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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

#81

Post by tempusalaria »

Kye wrote: post #65
blibble wrote: post #52

Earlier quoted context omitted.

> You’re so right! It was an absolute disaster for us. Never do it!!!!! has cloudflare ever had a profitable quarter? I could give away my investor's $10 bills all day too

On a skim, they seem to be losing money the same way Amazon did. It's marginal, with a purpose, and could be turned around by trying to.

Last quarter they had negative operating margins of over 20%. That’s not really marginal. Considering they already do over $500mln in revenues and are growing mid 30s it’s very possible they never make a profit.

A big chunk of software VC success over the past 20 years has been public markets accepting loss making companies and giving them a lot of credit for potential future margins.

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

#82

Post by redbell »

Definitely, one of the most interesting reads so far, and without a doubt, the best piece on "The other side of VC funding"

> "Company MagicalUnicorn has still not figured out how to perform food delivery in a profitable way. They’re going to run out of money soon. But to buy themselves more time, they sold parts of the company for 10m € to the VC investor DudeFund."

I never thought of this alternative opinion like that when reading about a startup raising more money!

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

#83

Post by mattbuilds »

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…

I wish we could stay away from generalities. There is no one size fits all answer to questions like "should I take funding?". The answer depends on your goals and where you are competing.

If what you are trying to do is capital intensive, has tons of competition and generally will need the scale in order to compete/turn a profit, you should probably take VC funding.

If you want full control over your product or are operating in a niche and think the explosive growth necessary will hinder you, you have different priorities. You might not be trying to make the next "big thing" and in this case probably don't take funding. In fact, you probably don't want VC funding because your goals don't align with theirs.

Like most difficult questions, the answer is: it depends.

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

#84

Post by j45 »

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…

There is an option #4 that I’ve been around a few times: build a shark that is doing the acquiring within 5 years.

Superior tech, maybe hyper efficient, hyper profitable.

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

#85

Post by hn_throwaway_99 »

anonzzzies wrote: post #44
raesene9 wrote: post #32

The article has a lot of interesting points, but seems to miss out on one of the main reasons (IMO) that startups take funding, which is to grow faster than (or as fast as) their competition. Unless you're lucky enough to be in a market segment without competition, you need to keep an eye on what your competitors are up to. If they can expand faster, add features faster and get more customers than you, it damages you…

OR (as you say, but many miss) you do not care about being the market leader. I just want to have a nice company with nice people, no stress and making millions for all to live. I don’t need vc money, stress, be the market leader or ‘be faster than the competition’. A LOT of services or products you can make a long term (decades) money with like this. I don’t need more than 10m euros in my life, nor do my colleagues…

As someone who's worked for tons of startups, it's not that binary. For loads of industries, there is simply no viable path without significant outside funding (whether from a VC or very rich founder), and even if you look at some of the most famous outliers (like Atlassian), I don't believe the path they took is even viable these days anymore.

For example, if you're selling any sort of business SaaS product these days, the regulatory regime has changed greatly from 20+ years ago. The cost of just something like SOC 2 or ISO 27001 certification, which most enterprises will require to even talk to you, often prohibitively prohibits bootstrap-like funding models. Couple that with the fact that software engineering salaries are comparatively way higher than they were 20 years ago.

The short of it is that a lot of people take VC funding not because they want the "misery of competing, stress, exposure, running all the time etc etc", but because, in many industries, there is simply no other option if you're not already rich.

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

#86

Post by tptacek »

I didn't like most of this post but did feel like the "Second Order Effects", for the most part, ring true.

The only thing I can comment on here with any authority is the consult-to-product model, which I've attempted a bunch of times. It is drastically harder than this post makes it seem to pivot from a viable consulting business to a product; it's notoriously difficult, consultancies are constantly trying to do it (it's the dream!), and very few of them succeed.

That's not to say you shouldn't do a consulting company! They can be great. If you are comfortable with the idea of settling into a long-term consultancy if the product doesn't work out, it's a good way to hedge. Most products fail too! But consultancies (as opposed to products bootstrapped by consultancies) are probably a lot safer to build.

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

#87

Post by klysm »

allenleee wrote: post #19

VC money is the rocket fuel. If you're not going to build a rocket, then don't take resources. There are plenty of tech startups generating over $100 million in revenue that didn't require that fuel.

I’ve seen several people say that in this thread - who is the original source of that analogy?

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

#88

Post by breadwinner »

Similar advice from Mark Cuban: "If you think that raising capital is the best way to get your business off the ground, you’re wrong, according to Mark Cuban.

You should actually do the complete opposite, the billionaire entrepreneur said during a panel at SXSW last month, and opt to start a business “with as little money as possible.”

https://www.cnbc.com/2023/04/09/mark-cuban-best-way-to-start...

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

#89

Post by runlaszlorun »

adventured wrote: post #42
DeathArrow wrote: post #16

>You know, in ancient times, when Peter Drucker, the Master Yoda of business books, was still roaming the planet (alongside dinosaurs, probably) and writing business books, the definition of a successful company actually included the fact that the company was making more money than it was spending - it was profitable. I guess some companies like Yahoo were never profitable but some people got rich buying and selling…

Yahoo isn't a good example. They were able to routinely turn a profit after the dotcom bust. Their business was very similar to Twitter's profitable years in terms of margins (pre Elon; 10-20% operating income margins). Yahoo had a gigantic (at the time), successful ad business and a lot of properties to display the ads on. As of right now, the single greatest example in modern business history is Uber. Although they…

Yikes. I knew they’ve hemorrhaged money but I didn’t know it was that much. I ran the numbers once back when their total funding a lot less. And I came to the conclusion that with that money they could have literally paid every cab driver’s salary for a year and given out free rides. But since you need regulators to look the other way, there was enough to literally give every state legislator in every single state a million dollars. And I’m sure it’d take far less. And there was still a sizable chunk left over.

I feel like the startup game for a while now has been… and the numbers are arbitrary but I don’t think the dynamic is wrong… raise about $100 million to get a total of $10m in revenue and then be worth $1b. That’s not business as we think of it.

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

#90

Post by lifeisstillgood »

anonzzzies wrote: post #44
raesene9 wrote: post #32

The article has a lot of interesting points, but seems to miss out on one of the main reasons (IMO) that startups take funding, which is to grow faster than (or as fast as) their competition. Unless you're lucky enough to be in a market segment without competition, you need to keep an eye on what your competitors are up to. If they can expand faster, add features faster and get more customers than you, it damages you…

OR (as you say, but many miss) you do not care about being the market leader. I just want to have a nice company with nice people, no stress and making millions for all to live. I don’t need vc money, stress, be the market leader or ‘be faster than the competition’. A LOT of services or products you can make a long term (decades) money with like this. I don’t need more than 10m euros in my life, nor do my colleagues…

My take is the VC world will split into three

- Million startups - put loads of cash into thousands of startups globally and play a huge vegas lottery - there is a lot of work there for the BC companies but played well it will have influence at the levels seen by newspapers or major consultancies used to

- the current much maligned approach that is going to creep further up the series A B C tree supplying capital to companies that have developed the model to just churn

- your one. The one I and half of HN is looking for :-) Honestly this confuses me - there is a large chunk of people on this very site that you could have convinced to leave what they are doing and set up a company with the risk of doing so mitigated by "nice VC" cash.

And since everyone in the industry claims they invest in people not ideas then they are turning away people because they won't raise their price to meet a new point on the risk threshold curve.

So yeah something like VCs that fund profitable non IPO businesses seems a good idea. I mean if you stop asking people to make moon shots maybe more of them will just make 20% per year ROI

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