Ask HN: Why is raising money from VCs worn as a badge of honour?
52 comments
It's not really the same as a loan - you don't pay it back with cash, it's paid for upfront with a chunk of equity (usually). And if the company fails, the investors take a bath & you aren't personally liable for it. Not fun but it happens all the time.
Why is it celebrated? Because A) the company suddenly has more capital in their bank account to grow the business and B) they have someone with connections and power who has a vested interest in the business succeeding, both of which improve the long-term likelihood of success/profit (in theory at least).
PS: many people do celebrate and post about it when they get a home loan, it's an exciting thing! Debt is a tool, it's not inherently shameful.
Why is it celebrated? Because A) the company suddenly has more capital in their bank account to grow the business and B) they have someone with connections and power who has a vested interest in the business succeeding, both of which improve the long-term likelihood of success/profit (in theory at least).
PS: many people do celebrate and post about it when they get a home loan, it's an exciting thing! Debt is a tool, it's not inherently shameful.
I think it’ll be widowed down in prestige like all things. Graduating high school, who cares. Getting a loan to goto college, and graduating - guess what, who cares? The more unsubstantial ideas getting millions and petering out, over time, will create the ‘who cares?’ effect.
Saturation is the mother of all mediocrity.
On the other hand, systems, which inevitably become entrenched, are built on saturation. It becomes a mediocre way of life.
Saturation is the mother of all mediocrity.
On the other hand, systems, which inevitably become entrenched, are built on saturation. It becomes a mediocre way of life.
I never saw it as a badge of honour. I am 1000x more impressed by companies that are bootstrapped from nothing into successful businesses. The founders of those companies are real entrepreneurs. The PowerPoint slinging guys getting VC funding and then loosing it all are not entrepreneurs. They are something else entirely.
It is validation that (in theory) someone has peeked behind the curtain and done some due diligence on the startup and put money on the line as a bet that the company has a chance to be a success. Compare that to some other startup that was unable to get any investors.
That said, I would rather be a bootstrapped startup with revenue than one that raised a lot of money.
That said, I would rather be a bootstrapped startup with revenue than one that raised a lot of money.
The problem with bootstrapping is that eventually you'll hit an inflection point where the viability of the business model starts becoming visible. At that point you'll most likely start attracting competition. Unless it's a niche a business with a small TAM, your competitors will most likely raise VC funding to throw cash at hyper growth in a way you can't while staying cash flow disciplined.
In today's environment VC capital is nearly ubiquitous. So you have to assume that sooner or later you'll run up against VC-funded competitors. If you don't have a game plan to survive as a bootstrapped business when that day comes, then you pretty much have to raise VC funding.
In today's environment VC capital is nearly ubiquitous. So you have to assume that sooner or later you'll run up against VC-funded competitors. If you don't have a game plan to survive as a bootstrapped business when that day comes, then you pretty much have to raise VC funding.
Hypergrowth is really a B2C thing. You don't really get hyper-growth for B2B with capital.
For example, Microsoft has all the cash in the world, but it took ages for Windows server or MSSql to gain significant market share.
Oracle grew "slowly" in a bootstrapped kind of way, selling expensive product and so on. Despite the "hyper growth" of startups (mysql?) oracle is still a gold standard for databases (as determined by mindshare in companies.)
Yes there are VC winners, but as we know most VC companies are losers. Having a VC compeditor is fine, they burn hot, create buzz for your market space, validate your product existance, and then typically flame out, leaving market demand, and lots of trained experienced people to employ.
Bootstrapping is indeed a long hard road, with no easy riches, and again most companies will fail, but if you look around pretty much every company that exists in the world (outside tech) was bootstrapped [1], and even most companies inside tech were bootstrapped.
[1] I'm defining bootstrapped here as no-Vc-money. Bootstrapped companies typically have some small amount of seed money to start, and require a large time investment.
For example, Microsoft has all the cash in the world, but it took ages for Windows server or MSSql to gain significant market share.
Oracle grew "slowly" in a bootstrapped kind of way, selling expensive product and so on. Despite the "hyper growth" of startups (mysql?) oracle is still a gold standard for databases (as determined by mindshare in companies.)
Yes there are VC winners, but as we know most VC companies are losers. Having a VC compeditor is fine, they burn hot, create buzz for your market space, validate your product existance, and then typically flame out, leaving market demand, and lots of trained experienced people to employ.
