Navigating Mid-Success(blog.ycombinator.com)
blog.ycombinator.com
Navigating Mid-Success
https://blog.ycombinator.com/navigating-mid-success/
59 comments
Good analogy, but without taking into account the financing side of things it's only a partial picture.
Imagine if that player was borrowing and spending Other People's Money since High School, based on the EXPECTATION that one day he'll be the next LeBron James and pay it all back with sufficient return or forced into bankruptcy.
He had natural talent, but needed money for better shoes, trainers, better nutrition, etc in order to achieve the top level as quickly as possible. So he found some people to loan him the money.
In that scenario, it's not so much a question of whether playing in the NBA is a desirable outcome -- it's certainly better than if he hadn't made it that far -- but one would have to also consider the financial outcome for his investors and him personally.
There are lots of bankrupt NBA players (for different reasons, but still).
This is the article's point: if you're not LeBron, don't choose a trajectory that requires that level of outsized outcome in order to be successful.
Imagine if that player was borrowing and spending Other People's Money since High School, based on the EXPECTATION that one day he'll be the next LeBron James and pay it all back with sufficient return or forced into bankruptcy.
He had natural talent, but needed money for better shoes, trainers, better nutrition, etc in order to achieve the top level as quickly as possible. So he found some people to loan him the money.
In that scenario, it's not so much a question of whether playing in the NBA is a desirable outcome -- it's certainly better than if he hadn't made it that far -- but one would have to also consider the financial outcome for his investors and him personally.
There are lots of bankrupt NBA players (for different reasons, but still).
This is the article's point: if you're not LeBron, don't choose a trajectory that requires that level of outsized outcome in order to be successful.
I believe this scenario actually happens for soccer players, where investors can by equity in a young player's future sale to a bigger club. Although I think there have been some recent attempts to crack down on this practice.
DHH used the same analogy in his podcast with Tim Ferriss: http://tim.blog/2016/10/27/david-heinemeier-hansson/
Not to mention "unicorn" is meaningless in the long term.
I think I like this statement but could you elaborate on what you mean?
Meaning, it doesn't matter if you grow very fast if you can't make the business sustainable.
The subtext to this piece is the mathematics of venture capital investing.
1. Most companies fail. Not "turn into airplanes"; plow into the ground at terrific speed leaving an unrecognizable smoking crater.
2. VC investors survive this by investing in a portfolio of companies, not just one or two.
3. For the math of a portfolio to work out, the winners have to pay for the losers.
4. The majority of the portfolio is losers.
Because they invest so little in such a large portfolio of companies, YC can afford to cultivate startups that are aiming for 8-digit outcomes. But VC firms, as a general rule, can't: for your startup's success to make their math work, you need an outstanding return. They'd rather you return something than nothing --- but they wouldn't rather by much.
There's a lot not to like about this model, but it's not really a moral question. There isn't a model where just a couple of investors plow millions of dollars into your startup all at once where simple mathematics aren't determining everyone's positions.
So when we talk about the difference between shoot-the-moon companies and "airplanes" or "lifestyle businesses" or whatever dumb term we're using for them this week, we'd do well to keep in mind that the people pushing you away from these kinds of outcomes really don't have a choice.
1. Most companies fail. Not "turn into airplanes"; plow into the ground at terrific speed leaving an unrecognizable smoking crater.
2. VC investors survive this by investing in a portfolio of companies, not just one or two.
3. For the math of a portfolio to work out, the winners have to pay for the losers.
4. The majority of the portfolio is losers.
Because they invest so little in such a large portfolio of companies, YC can afford to cultivate startups that are aiming for 8-digit outcomes. But VC firms, as a general rule, can't: for your startup's success to make their math work, you need an outstanding return. They'd rather you return something than nothing --- but they wouldn't rather by much.
There's a lot not to like about this model, but it's not really a moral question. There isn't a model where just a couple of investors plow millions of dollars into your startup all at once where simple mathematics aren't determining everyone's positions.
So when we talk about the difference between shoot-the-moon companies and "airplanes" or "lifestyle businesses" or whatever dumb term we're using for them this week, we'd do well to keep in mind that the people pushing you away from these kinds of outcomes really don't have a choice.
