investment and did a bunch of things wrong. 1) Spent the whole investment on Founders salaries. They had 4 tech prog…

Founders overspend once they get their first initial investment Interestingly enough, Joel Spolsky wrote about this danger in http://www.joelonsoftware.com/articles/VC.html , where he discusses the relationship between revenue, PR, fundraising, and code. Any of those can get wonky if one substantially outpaces the others.

I am not sure that spending it all on yourself is the worst thing you can do with the money. If you continue to live on raman then you will be accumulating a lot of cash that you can leverage later. I am surprised that any investor would sit back and let this happen - I certainly wouldn't if I was an investor in such a company.

Re: The Fatal Pinch

#136

Post by michaelrwolfe1 »

danieltillett wrote: post #123
tptacek wrote: post #120

Earlier quoted context omitted.

So what? At this point in the story we're talking about a company on life support. That's why they're consulting and not continuing to put all their time into product. There's not a whole lot VC can do about it at this point.

>There's not a whole lot VC can do about it at this point. Except ask for their money back :) If you think you can get away with running a sane growth company (100% Y/Y) and don't have to worry about the VCs asking for their money back, then the most rational thing to do is take the seed money and run the business as a "slow growth" business with an enormous runway. Unfortunately most VC's are aware of this and will…

VCs can't ask for their money back. It belongs to the company and is in the company bank account. They can refuse to give you more, and if they control the board they can try to put in a new management team, but except for cases of fraud or other malfeasance, they cannot get their money back.

Re: The Fatal Pinch

#137

Post by pbreit »

AndrewKemendo wrote: post #91
rjtavares wrote: post #86

Earlier quoted context omitted.

I would argue that three 22 year olds on their first startup shouldn't be building a product that can't be validated by the market in one or two years.

Define validate. That is kind of the crux of my question. If it means "profitability" then that is a different threshold than "users." I am trying to figure out what PG is trying to describe.

It's pretty obvious when it happens but it's most definitely not profitability. Rapidly growing usage (ie, traction) with an envisionable business model is usually sufficient. While the revenues themselves are not strictly necessary, it does help to demonstrate the ability to collect them.

Re: The Fatal Pinch

#138

Post by michaelrwolfe1 »

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?

You have to find investors who share your vision, trust your team, and are smart enough to know the business is capital intensive. I've been on 5 teams that did this successfully.

Re: The Fatal Pinch

#139

Post by pbreit »

AndrewKemendo wrote: post #77
_sentient wrote: post #70

Earlier quoted context omitted.

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.

Being rich/connected is great, but there's a third option: Show early traction. Isn't that the point of those companies though, that you aren't seeing traction for a while? It could be that PG is making the distinction implicitly between revenue/profit and traction. So for example twitter, FB etc... were not profitable or getting revenue well after they had already amassed millions of users. If that is the case, then…

If you've managed to gain traction with a service that has a clear business model (Twitter and Facebook would obviously qualify) then you are on the right track. Booking revenues is good but mostly because it demonstrates that you can book revenues, not because you actually need the cash.

Re: The Fatal Pinch

#140

Post by pbreit »

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?

If you're only access to capital is cold intros and no track record then you are definitely at a severe disadvantage (as you should be).
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