Most startups are spending money too fast. Slow it down. • Hacker News Board

Re: Most startups are spending money too fast. Slow it down.

#31

Post by freejack » Mon, Dec 05, 2011, 10:01 PM UTC

brezina wrote: post #17

Sometimes it is more risky to be less aggressive. This is a lesson I learned from Vinod Khosla - who by most metrics knows what he is doing. In nascent markets user acquisition costs rise quickly. In network effect businesses, switching costs are high. So should you lower your burn? Not necessarily. Ask yourself just as often "should I increase my burn."

Another way to look at it is "Am I burning effectively?". If you're being honest, the answer is usually no. Unless your money is free, a lot can be achieved with no new burn. I like to keep tinder (cash) dry until we've found a way to be effective and then invest in it heavily.

Put another way, it doesn't matter what your burn is if you've got your rockets pointed in the wrong directions.

Re: Most startups are spending money too fast. Slow it down.

#32

Post by BerislavLopac » Mon, Dec 05, 2011, 10:10 PM UTC

jroseattle wrote: post #26

js2 wrote: post #7

Earlier quoted context omitted.

Nine women.

Yes, nine is the natural answer. The quote was explained to me in terms of ten women, so I went with that. Nine, ten...the important consideration is the fallacy of assuming that increasing spend provides a commensurate yield in productivity and output. The more appropriate analogy would have been Brooks's Mythical Man Month.

Actually, Brooks uses that quote in the book himself. :)

Re: Most startups are spending money too fast. Slow it down.

#33

Post by jroseattle » Mon, Dec 05, 2011, 11:49 PM UTC

BerislavLopac wrote: post #32

jroseattle wrote: post #26

Earlier quoted context omitted.

Yes, nine is the natural answer. The quote was explained to me in terms of ten women, so I went with that. Nine, ten...the important consideration is the fallacy of assuming that increasing spend provides a commensurate yield in productivity and output. The more appropriate analogy would have been Brooks's Mythical Man Month.

Actually, Brooks uses that quote in the book himself. :)

Ahh, good call!

Re: Most startups are spending money too fast. Slow it down.

#34

Post by trevelyan » Tue, Dec 06, 2011, 12:54 AM UTC

"There is no liquidity reason that explains why there's plenty of money available to seed concepts and not enough money available to A rounds."

Is this true? I'd have assumed that most seed funding is provided by smaller investors who are investing personal funds while venture capital is using institutional capital.

We're now year three+ after the general market downturn, which means deleveraging, wealth destruction and a preference for liquid asset classes (i.e. look at Treasury yields) shrinking the availability of institutional capital available for VC funds. And isn't this exactly what we are supposed to see in this situation? Smaller and knowledgeable investors pump up the bottom end of the market because it offers a much better return than sticking cash in anything else?

Re: Most startups are spending money too fast. Slow it down.

#35

Post by a5seo » Tue, Dec 06, 2011, 3:50 AM UTC

trb wrote: post #22

jroseattle wrote: post #5

There are so many dynamics at work when it comes to burn rate. At previous startups in which I was involved, we were expected to increase spending by the investors. While we wanted to walk it slowly, they wanted us to spend more (on headcount.) As was expected, the lesson of ten-women-cannot-make-a-baby-in-a-month was relearned.

We had to actually fight our investors to reduce our spending by 50%. We prevailed, and that's probably the reason the company's finally making money years later (instead of going broke early on), but it was a strange situation.

This pressure is the natural misalignment of incentives of investors and entrepreneurs.

It's a cliche, but it's true: investors want you to go big or go home. Their outcome is binary. The IRR they see gets killed if you take 15 years to exit instead of 5. As an entrepreneur, you may very well make life-changing money by riding it out and making your vision work eventually, but that's not how (most) (professional) investors measure success.

Which is why you should think long and hard before you raise money about whether you WANT to deal with that misalignment in your life.

No doubt, raising money is viewed as cool (viz. entreporn) and may ease your path in other ways, but it introduces certain physics to your business.

Re: Most startups are spending money too fast. Slow it down.

#36

Post by tzury » Tue, Dec 06, 2011, 4:42 AM UTC

davidhansen wrote: post #29

BrandonM wrote: post #20

Earlier quoted context omitted.

Since it takes a while to raise money, and since running low on cash can lead to a crisis, much fundraising is in anticipation of 1 or 2. But you're right, a lot of status do seem to raise money simply because it's what everyone else is doing.

In case #1, it doesn't take a lot of time to raise money. Collateralizing a bank loan against future revenue is a fairly pretty straightforward process, and the only "pitch" you need is (possibly audited) documentation of your free cash flow.

a) Bank loan is not an investment, not even a convertible debt.

b) Raising Money takes longer time than one imagine at first, especially at start when every available second is used for the development. All of a sudden, in the middle of the code server development, you have to stop your hacking works and author a 15-18 slides deck for an investor, that alone can take about a week.

You know, working on the figures, facts, and backing up your thesis. Sending it over to get reviews, meeting, waiting for answer.

It takes time, and it takes the most expensive time of yours.

You are suddenly stop working for the startup and start working for the investor(s).

Re: Most startups are spending money too fast. Slow it down.

#37

Post by nl » Tue, Dec 06, 2011, 5:23 AM UTC

rokhayakebe wrote: post #4

The real problem is startups raise money too early. In my mind there should be two main reasons to raise money: 1) You have figured out a way to make $1 while spend less, and your data tells you you can do this x times over, 2) You cannot afford to pay for your servers or dev time due to customer growth. Can you think of more reasons?

In my mind there should be two main reasons to raise money

Seriously?

Try doing a startup with a hardware component without up-front funding.

Re: Most startups are spending money too fast. Slow it down.

#38

Post by ryanpers » Tue, Dec 06, 2011, 7:54 AM UTC

rokhayakebe wrote: post #4

The real problem is startups raise money too early. In my mind there should be two main reasons to raise money: 1) You have figured out a way to make $1 while spend less, and your data tells you you can do this x times over, 2) You cannot afford to pay for your servers or dev time due to customer growth. Can you think of more reasons?

Maybe in a world where you have disposable software products. But if you are developing something more complex, you can have a substantial period where you are developing science, technology and you cant bootstrap that on ramen when the people you might need to pay for it all can get real bucks elsewhere doing the same thing.

Then again, HN is very noddy-apps-oriented.