The flip side of this is that if you're not planning on a unicorn, don't get hitched to the VCs that are hunting unicorns. There are other investors who'd be quite happy to get that 5x back and build a $100M company, or even a $20M company.
Even still, those $20-100M companies still get bought out by bigger conglomerates. If you look just at Google and Facebook's acquisition list, it's pretty much all the deals they did the last 2 years.
Right. The larger you grow, the shorter the list of potential suitors for a liquidation event/buyout becomes.
On the other hand, the businesspeople in charge of buyouts tend to like large, within their budget. It's about the same amount of due diligence work whether buying a $10M company or a $100M company, so if they need to hit certain numbers, then larger is better.
On the other hand, the businesspeople in charge of buyouts tend to like large, within their budget. It's about the same amount of due diligence work whether buying a $10M company or a $100M company, so if they need to hit certain numbers, then larger is better.
Does an acquisition list exist?link? Any resources on how to get acquired?
https://en.wikipedia.org/wiki/List_of_mergers_and_acquisitio...
https://en.wikipedia.org/wiki/List_of_mergers_and_acquisitio...
They may not be comprehensive, but it's a good starting point.
https://en.wikipedia.org/wiki/List_of_mergers_and_acquisitio...
They may not be comprehensive, but it's a good starting point.
Huh, are there really a significant # of investors who put money into $20MM companies looking for 5x returns? That's surprising.
Looking for and being quite happy to get are two different things.
I'll happily take a 5x on any of my angel investments. I didn't go into them thinking that was the best possible (hoped for) case.
Getting 5x on all of them would be above my average.
I'll happily take a 5x on any of my angel investments. I didn't go into them thinking that was the best possible (hoped for) case.
Getting 5x on all of them would be above my average.
I would also expect angel investors to be a little more understanding about slightly less than "MAX GROWTH NOW!!!!!", relative to a large VC firm, and less likely to force the founders into a path the founders don't want to take if the numbers aren't ideal..
Over in the mainstream stock market, an 8% total return per annum, repeated indefinitely, is more of an ideal than a reality; CalPERS (the California pension system) has been completely unable to attain it. I suspect that the same is true of Silicon Valley, once you factor in the timeframe question and the high risk of failure in any single investment.
There are more kinds of investors than just venture investors. Small shop private equity often invest sums below this, and they're interested more in reducing the risk of their return than finding a portfolio maker, for example.
Yes, many of them are my clients. But they'll go invest $200M across 10 companies and hope one gets a 5x, 3 get 2-3x, and the rest marginal gains.
There aren't really.
Only if you're talking about venture investors. There a lot of types of investors who each have different tolerances for risk-return ratios.
Not really. Pretty much the more risk people take on the more return they are shooting for so the ratio stays the same.
Are these mostly angels / Micro-VCs? Where do you recommend looking for them?
I would recommend looking within your local angel network. VCs have a certain structure that require them to bet on unicorns otherwise the model breaks down. I suggest finding an angel that knows your space and can bring value.
And in the end as a founder you might end up owning a part of the business that is worth more than a highly diluted piece of a $1 billion company.
Fuck building a $100M. Can you build a $10M or just a $1M company? Just do that (first).
I read somewhere - first get comfortable, then get rich (or change the world). This insane focus on the wrong metric (valuation/size of your company) is going to hurt nearly every first-time founder, which I presume most of you will be.
Once in a while, you do hit the jackpot, but let it happen to you, let it come to you as you make progress and hit bigger and better milestones. Pretty sure even Zuck, Gates, Jobs, or you-name-it-unicorn-founder had no fucking clue that theirs would be the unicorn company.
I read somewhere - first get comfortable, then get rich (or change the world). This insane focus on the wrong metric (valuation/size of your company) is going to hurt nearly every first-time founder, which I presume most of you will be.
Once in a while, you do hit the jackpot, but let it happen to you, let it come to you as you make progress and hit bigger and better milestones. Pretty sure even Zuck, Gates, Jobs, or you-name-it-unicorn-founder had no fucking clue that theirs would be the unicorn company.
This article isn't about building a $1M or a $10M company. It's about companies who have done that already.
Thank you for the nitpick. I wasn't talking about the article either.
I'm a founder of a company that had "mid-success" (a few times over).
I mostly agree with this article and when I see companies in my former market raising $100M+ rounds I always cringe.
