I think YCombinator is attempting great things and has a great strategy. However, after StartupSchool I'm mulling over my intention to build my startup without getting any funding. Yet, what I saw yesterday was mostly based on the assumption that a startup has to go thru rounds of funding.
A bit of background: I'm not young, right out of college. I've been working for startups for about 18 years with a couple periodic stints at major tech companies. In all the startups I've worked for, the two leading causes of startup death are 1) Founder friction. 2) Stupid VC tricks.
Founder friction is a risk that I'm sure everyone understands. But the risk of taking money from a VC is one that I think is under appreciated. Generally these risks manifest themselves in the form of the VC meddling in the company to the theoretical benefit of the VC, and the companies detriment. Speaking of instances I have intimate knowledge of, in one case the investment was contingent on 1/3 of it being spent on hardware and software from two companies that the VC had ties to-- overpriced hardware when commodity PCs would have done, and very expensive software that caused us to hire consultants (from the company that sold the software of course) to try and make it work, and ultimately forced us to revert to the original plan and build it ourselves. Significantly delaying our ability to scale up the product.
In another case the VC required that we hire a new CEO, and manuvered us into hiring a friend of the Partners who was non-technical and was fond of changing company direction quarterly whether we needed it or not, to follow the latest business fad... no matter how irrelevant it was to our industry. (EG: one quarter it was "Push" and we were a company that made video game technology... nothing to do with "Push" but we had to have a "push story" and issue press releases.)
And of course, you can find lots of other examples of similar things happening at other companies.
I don't want to paint with too broad of a brush. I recognize that my experience is limited to the half dozen startups I've worked for, and the dozen or so VC partners and associates I've known over the years.
But I have a strong impression that these are not people who understand technology, or the technology business well enough to give good advice. Further, they have shown a propensity to force companies to go in a direction that helps their other investments, but may be detrimental to the company.
And, more importantly, is investment really necessary?
In this day and age, you can get servers provisioned easily-- no need to commit to hardware purchases and long term datacenter leases. The tools are high level and easy to use and there's a lot of open source to leverage so that you can focus on the added value part of your product. Leverage has increased dramatically.
Furthermore, companies are now starting to go without investment, such as MyBlogLog which was acquired only a few months after launch without doing a VC round.
Thus I reach the conclusion that the course for me to take is to not seek investment at all.
This may not be possible for someone who is recently out of college. (And thus the funding from YC is not the kind of investment I'm talking about here-- the presusre to use the money to get three months of solid focus on the product is really positive "interference" especially when backed by the rapid feedback, networking, and weekly seminars.)
But if you start to get some traction with your product, and you're not building something that inherently requires massive investment... probably small angel rounds are the way to go until you can be acquired or reach profitability.
And while being acquired may always be wise-- reaching profitability is a milestone that I think truely marks success. Nobody can ever take that away from you once you've done it-- its victory.
Startupschool was great-- was good inspiration, and much of what was said checked well with my thoughts giving me a boost in confidence that I'm on the right track.
I love lists like "5 dos and 5 don'ts" or the X things that cause startups to fail, or Pauls 16 reasons... love to check those off and go "Yep, Yep, Yep"... and there were a couple that I need to work on.
Hopefully this little rant is not offending anybody... in summary, I'd say winning means making a viable business. Getting VC funding shouldn't be the goal.
Funding is great for providing food, housing, servers, bandwidth, etc. If you can arrange all the practical issues yourself and can work full-time on your startup it definitely doesn't seem wise to take investment.
Taking investment is a huge risk and it should only be done in a calculated way. It has to be a net increase in your chances of success and for each company that calculation varies a lot. I don't think there is any right answer to this one.
I failed to make a distinction-- I am not opposed to funding, but think that VC funding is overrated.
If you are seeing your business as a 1-3 year affair- if you believe that in that time period you'll either crash or get bought or go big, and you don't have any resources... then taking VC funding to cover basics like food, housing, bandwidth, maybe makes sense. I would still say that angel funding is better. And if you're just out of college then its kind of a no-lose situation. You get funded, then you've won because you have a job until the funding runs out and even if you crash and burn, you'll still be well set up to do another startup.
But if you want to build something that lasts... you have to take into account all the costs of various types of funding. This I may not have illuminated as well.
After so many months, the VC funds turn into, effectively, a high interest rate loan with a lein against your business. If you go to sell, you may find that they get the entire proceeds. Sometimes they even put a 2-3x liquidation preference there... so even a success results in nothing to the founders.
The essense of these terms is that the clock is ticking, and you are put in a position where you have to hit a home run, or die trying. And the VC firm will guide you in this direction, and replace you if you do not make the choices that lead that way. They are only interested in home runs, not viable businesses.
This is also why acquisition is more popular now- the risk reward profile has changed, or at least people learned form the 1990s bubble.
Google is probably the best example of making funding work for you. They took angel and VC and built a company to last.