Bootstrapping is indeed a long hard road, with no easy riches, and again most companies will fail, but if you look around pretty much every company that exists in the world (outside tech) was bootstrapped [1], and even most companies inside tech were bootstrapped.
[1] I'm defining bootstrapped here as no-Vc-money. Bootstrapped companies typically have some small amount of seed money to start, and require a large time investment.
It's not obvious that VC funding helps your long term survival, though. It's a loan, and it has to be paid back at some time, often in ways that are detrimental in the longer term. "Hypergrowth" is mostly a myth anyway: slow and steady will win any race.
VC capital is useful assuming it's a winner-takes-all / capital-intensive market, but many markets are not, in which case optimizing for $ raised is actually a distraction
Example: Delicious was sold to bootstrapped competitor, Pinboard for only $35K. Pinboard is still around to this day
https://www.productlessons.xyz/article/pinboard-delicious-fa...
Example: Delicious was sold to bootstrapped competitor, Pinboard for only $35K. Pinboard is still around to this day
https://www.productlessons.xyz/article/pinboard-delicious-fa...
Linus (Tech Tips) has a good video about why external investment is useful: https://www.youtube.com/watch?v=LSxbc1IN9Gg , but he's talking about a hardware company, which is probably different to a software one. Skip to around 5:00 to get to topic.
> The problem with bootstrapping is that eventually you'll hit an inflection point where the viability of the business model starts becoming visible. At that point you'll most likely start attracting competition. Unless it's a niche a business with a small TAM, your competitors will most likely raise VC funding to throw cash at hyper growth in a way you can't while staying cash flow disciplined.
You can choose to take investment then, but it will be on much better terms than your competitors get. It's likely that you'll be able to raise more with less dilution.
Or, you can sell.
You can choose to take investment then, but it will be on much better terms than your competitors get. It's likely that you'll be able to raise more with less dilution.
Or, you can sell.
bootstrapping sounds cool and i’ve done that for many years. at some point you need money to grow because hiring people is super expensive and/or risky and marketing is not free either. so if you cannot generate enough cash to pay for that you are stuck. you are then basically still juggling all the work yourself perhaps with your cofounder and no investor will touch you because they think you are weird or don’t want to work with people even though the business is valid and the potential is huge given a investment. most investors are not very smart, have little operating experience and are not very good at listening. looking back i would never start a company again with my own money as the journey is brutal. i would rather have an investor on board, be able to hire people and pay myself rather than being broke for many years and working myself to death.
Imagine trying to bootstrap a semiconductor or EV company. Or a rocket company.
A semiconductor or EV company is not borrowing to chase "hyper growth", though. They need that money to literally set up shop.
setting up shop is not enough. sooner or later you need to pay for marketing which costs a lot of money. all this worth of mouth viral shit is BS IMHO.
Having worked for a semiconductor startup (Transmeta) that raised $500-ish million, I can assure you they spent plenty on marketing.
i am in the hardware business, so pretty close
I mean companies like MailChimp became a billion dollar company without any of that. I think it can still work but most people have blinders on.
not sure how bootstrapping works today, marketing is really expensive. i don’t believe organic SEO works anymore. so you need to buy ads which is $$$$$.
not really just look at canny.io https://twitter.com/sarahhum/status/1461378442256072712
not sure what I'm looking at. Do you mean that canny is an example of a startup that "made it" without spending money on marketing? or do you mean that I should use canny for marketing?
If it's the former, how do you know they did not spend money on marketing and that their user base grew "magically" just because the product is great?
also, 9 person team right from day 0 without funding. I wonder how that happened.
people create great products all the time that get no traction.
If it's the former, how do you know they did not spend money on marketing and that their user base grew "magically" just because the product is great?
also, 9 person team right from day 0 without funding. I wonder how that happened.
people create great products all the time that get no traction.
they are an example of "bootstrapping works".
the founders created enough revenue to slowly hire that team. they didn't have that from day 0.
again, this is how actual real sustainable businesses are created. they can raise money now if they want, not the ones with 0 revenue.
the founders created enough revenue to slowly hire that team. they didn't have that from day 0.
again, this is how actual real sustainable businesses are created. they can raise money now if they want, not the ones with 0 revenue.
