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Don't Take VC Funding – It Will Destroy Your Company

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Re: Don't Take VC Funding – It Will Destroy Your Company

#271

Post by sfink »

seraphsf wrote: post #144

A fun puzzle: if today you take $10m of VC funding at a $20m post-money valuation (ie you sold 50% your company), how much will you get if you sell the company for $20m tomorrow? Answer: typically, you’ll walk away with $5m (25%) or less. VC funds usually have a 1x preference, which means the get their $10m back (plus interest), and THEN they split the remaining proceeds with you 50-50%. So if you take VC money, you…

Good point.

> VC makes sense if you can grow fast and very large.

I could also argue that such companies are often a blight on the ecosystem. They're an invasive weed that outcompetes a rich variety of smaller companies, sucking the resources required to sustain such companies without doing nearly as much to enrich the environment. And then they tend to die off (perhaps through acquisition and having their product cancelled/absorbed into the larger company's), leaving customers high and dry. If they hadn't been there, some of the smaller companies would have still been around.

Re: Don't Take VC Funding – It Will Destroy Your Company

#272

Post by theptip »

onion2k wrote: post #68
eastdakota wrote: post #22

You’re so right! It was an absolute disaster for us. Never do it!!!!! Kidding aside, it is true that raising money from VCs puts you on a very defined path with really only three potential outcomes: 1) failure, 2) sell to acquirer, or 3) go public. There are a small handful of exceptions, mostly for companies that throw off massive amounts of cash, but, realistically, those are the outcomes. If you don’t like any of…

According to Statista there were 16,464 VC deals signed in 2022. There were 181 IPOs in that year. The most IPOs in a year ever is 1,035. Obviously the two aren't directly comparable, but the point I'm getting at is that an IPO exit for any company is really unusual. If you found a company and take on VC funding your exit event is much more likely to be getting acquired if you don't fail. It does happen, and deserved…

You’d want to compare this with the base rate of failure for a business venture (ideally across the economy and specifically bootstrapped tech companies).

Spoiler: most businesses fail.

I’d also believe that VC funded companies are more likely to fail as they are making all-or-nothing swing for the fences plays. But you need to compare to the correct baseline to avoid confusion.

Re: Don't Take VC Funding – It Will Destroy Your Company

#273

Post by jacquesm »

marcosdumay wrote: post #256
adventured wrote: post #109

Earlier quoted context omitted.

Failure is definitely the commonality. The BLS reports typically that 1/2 of all new businesses (in the US) will formally fail within five years. One can safely guess that at least half of those remaining are something between zombies and hanging on by a thread. 1/4 or fewer will make it 15 years or more. And of course it varies by sector, restaurants notoriously have an exceptionally high failure rate. For all busin…

Those figures also do not account for selling all of the company's property with some profit and closing it down; the equivalent of an acquihire for small and medium companies is counted as failure. Running it successfully for a couple of years and changing your mind is counted as a failure too. I don't have a link on hand, but I've seen studies from people that counted how many business actually closed due to money…

I would expect it to be close to 100%. The difference between the 80% and the 100% is the ones that grow in spite of and sometimes because of their problems. Every business will run into trouble, sooner or later. In fact I don't recall a year in the past decade without some kind of crisis that needed fixing. Some self inflicted, some just circumstance and some outside malice. Never a dull moment if you run a small company.

Re: Don't Take VC Funding – It Will Destroy Your Company

#274

Post by tptacek »

Hermitian909 wrote: post #266
tptacek wrote: post #94

Earlier quoted context omitted.

(1) SOC2 is somewhere between $10,000 and $20,000 if you do it cheap. (2) That's a dollar amount that most bootstrappers can swing. (3) Critically, you don't do SOC2 until you have a critical mass of purchases requiring it. (4) Many (most?) of your customers, especially your early customers, won't require it, and/or will have alternate paths for companies without a SOC2 attestation. (5) When you finally do hit the bi…

SOC2 is also waaaay less expensive on the development side if you do just a little upfront development in dev tooling: logging, backups, encryption in transit and at rest, tagging data with sensitivity levels, IAM policies, and CI. I've seen a few founders who invested a few weekends pre-funding into this sort of tooling get to SOC2 and have almost no development costs (still have to document those processes though).