> But as a general rule, the longer you delude your investors here, the worse shape you’ll be in.
This is true, but the real problem is not deluding your investors but deluding yourself. It's often necessary to have unreasonable optimism to overcome every hurdles along the way. Knowing when that optimism crosses the line can be difficult especially in the bubble of fundraising.
> Very often I’ve seen cases where founders know in their hearts they have an airplane but are able to convince good investors it might still be a spaceship. This really causes a lot of heartache, and often precludes your opportunity for a good acquisition later.
The point about over-raising limiting future options really resonates. It's one of the saddest things that can happen: all of the hard work has been done to build a viable business, but in the rush to get there too much money was raised, so the the cap table has gotten to the point where any reasonable exit will yield the founders and employees almost nothing. So frustrating.
> Let’s define a “really good airplane” as a company that has profitability within reach and is on track to be worth $100 million with several more years of hard work.
Here's the thing. Airplanes can get much bigger than $100M, they just take longer to get there. They have to fight their way there and rarely get the spotlight. That's just the way some markets are, no matter how great the product, no matter how smart the team. It's a shame when founders build a real company but destroy the value of its equity by trying to make it something that it's not.
I mostly agree with this article and when I see companies in my former market raising $100M+ rounds I always cringe.
> But as a general rule, the longer you delude your investors here, the worse shape you’ll be in.
This is true, but the real problem is not deluding your investors but deluding yourself. It's often necessary to have unreasonable optimism to overcome every hurdles along the way. Knowing when that optimism crosses the line can be difficult especially in the bubble of fundraising.
> Very often I’ve seen cases where founders know in their hearts they have an airplane but are able to convince good investors it might still be a spaceship. This really causes a lot of heartache, and often precludes your opportunity for a good acquisition later.
The point about over-raising limiting future options really resonates. It's one of the saddest things that can happen: all of the hard work has been done to build a viable business, but in the rush to get there too much money was raised, so the the cap table has gotten to the point where any reasonable exit will yield the founders and employees almost nothing. So frustrating.
> Let’s define a “really good airplane” as a company that has profitability within reach and is on track to be worth $100 million with several more years of hard work.
Here's the thing. Airplanes can get much bigger than $100M, they just take longer to get there. They have to fight their way there and rarely get the spotlight. That's just the way some markets are, no matter how great the product, no matter how smart the team. It's a shame when founders build a real company but destroy the value of its equity by trying to make it something that it's not.
Quite often you find entrepreneurs getting sucked into the mindset of building for investors and not necessarily building for customers. Entrepreneurs and their teams are too focused on valuation and not enough on business fundamentals.
Silicon Valley is a place where founders need to be reassured that building a company that's profitable but only worth $100 million is "nothing to be ashamed of."
Silicon Valley is a place where founders need to be reassured that building a company that's profitable instead of being valued at around $100m before liquidation preferences etc are considered is nothing to be ashamed of :)
I don't think the article is about founders needing reassurance or emotional support. It's advice for founders to navigate the dynamic with investors that are pushing them to go for a bigger outcome.
Or perhaps we can just stop referring to them as "medium success" companies. "Medium success" for whom?
$100M in revenue/year to anyone but a very very small percentage of people in the world is a wildly successful business you just built.
$100M in revenue/year to anyone but a very very small percentage of people in the world is a wildly successful business you just built.
Article speaks about $100M valuation. It's much different from $100M/year.
It doesn't have to be the main focus of the article for it to be revealing about silicon valley and the author.
You mean the readers?
All three. A half-time locker room pep talk gives information about the coach, the players, and football culture generally.
You're missing the point. This was written for folks who have already raised at least a seed round.
But, are there so many thousands of those types of people that it needs to be broadcast as a blog post?
I mean, couldn't he walk around the halls of YC and pat a few people on the shoulder and say that same thing?
Not trying to be facetious.
I mean, couldn't he walk around the halls of YC and pat a few people on the shoulder and say that same thing?
Not trying to be facetious.
> Are there so many thousands of those types of people that it needs to be broadcast as a blog post?
Yes. There are a ton of SaaS startups with two or three clients each paying a few hundred thousands of dollars per year. This is the area where it doesn't make sense to shut down the business because with even a couple more clients it would be worth $20M+, but where even if you could it probably wouldn't make sense to raise money.