You don't have to pay it back but you do give up equity.
It depends on the deal you strike. Mark Zuckerberg still controls Facebook even though it is a public company despite selling a bit here or there if he wants cash, borrowing against the shares, etc.
Other founders lose control of the company at an early stage. Many people would be delighted to get $5-50M worth of stock in a quality public company and be free to do something else with their life.
VC and accelerators offer benefits by association. For instance I worked at a startup that used space at an accelerator for B2B software startups close to Union Square in New York City. It was energizing to be surrounded by people who are thinking about both the software development and marketing aspects of the business, there is the network of the people who run the accelerator and brand name which helps with finding customers, hiring. You can walk out of that office and hike (or take the subway or a car) to meetings with mega finance, media, consumer brands, you name it.
It depends on the deal you strike. Mark Zuckerberg still controls Facebook even though it is a public company despite selling a bit here or there if he wants cash, borrowing against the shares, etc.
Other founders lose control of the company at an early stage. Many people would be delighted to get $5-50M worth of stock in a quality public company and be free to do something else with their life.
VC and accelerators offer benefits by association. For instance I worked at a startup that used space at an accelerator for B2B software startups close to Union Square in New York City. It was energizing to be surrounded by people who are thinking about both the software development and marketing aspects of the business, there is the network of the people who run the accelerator and brand name which helps with finding customers, hiring. You can walk out of that office and hike (or take the subway or a car) to meetings with mega finance, media, consumer brands, you name it.
> You don't have to pay it back but you do give up equity.
In most cases, investors get preferred shares, and founders get common shares. In the great majority of companies, the founder will earn their wages and get nothing for their equity.
About 10%[1] of companies do okay (not unicorn amounts), and founders might earn up to some millions.
For 20% (at a guess), the company is sold but the common shares are under water so founders get zero. That is because the preferred shares have seniority (priority) and the VCs get all the proceeds from a sale (e.g. acquihire).
There is a tiny minority[2] of super-successes (<1%) where founders make huge amounts, and selection bias means you have heard a lot about these very small number of successes.
The rest of the companies went bust spending all the money, and the founder hopefully got some wages.
But yes, a founder doesn’t owe anything for loans unless they were a guarantor for company debts, or they incurred personal debts while building the business (friends & family, mortgage drawdowns, credit card etcetera).
[1] https://80000hours.org/2014/05/how-much-do-y-combinator-foun...
Edit: my comments above are about companies that take VC money. No idea what the numbers might be like for YC founders that don’t get anything more than their YC investment.
[2] http://paulgraham.com/swan.html — also has this quote relevant to the article “That's the scary thing: fundraising is not merely a useless metric, but positively misleading. We're in a business where we need to pick unpromising-looking outliers, and the huge scale of the successes means we can afford to spread our net very widely. The big winners could generate 10,000x returns. That means for each big winner we could pick a thousand companies that returned nothing and still end up 10x ahead.”
In most cases, investors get preferred shares, and founders get common shares. In the great majority of companies, the founder will earn their wages and get nothing for their equity.
About 10%[1] of companies do okay (not unicorn amounts), and founders might earn up to some millions.
For 20% (at a guess), the company is sold but the common shares are under water so founders get zero. That is because the preferred shares have seniority (priority) and the VCs get all the proceeds from a sale (e.g. acquihire).
There is a tiny minority[2] of super-successes (<1%) where founders make huge amounts, and selection bias means you have heard a lot about these very small number of successes.
The rest of the companies went bust spending all the money, and the founder hopefully got some wages.
But yes, a founder doesn’t owe anything for loans unless they were a guarantor for company debts, or they incurred personal debts while building the business (friends & family, mortgage drawdowns, credit card etcetera).
[1] https://80000hours.org/2014/05/how-much-do-y-combinator-foun...
Edit: my comments above are about companies that take VC money. No idea what the numbers might be like for YC founders that don’t get anything more than their YC investment.
[2] http://paulgraham.com/swan.html — also has this quote relevant to the article “That's the scary thing: fundraising is not merely a useless metric, but positively misleading. We're in a business where we need to pick unpromising-looking outliers, and the huge scale of the successes means we can afford to spread our net very widely. The big winners could generate 10,000x returns. That means for each big winner we could pick a thousand companies that returned nothing and still end up 10x ahead.”