You don't even need to bother with the encryption and sensitivity levels (your data classification policy can be just that, a policy). The ace move is to roll a set of SOC2 policies that just captures what modern dev teams do anyways; that was the idea behind https://latacora.micro.blog/2020/03/12/the-soc-starting.html.

The right way to think about SOC2 is that it's a ~$15k outlay that will come up when a major customer proposes a P.O. that justifies it, and little else.

Re: Don't Take VC Funding – It Will Destroy Your Company

#275

Post by sfink »

ahmedfromtunis wrote: post #26

The writer is not an entrepreneur (according to his bio), and didn't back his "analysis" with any form of data (beyond some anecdotal telltales) — yet his conclusion is stated without any sliver of doubt: "it *will* destroy your company"!

I think the conclusion is justifiable, but it relies on the author's definition of "destroy".

"If you want to run a company that looks like X, then taking VC money will prevent that from happening" is a pretty easy conclusion to make, though the only value in it is in the description of potentially surprising parts of what not-X looks like, to allow readers to judge whether they care.

Re: Don't Take VC Funding – It Will Destroy Your Company

#276

Post by paulddraper »

onion2k wrote: post #68
eastdakota wrote: post #22

You’re so right! It was an absolute disaster for us. Never do it!!!!! Kidding aside, it is true that raising money from VCs puts you on a very defined path with really only three potential outcomes: 1) failure, 2) sell to acquirer, or 3) go public. There are a small handful of exceptions, mostly for companies that throw off massive amounts of cash, but, realistically, those are the outcomes. If you don’t like any of…

According to Statista there were 16,464 VC deals signed in 2022. There were 181 IPOs in that year. The most IPOs in a year ever is 1,035. Obviously the two aren't directly comparable, but the point I'm getting at is that an IPO exit for any company is really unusual. If you found a company and take on VC funding your exit event is much more likely to be getting acquired if you don't fail. It does happen, and deserved…

1. 2022 was historically low for IPOs.

2. Companies will have multiple rounds of funding before IPO.

3. Acquisitions are more common than IPOs.

4. Yes, a significant number of startups fail. If it were easy everyone would do it.

Re: Don't Take VC Funding – It Will Destroy Your Company

#277

Post by adamzerner »

jaysinn_420 wrote: post #133
XCabbage wrote: post #113

> VC Funding Means You Will Sell Your Company > Remember when I wrote earlier that the VC dudes definition of “making everyone happy” after investing in your company doesn’t mean making it profitable? So now you might ask: Okay, so what do my VC investors want? ... They want to make a lot more money. > ... > Now, all of this might be none of your business, you might think. But it is! Because now the inevitable conseq…

Because as part of the VC investment, they are also taking positions on the board of your company. Maybe enough of a position that they can oust you if you don't do as they "suggest". Also, one round of funding is rarely the end of it, and if you are demonstrating that you are not playing their game and trying to become a Unicorn, then you will not get a second round of funding. Why do you think VC control is bullshi…

That makes sense to me that in these two particular situations they have leverage. But what if they don't have enough board seats and you also aren't looking to raise a subsequent round? It sounds like then they don't really have leverage, right? If so, it seems easy enough to guard against the risk that VCs end up with too much leverage over you.

Re: Don't Take VC Funding – It Will Destroy Your Company

#278

Post by network2592 »

eastdakota wrote: post #218
network2592 wrote: post #204

Earlier quoted context omitted.

