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The Fatal Pinch

paulgraham.com

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Re: The Fatal Pinch

#151

Post by danieltillett »

parasubvert wrote: post #146
danieltillett wrote: post #141

Earlier quoted context omitted.

What about redemption rights? These are a pretty big stick to bang over the head of any founders who think it might be better to run the business in a way the VC doesn't like.

Redemption rights are relatively rare, and even if such a clause were in the funding, it would be after a longish period after close (5-7 years). Usually it's for older funds. Thus they're not much of a stick. The only stick is the board voting to fire (or strongly encourage resignation of) the all or part of the founding management team, which if you're already on life support, can be a win/win: founders keep their…

Are they rare or just rarely enforced? I can't say that my experience is up to date, but back in the day when I was actively looking for VC funding they were in all the agreements pushed my way.

If they are rare in agreements then more founders should "pivot" to a lifestyle business after raising a whole lot of cash. With a couple of million dollars in the bank you can certainly build a very nice low risk business that will provide a great income :)

Re: The Fatal Pinch

#152

Post by parasubvert »

danieltillett wrote: post #151
parasubvert wrote: post #146

Earlier quoted context omitted.

Redemption rights are relatively rare, and even if such a clause were in the funding, it would be after a longish period after close (5-7 years). Usually it's for older funds. Thus they're not much of a stick. The only stick is the board voting to fire (or strongly encourage resignation of) the all or part of the founding management team, which if you're already on life support, can be a win/win: founders keep their…

Are they rare or just rarely enforced? I can't say that my experience is up to date, but back in the day when I was actively looking for VC funding they were in all the agreements pushed my way. If they are rare in agreements then more founders should "pivot" to a lifestyle business after raising a whole lot of cash. With a couple of million dollars in the bank you can certainly build a very nice low risk business th…

I'm not a VC so I don't have an eye on the current trend, but a few years ago they were in less that 20% of deals in a particular quarter: http://venturebeat.com/2011/07/04/demystifying-the-vc-term-s...

So, perhaps not exactly "rare", but uncommon. And rarely used, even if included. Back in 2008ish when I was more into fundraising, I didn't see them.

Re: The Fatal Pinch

#153

Post by blazespin »

joshu wrote: post #32
sama wrote: post #22

Earlier quoted context omitted.

on the contrary, most of my best investments have been in rounds of <$500k. i'm more afraid of startups raising megarounds as their initial round.

Interesting. For me, all but one that raised < $500k died.

This is news.ycombinator.com, a forum for an incubator that's main raison d'être is seed funding .. What else would you expect?

Re: The Fatal Pinch

#154

Post by danenania »

danieltillett wrote: post #56
tptacek wrote: post #50

Earlier quoted context omitted.

If you operate as if every round of financing you get is your last, it is irrational to waste investor money to fake traction. One view of the lifecycle of startups is that companies that try to do that have already lost the game; they're predicating their success on future financing rounds.

I wasn't suggesting companies are trying to fake traction, but they do seem to be encouraged by at least some of their investors to hit very high grow rates (say 30% a month) which are only possible if you spend a lot and so have a very short runway.

Does growth really count in VC land if you have to buy it at a loss? I would expect a smart VC to simply discount such an inherently unsustainable version of growth. Is the idea that growth at a loss is still better than nothing?

If you have a good enough product to hold its own, shouldn't you be capable of getting at least a decent ROI on ads? If you can't do that, why try to grow? Spend the money on improving your product and branding instead.

Re: The Fatal Pinch

#155

Post by rdtsc »

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…

Selling to big colleges is not too different than selling to large enterprises and/or to Uncle Sam. Product quality and features are much lower on the list, than lobying, networking, marketing, developing contacts. Learn to play golf (or whatever the CEOs and administrators of big institutions or companies are doing today to socialize). Or instead of hiring another programmer hire someone who was in charge of making buying decisions for the industry you are trying to sell to.

That is also the reason why many colleges, or governments, end up with crapy overpriced software. You look at it and say "I can do 10x better and sell for 10x cheaper". The problem is you are not aware of the size of the iceberg lying under the water.

Re: The Fatal Pinch

#156

Post by hbhakhra »

ghobbins wrote: post #149

First time founder. My company is in a "fatal pinch." Similar to a previous comment by @LukeFitzpatrick, we built something for our alma mater that we thought we could sell to colleges for 50k/year. We got investment, we built it, we sold it to a few more schools but the software is not feature-packed and mature enough to attract sales fast enough. Higher ed also moves super slow even when you're doing well. We're st…

I'm at the prototype phase of an educational product and have shown the product to teachers and they are interested in using it in the classroom, but they have already expressed concerns in pushing sales through the school. It seems like you have had some success at least so if you could share any advice, it would be much appreciated.

p.s. I can email you if you don't want to share publicly

Re: The Fatal Pinch

#158

Post by blazespin »

ghobbins wrote: post #149

First time founder. My company is in a "fatal pinch." Similar to a previous comment by @LukeFitzpatrick, we built something for our alma mater that we thought we could sell to colleges for 50k/year. We got investment, we built it, we sold it to a few more schools but the software is not feature-packed and mature enough to attract sales fast enough. Higher ed also moves super slow even when you're doing well. We're st…

The problem with education is that you compete with a lot of non profits or at least non profit mentality. Universities, for example, view making a profit as contrary to their mission (and to be fair, it probably is).

Re: The Fatal Pinch

#159

Post by Permit »

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…

>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.

>5) They didn't do any market testing and validation = wrong product market fit.

How does this happen? How do startups receive funding without doing some level of marketing testing and validation?

I ask because in Canada it seems extremely hard to get even angel funding (beyond family members) without demonstrable traction and growth. Is that not the case in the US?

Re: The Fatal Pinch

#160

Post by freshflowers »

ghobbins wrote: post #149

First time founder. My company is in a "fatal pinch." Similar to a previous comment by @LukeFitzpatrick, we built something for our alma mater that we thought we could sell to colleges for 50k/year. We got investment, we built it, we sold it to a few more schools but the software is not feature-packed and mature enough to attract sales fast enough. Higher ed also moves super slow even when you're doing well. We're st…

Please make sure it's something your team can actually get behind, and be very careful about how you put it. Because for experienced developers, any sign of pivoting to consulting is a sign to run for the exit. That's explicitly not what they signed up for when they took a chance on a start-up. Many will rather help out by cleaning the toilets than to fundamentally change the nature of their work.

It's kinda shocking that PG omitted that part, because I've seen it happen several times.

(Read michealochurch's comment further down on this page, he pretty much nails it.)

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