> In most cases, investors get preferred shares, and founders get common shares. In the great majority of companies, the founder will earn their wages and get nothing for their equity.
I've found this post (by a VC!) to be helpful to understand how dilution works. tl;dr: don't do a startup for the $$$.
https://bothsidesofthetable.com/understanding-how-dilution-a...
I've found this post (by a VC!) to be helpful to understand how dilution works. tl;dr: don't do a startup for the $$$.
https://bothsidesofthetable.com/understanding-how-dilution-a...
Yup. Rather build a business for the $$$.
Dilution is mostly a separate problem, and it mostly only becomes relevant if you are one of the few winning businesses, where dilution just controls just how big you win. Dilution often matters more due to founders losing voting control before the business is a success, where founders have lost control of the business due to not controlling the board, amongst other risks. I worked at a business where the founder was ousted, and the investors then drove the valuation of the business down, through their bad decisions (edit: bad from the founders point of view, I don’t know enough about the internal incentives of the investors to know whether losing money was offset by other gains by the investors, although I personally felt that was unlikely).
If you are a founder, or are thinking of becoming one, be extremely wary of anything written by VCs. VCs tend to silently elide or ignore the real problems faced by founders. I suspect this isn’t intentional, but it is just that VCs seem to always talk about everything from their point of view.
For example your link about dilution talks about valuation, but preferred stock also usually has other rights that the diluted common stock (owned by founders or employees) does not have. The difference is critical, yet that article hardly even mentions the issue of common stock rights! https://www.propelx.com/blog/preferred-stock-vs-common-stock... Edit: Your linked article does refer to participating preferred equity and participating liquidation preferences; for a good summary of those see: https://www.startupblog.com/non-participating-vs-participati...
If you are a founder, or are thinking of becoming one, be extremely wary of anything written by VCs. VCs tend to silently elide or ignore the real problems faced by founders. I suspect this isn’t intentional, but it is just that VCs seem to always talk about everything from their point of view.
For example your link about dilution talks about valuation, but preferred stock also usually has other rights that the diluted common stock (owned by founders or employees) does not have. The difference is critical, yet that article hardly even mentions the issue of common stock rights! https://www.propelx.com/blog/preferred-stock-vs-common-stock... Edit: Your linked article does refer to participating preferred equity and participating liquidation preferences; for a good summary of those see: https://www.startupblog.com/non-participating-vs-participati...
To answer the last question: all companies are in competitive markets. For example - if you can get customers for your saas product at a cost of $25,000 per customer and that customer is worth $100,000 to your business over the lifetime, and you can acquire 10,000 of them over the next 18 months - you probably should take all the money required and go get them.
If you don't, some other company with a similar product will.
To be clear though - most companies do exactly as you are saying. You just never hear much from them unless you are their target market.
If you don't, some other company with a similar product will.
To be clear though - most companies do exactly as you are saying. You just never hear much from them unless you are their target market.
Right so I totally get that. I am not against raising money when there is a clear understanding that $10 is getting me $20 in revenue so lets put a dump truck this side of the pipe and blast off.
What I fail to understand is, for a lot of companies, they haven't achieved that but are raising a lot of money and showing that off as their only achievement. It should be little shameful to raise money and sell part of the company before even building a sustainable business.
What I fail to understand is, for a lot of companies, they haven't achieved that but are raising a lot of money and showing that off as their only achievement. It should be little shameful to raise money and sell part of the company before even building a sustainable business.
>It should be little shameful to raise money and sell part of the company before even building a sustainable business.
why? VCs generally aren't interested in buying part of a currently sustainable business. They want a company that will be vastly more profitable in the future.
Companies with no current revenue or sustainability have infinitely more room for growth.
why? VCs generally aren't interested in buying part of a currently sustainable business. They want a company that will be vastly more profitable in the future.
Companies with no current revenue or sustainability have infinitely more room for growth.
I think if you were selling part of the company to grandmas and grandpas who were using their life savings, yeah, shame. By and large the people investing are wealthy, greedy (and I don't mean that in a bad way), savvy people. They want to get in early at a good price before it's certain, and hit a 100x on it.
VC exists because having an idea isn't enough. If you're one developer, working nights and weekends on your idea, the barrier to compete with you is low. If you get VC money, you can immediately put several fulltime developers on the project, and the barrier to compete with you is higher.