The cog can be an outcome that is almost as bad the slog. You are overestimating the amount and range of learning that is possible under the vc path outside of the slog (eg the cog). Indeed, you may feel like you are learning quite a bit. But that will generally be lessons that the vc investors want you to learn. Your statements imply that there are lessons to be learned that can only be facilitated by the kind of mo…

What a depressingly nihilistic world view. Certainly if you believe you are beholden to some entity’s rules you must follow then all you can ever learn is what the entity you follow is willing to teach. We took a different path. We talked to our investors generally four times a year at Board meetings. We had a rule that no sentence we said in those meetings could end with a question mark. We recognized that we were t…

A sincere thanks for sharing your experience and insights. Curiosity and a flexible mindset with a fast learning rate and a willingness to challenge even closely held assumptions can result in innovative knowledge under any context, including a vc investment one.

But curiosity is not limitless. It is a function of time. And it would be disingenuous to completely refute the fact that a vc frame of reference will affect curiosity - perhaps even in an adverse manner that can reduce innovation.

Let's get practical and technical with a Cloudflare example. Arguably, there would be no Cloudflare without the ability to change nameservers from domain registrars. You spotted some network slack with the ability of people to easily move to Cloudflare with a relatively simple nameserver change.

That was innovative and surely a result of your curiosity. That allowed you to then build upon that traction and offer a wider range of cloud services.

However, Cloudflare itself eventually became a domain registrar. In the terms of service, Cloudflare blocks all nameserver changes for domains registered with Cloudflare - the very option that allowed Cloudflare to emerge in the first place.

There is no justifiable technical reason for this. It is essentially a political decision borne out of a vc frame of reference. Perhaps the political justification is : Let's lock in people that registered domains with us on Cloudflare. So, they will will be forced to use Cloudflare services.

Arguably, this is a violation of ICANN guidelines that allowed you to obtain your domain registrar license. The block is essentially pointless. Most people interested in nameserver changes for Cloudflare registered domains just want to coordinate across multiple Cloudflare accounts. Multiple questions have been posted in Cloudflare community forums for years. Yet, nothing gets done about it.[1]

The fundamental point is that curiosity led you to use nameserver changes to get some traction. As the vc frame of reference gained more importance over the years, it blocked your curiosity by nudging you to block nameserver changes.

You are undoubtedly still curious. But that curiosity time is spent on board meeting formats and and how to optimise slide presentations - instead of realizing that some curiosity doors that allowed the existence of Cloudflare in the first place are getting closed. Ramifications of that attitude and mindset going forward are overlooked.

So yes, curiosity is good. But, there is no inherent primacy of curiosity under vc versus outside vc. Highly curious people tend to be self directed in any context. If anything, the direction provided by vc can limit curiosity and be ultimately self defeating.

[1] https://community.cloudflare.com/t/unable-to-change-cloudfla... https://community.cloudflare.com/t/still-no-way-to-transfer-... https://community.cloudflare.com/t/how-can-i-change-nameserv...

Re: Don't Take VC Funding – It Will Destroy Your Company

#279

Post by blibble »

eastdakota wrote: post #240
MatthiasPortzel wrote: post #179

Earlier quoted context omitted.

It's still indicative of VC culture that the CEO calls the company a success after IPO. Rather than, say, after the company is profitable. (I have a couple shares of NET, so I'm optimistic they'll be profitable eventually. But sometimes their path to getting there seems lackadaisical.)

I don’t think IPO was success. It was just another fundraising event. Another step in the journey. And, per this discussion, the end of our VC journey and beginning of our public company journey. “Profitability” is a funny term on Hacker News. Think most people here aren’t accountants so they think of profitability as: do you have more cash in the bank at the end of the period than you did at the beginning. That’s “f…

> “Profitability” is a funny term on Hacker News. Think most people here aren’t accountants so they think of profitability as: do you have more cash in the bank at the end of the period than you did at the beginning. That’s “free cash flow profitable.”

no, I look at your financial statements and look for Net Income

(more or less the only number that can't be manipulated by clever tricks)

https://cloudflare.net/news/news-details/2023/Cloudflare-Ann...

> We’ve had non-GAAP operating profits even longer.

you may want to look up what the second A in GAAP stands for

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