For people who have already put in the 10+ years to develop the skillset to build a huge company (e.g. learned marketing, coding, sales, etc.), this may actually be the most common outcome.
The point is that once you raise even a seed round you're now a wealth manager who is getting judged on your ability to generate IRR and cash-on-cash return and liquidity, not just your ability to make something cool and use it to support yourself. Yes, starting a $100M business is impressive, but once you decide you want to be in the business of being a wealth manager then it becomes a means to an end rather than being the end goal itself.
Yes. There are a ton of SaaS startups with two or three clients each paying a few hundred thousands of dollars per year. This is the area where it doesn't make sense to shut down the business because with even a couple more clients it would be worth $20M+, but where even if you could it probably wouldn't make sense to raise money.
For people who have already put in the 10+ years to develop the skillset to build a huge company (e.g. learned marketing, coding, sales, etc.), this may actually be the most common outcome.
The point is that once you raise even a seed round you're now a wealth manager who is getting judged on your ability to generate IRR and cash-on-cash return and liquidity, not just your ability to make something cool and use it to support yourself. Yes, starting a $100M business is impressive, but once you decide you want to be in the business of being a wealth manager then it becomes a means to an end rather than being the end goal itself.
[deleted]
This advice is valuable to more than just "airplanes," because the truth is that there aren't just two classes of companies -- "airplanes" and "spaceships" -- there are infinitely many.
And it's just as important to realize that your $2B company is not a $20B company as it is to realize that your $200M company is not a $2B company.
If your company can plausibly be $50M, and you realize that, you can get wealthy and your investors can have positive outcomes (not "wildest dream" outcomes of course). But if your company is plausibly $2B, but you try to make it a $20B company, you and your investors will end up less happy than $50M guy, even though his company was worth 1/40th of what yours is.
I think that the story of a lot of companies during the Great Recession is of over-funding themselves to their eventual detriment -- even companies that are objectively very valuable.
And it's just as important to realize that your $2B company is not a $20B company as it is to realize that your $200M company is not a $2B company.
If your company can plausibly be $50M, and you realize that, you can get wealthy and your investors can have positive outcomes (not "wildest dream" outcomes of course). But if your company is plausibly $2B, but you try to make it a $20B company, you and your investors will end up less happy than $50M guy, even though his company was worth 1/40th of what yours is.
I think that the story of a lot of companies during the Great Recession is of over-funding themselves to their eventual detriment -- even companies that are objectively very valuable.
Anybody have any advice for those who are actually aiming to build a perfectly serviceable airplane, preferably with a reliable-enough autopilot? Articles containing such advice are also welcome.
Don't take money from VCs who are expecting a 10-20x return?
Hell, avoid VCs entirely if you can avoid it.
@patio11 's blog is pretty good. he tells the story of building a micro isv, then another.
at the end of this page is a link to his first post.
http://www.kalzumeus.com/start-here-if-youre-new/
at the end of this page is a link to his first post.
http://www.kalzumeus.com/start-here-if-youre-new/
You're probably best off avoiding investors looking for venture level returns. Private equity and debt funding are an option, but you'll need to show traction first.
> When you start a startup, you get pushed off the side of a cliff with a bag of aerospace parts.
Here's a pain point for someone to solve: why the fuck does the VC process necessitate pushing unequipped people off cliffs?
Here's a pain point for someone to solve: why the fuck does the VC process necessitate pushing unequipped people off cliffs?
There are actually a number of VCs showing up right now to address this pain point.
They're tending to fund profitable B2B companies with $5-40m in annual revenue and explicitly state that they're content with the option of 3-5X returns (while still hoping for more).
They're tending to fund profitable B2B companies with $5-40m in annual revenue and explicitly state that they're content with the option of 3-5X returns (while still hoping for more).
Could you drop a few names here?
one example i know of: http://scaleworks.com/
they bought Filestack (formerly Fileppicker), Chargify and a few more
Lew wrote about basically the same thing as sama earlier this month: https://medium.com/@lewmoorman/not-venture-scale-get-over-it...
they bought Filestack (formerly Fileppicker), Chargify and a few more
Lew wrote about basically the same thing as sama earlier this month: https://medium.com/@lewmoorman/not-venture-scale-get-over-it...