It's not a badge of honor, it's the only way to even enter the market.
It's not a badge of honor, it's the only way to even enter the market.
I mean basecamp and MailChimp prove you wrong. And there are countless others.
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It is a welcome party to say you are now part of the capital markets. Now there is a ticking time bomb for you to make the investor class more rich.
My friend once said he didn't want to listen to pundits talking about the future (outcome of an election, how the economy is going, etc, etc) unless they were willing to put money on the line.
With VC money, someone is willing to put money on the line when it comes to believing in your success.
"Someone didn't just give me a recommendation, they bet on me!"
With VC money, someone is willing to put money on the line when it comes to believing in your success.
"Someone didn't just give me a recommendation, they bet on me!"
That’s essentially a prediction market, if I understand them correctly.
1. Validation from brands/people considered to know what they're doing
2. $$ to grow business
3. Founders sometimes gets to take money off the table (example: Clubhouse founders made millions in their seed round)
4. Easier to hire talent because your name gets out: techcrunch, crunchbase, topstartups.io
2. $$ to grow business
3. Founders sometimes gets to take money off the table (example: Clubhouse founders made millions in their seed round)
4. Easier to hire talent because your name gets out: techcrunch, crunchbase, topstartups.io
Clubhouse founders made millions in their seed round.
I don't know if that is true, but if that is, then that is fundamentally inefficient from a market point of view. Clubhouse is failing and the founders shouldn't be compensated yet.
I don't know if that is true, but if that is, then that is fundamentally inefficient from a market point of view. Clubhouse is failing and the founders shouldn't be compensated yet.
What else can most of these start ups claim? They would usually all have low user base, high “growth” (from a low base), low/non-existent revenue, not listed on the share market, forget about profit. Everyone wants to make themselves look better
It's a marketing tool. It is like saying, "All these smart people believe in our growth potential. You as a potential employee too should believe us. You as a customer should think we have innovative solution to your needs"
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Also same reason when a large institutional investor picks up a large number of shares of your favourite growth stock and the price pops. It signals to the market that there is confidence in that company.
It helps a lot with recruiting. For an engineer with a choice of where to work and with disparate total compensation across companies, they may be more likely to choose a company that can maximize potential total comp, and a startup with VC funding increases their chances of winning that IPO lottery ticket.
Also, it is not quite a loan or debt, what happens is you are exchanging your equity for a money infusion to help you grow. If the startup fails, no money has to be repaid, the VC firm loses money. But if the startup succeeds, you succeed, but so does the VC, it becomes a win-win for both parties.
Also, it is not quite a loan or debt, what happens is you are exchanging your equity for a money infusion to help you grow. If the startup fails, no money has to be repaid, the VC firm loses money. But if the startup succeeds, you succeed, but so does the VC, it becomes a win-win for both parties.
Most well off people can get a loan to buy a house. A very tiny number can raise significant amounts of venture funding. This is why it is a badge of honor.
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> Somehow when folks take a large loan and buy a house which they can't really afford, usually they don't shout about it on social media forums.
But they do shout about it to the seller of the house. This is the same situation but instead of advertising to a seller that I can afford your house, you're advertising to employees that you won't go bankrupt in a few months.
But they do shout about it to the seller of the house. This is the same situation but instead of advertising to a seller that I can afford your house, you're advertising to employees that you won't go bankrupt in a few months.
Money is power and now you have some external validation and can afford some nice things.
Lots of things are badges of honor to various groups of people.
its not; or rather, it’s celebrated by the press as orchestrated by the founder because media is a key tool to influence how the world perceives them
Maybe it is the five percent fee (finder's fee or commission) for raising the money. Receiving five percent of a few million dollars isn't a bad day and would make just about anyone proud.
I agree with your question.
It's not "raised".
It's chunk of business sold and chunk of control lost and now business got a bunch of new bosses who will dictate what and how things are done.
No glory.
It's not "raised".
It's chunk of business sold and chunk of control lost and now business got a bunch of new bosses who will dictate what and how things are done.
No glory.
Somehow when folks take a large loan and buy a house which they can't really afford, usually they don't shout about it on social media forums.
But somehow when it comes to start-ups it's almost worn as a badge of merit?
Why is that the case and why don't more companies try to raise money later in the cycle and try and make do with their product revenue?