"...so even a success results in nothing to the founders."
No intelligent investor would create a situation in which the founders had no incentive to succeed. They want founder's interests to be aligned with theirs.
"...hit a home run, or die trying..."
That's not necessarily a bad thing. VC money can force you to move at breakneck speed to prove your idea is worthwhile or not. It's up to you to decide if its possible to succeed quickly like that, or find investors willing to build more slowly.
"...replace you if you do not make the choices that lead that way."
Again it comes down to smart investors. Bad ones replace people frequently and good ones are primarily investing in "the team", replacing you doesn't make sense when that is the case.
I think you might be interested in building more of a "lifestyle" business than what most people would define as a startup. I could personally enjoy doing either type of business.
"No intelligent investor would create a situation in which the founders had no incentive to succeed. They want founder's interests to be aligned with theirs."
That's not necessarily true. VCs want management's interests to be aligned with theirs. However, there's no particular reason for them to care whether management consists of founders or VC cronies, and most would probably prefer the cronies.
I've worked for startups where VCs liked the technology, liked the market positioning, but weren't particularly fond of the founding team. So they invest their money, and at the first sign of trouble, force the founders out. They ended up losing the auction for the company's IP (one of the founders bid on it through an employee proxy and took it to China), but that's not to say they didn't try...
I suspect this happens more often than entrepreneurs would like to think. It's the same VC that was featured on an essay here by a certain prominent Lisp hacker...
Google-- they did, and they also seemed to take their time doing it...
"No intelligent investor would create a situation in which the founders had no incentive to succeed. They want founder's interests to be aligned with theirs."
I responded to this, but its been said, and better:
"As things currently work, their attitudes toward risk tend to be diametrically opposed: the founders, who have nothing, would prefer a 100% chance of $1 million to a 20% chance of $10 million, while the VCs can afford to be "rational" and prefer the latter."http://www.paulgraham.com/vcsqueeze.html
"VC money can force you to move at breakneck speed"
You cannot predict the future- you cannot predict the level of success you will have in advance. Thus, signing agreements that put a ticking clock on your business is never a good thing. You can work at "breakneck speed" anyway, without increasing the risk of breaking your neck.
There is a fundamental limit to how fast you can go. Google was able to take their time and was fortunate in that regard. Netscape killed themselves with their speed. In fact, this forced breakneck speed is one of the killers of startups -- all the billions that were burned up in the space of 2 years between 2000-2001... much of that money, if spent more wisely, would have resulted in viable businesses in 2003.
"I think you might be interested in building more of a "lifestyle" business than what most people would define as a startup. "
I'm not sure what you mean by a "lifestyle" business. I consider the word "startup" to apply to any business. But since I am building a high tech startup that is a web based platform, I'm not taking the relaxed approach of someone opening a hair salon, or whatever.
I'm looking to increase leverage, growth rate, and viability.
In looking for a citation, I cam across the Paul Graham essay cited above- which I think makes the same essential point I'm trying to make. (So I'm sure I'm plagerizing him to some extent, mixed with my own experiences and stated less eloquently.)
In summary, many costs are now lower, thus leverage has increased, and so VC funds under traditional terms, are less desirable and less needed.
Google didn't take time doing anything. They spent millions on building out datacenters and on bandwidth.
The big thing that separates them from the Netscape story is that they're apparently smarter and managed to create a financially successful company. Its quite conceivable that lesser men would have given us Netscape #2.
"You cannot predict the future- you cannot predict the level of success you will have in advance."
But being forced to try things more quickly than you might otherwise may help you discover problems and their solutions before others do, like a fast forward button. If you have a company that can genuinely absorb capital it seems to work just fine.
"...prefer a 100% chance of $1 million to a 20% chance of $10 million, while the VCs can afford to be "rational" and prefer the latter"
In that scenario there's still great motivation for the founders to work hard. In the scenario you presented (no money left for founders) that is not the case.
Why didn't you just post a link to VC Squeeze essay if that's all you wanted to say? You're saying some different things and saying other things differently.
Paul and I are describing the same scenario... and that incentive only exists when it looks like there's a possibility for the one in a million payoff. Otherwise Liquidation Preferences mean that even a successful sell results in no return to the founders.
"But being forced to try things more quickly than you might otherwise may help you discover problems and their solutions before others do, like a fast forward button."
I could write code sitting here with a loaded gun on a timer, pointed at my head. I'm sure I would find problems in that code faster and "get it done" faster so that I could reset the timer.... but the code would not be as high quality, and it certainly wouldn't be more innovative.
And if I reached the point where I knew there was no way to get it done in time, then I'd spend the time looking for an exit. I'd have no motivation to get the code done, and a lot of motivation to get out of there.
"I could write code sitting here with a loaded gun on a timer, pointed at my head."
In most startups the proposition is metaphorically identical: succeed before money runs out or die. The kind of intense pressure that exists in all of the competitive startups I've seen. It's a marathon race, not a stroll through the park.