My e-mail is in my profile and I'd be happy to help you get in touch with them if you meet their parameters.
Most of them are looking to do just a few deals a year.
Most of them are looking to do just a few deals a year.
This is a very investor-centric article. It assumes that successful founders will one day want to "hit it out of the park" by the investor's definition (moreso than they have with a $100M company), as if founders live to serve the interests of the investors.
I'd suggest that founders who have a profitable $100M company get themselves free from the chain of their investors as quickly as possible and go about their lives running a successful company, never worrying about what investors think or want again. Remember which party is actually engaged in creating something valuable here. You might need their money to start, but if you do things right, you don't need it to live.
The other caveat here is that sama says many founders are surprised when potential acquirers don't consider them "legitimately valuable". That's because founders typically think of value in technical terms. AFAIK, acquisitions happen only because you have something that the company can't just rip off: either you already have a large/significant installed base in a segment the company wants, a recognizable brand, or you have some intellectual property that the acquiring company couldn't recreate by stuffing 3-4 engineers in a closet for a year (which costs ~$1M, much cheaper than any type of exit you're hoping for) (this basically means patents that they want to own for themselves, not really patents on interesting technology, because such patents can normally be circumvented).
I'd suggest that founders who have a profitable $100M company get themselves free from the chain of their investors as quickly as possible and go about their lives running a successful company, never worrying about what investors think or want again. Remember which party is actually engaged in creating something valuable here. You might need their money to start, but if you do things right, you don't need it to live.
The other caveat here is that sama says many founders are surprised when potential acquirers don't consider them "legitimately valuable". That's because founders typically think of value in technical terms. AFAIK, acquisitions happen only because you have something that the company can't just rip off: either you already have a large/significant installed base in a segment the company wants, a recognizable brand, or you have some intellectual property that the acquiring company couldn't recreate by stuffing 3-4 engineers in a closet for a year (which costs ~$1M, much cheaper than any type of exit you're hoping for) (this basically means patents that they want to own for themselves, not really patents on interesting technology, because such patents can normally be circumvented).
This seems to be a much more apt analogy for most startups:
Rather than being pushed off a cliff and asked to build a rocket, they are being strapped to the rocket (of VC funding) and asked to make it to the moon.
Not to diminish the hard work that goes into building a successful startup. Not all rockets make it to the moon, as the difficulty of a moon shot isn't really in generating thrust, but thrust is a necessary but not necessarily sufficient condition.
Rather than being pushed off a cliff and asked to build a rocket, they are being strapped to the rocket (of VC funding) and asked to make it to the moon.
Not to diminish the hard work that goes into building a successful startup. Not all rockets make it to the moon, as the difficulty of a moon shot isn't really in generating thrust, but thrust is a necessary but not necessarily sufficient condition.
"A company that has profitability within reach and is on track to be worth $100 million with several more years of hard work. This is nothing to be ashamed of"
I wonder if there's some vague sense of how disconnected one has to be from normal conceptions of reality to consider building a $100MM company something to be ashamed of.
I wonder if there's some vague sense of how disconnected one has to be from normal conceptions of reality to consider building a $100MM company something to be ashamed of.
I was reading this, and nodding along, until I saw that number. Is SV really that inflated?
Your average entrepreneur, say Bob from Bob's Plumbing, would be really happy to have his company build to $10MM over a decade or two.
Your average entrepreneur, say Bob from Bob's Plumbing, would be really happy to have his company build to $10MM over a decade or two.
I've always interpreted this sort of valuation as more about "potential best-case acquisition price" than about real market cap. Instagram was "worth" a billion dollars, because Facebook said so; that doesn't mean it had a $1bn market cap. But when VCs talk about you having a "$100MM company", that's what they mostly mean: that there might be a Facebook or two around who would pay that.
I'm actually curious, since we've seen a few (not many, but a few) tech IPOs of these SV darlings in the last five years: how well does their publicly-traded market cap today align with the projected valuations VCs invested at?
I'm actually curious, since we've seen a few (not many, but a few) tech IPOs of these SV darlings in the last five years: how well does their publicly-traded market cap today align with the projected valuations VCs invested at?
[deleted]
Imagine telling that guy he's a failure because he's no LeBron James. Apparently if you're not a unicorn founder you've achieved nothing.