The founders motivation is ownership and the potential payout that ownership provides. If you take so much investment that you can't sell your company for enough to profit from it then you may as well close up shop (which happens frequently).
You're arguing that reducing your chances for success is the only way to succeed. You presume that if you aren't about to die, then you must be lazy. You presume that the only model is unprofitability until someone either buys you or you get shut down.
You presume that reducing the number of scenarios by which a founder will become wealthy somehow motivates the founders more.
You say business should be shut down if they don't fit in the model you describe.
This is a very narrow view. Its also a very polarized view-- it seems to be the perspective that either you're trying to be the next youtube or you're opening a farm.
There really is quite a spectrum between them... and far more high tech successes are not youtube type situations. That's an extreme rarity.
You're locked into a mentality that causes you to repeat this perspective, and you don't seem to be responding to what I'm saying, and I just don't see things that way.
So, I don't see much point in continuing this thread.
This brings up a good point: choose your investors wisely.
While there are a plethora of non-technical investors that can potentially ruin your company, there's also technical investors who have been in the shoes of an early tech entrepreneur and have made it big. There's no guarantees of success, obviously, but it's important to take into consideration. I especially like Philip Greenspun's account of the tragic downfall of his company, ArsDigita: http://www.waxy.org/random/arsdigita/ (make sure to read it with a box of tissues handy, it's quite sad ;))
It's my perception that less spectacular versions are repeated frequently. Every time I see a story about a new investment followed by an announcement of a new CEO I have to wonder.
Gray Haired Suits and Hackers aren't exactly a match made in heaven. Few VCs seems truly comfortable with young technical people running the show. I'll admit that most of the time that might be because the founder lacks the confidence-inspiring "assertiveness" of people like Zuckerberg.
A bit of background: I'm not young, right out of college. I've been working for startups for about 18 years with a couple periodic stints at major tech companies. In all the startups I've worked for, the two leading causes of startup death are 1) Founder friction. 2) Stupid VC tricks.
Founder friction is a risk that I'm sure everyone understands. But the risk of taking money from a VC is one that I think is under appreciated. Generally these risks manifest themselves in the form of the VC meddling in the company to the theoretical benefit of the VC, and the companies detriment. Speaking of instances I have intimate knowledge of, in one case the investment was contingent on 1/3 of it being spent on hardware and software from two companies that the VC had ties to-- overpriced hardware when commodity PCs would have done, and very expensive software that caused us to hire consultants (from the company that sold the software of course) to try and make it work, and ultimately forced us to revert to the original plan and build it ourselves. Significantly delaying our ability to scale up the product.
In another case the VC required that we hire a new CEO, and manuvered us into hiring a friend of the Partners who was non-technical and was fond of changing company direction quarterly whether we needed it or not, to follow the latest business fad... no matter how irrelevant it was to our industry. (EG: one quarter it was "Push" and we were a company that made video game technology... nothing to do with "Push" but we had to have a "push story" and issue press releases.)
And of course, you can find lots of other examples of similar things happening at other companies.
I don't want to paint with too broad of a brush. I recognize that my experience is limited to the half dozen startups I've worked for, and the dozen or so VC partners and associates I've known over the years.
But I have a strong impression that these are not people who understand technology, or the technology business well enough to give good advice. Further, they have shown a propensity to force companies to go in a direction that helps their other investments, but may be detrimental to the company.
And, more importantly, is investment really necessary?
In this day and age, you can get servers provisioned easily-- no need to commit to hardware purchases and long term datacenter leases. The tools are high level and easy to use and there's a lot of open source to leverage so that you can focus on the added value part of your product. Leverage has increased dramatically.
Furthermore, companies are now starting to go without investment, such as MyBlogLog which was acquired only a few months after launch without doing a VC round.
Thus I reach the conclusion that the course for me to take is to not seek investment at all.
This may not be possible for someone who is recently out of college. (And thus the funding from YC is not the kind of investment I'm talking about here-- the presusre to use the money to get three months of solid focus on the product is really positive "interference" especially when backed by the rapid feedback, networking, and weekly seminars.)
But if you start to get some traction with your product, and you're not building something that inherently requires massive investment... probably small angel rounds are the way to go until you can be acquired or reach profitability.
And while being acquired may always be wise-- reaching profitability is a milestone that I think truely marks success. Nobody can ever take that away from you once you've done it-- its victory.
Startupschool was great-- was good inspiration, and much of what was said checked well with my thoughts giving me a boost in confidence that I'm on the right track.
I love lists like "5 dos and 5 don'ts" or the X things that cause startups to fail, or Pauls 16 reasons... love to check those off and go "Yep, Yep, Yep"... and there were a couple that I need to work on.
Hopefully this little rant is not offending anybody... in summary, I'd say winning means making a viable business. Getting VC funding shouldn't be the goal.