6 ms·

"Shoot for the moon" seems like a reasonable strategy when you're making the investment. However, certainly at some point while they were burning through that

by ssharp 3y ago

"Shoot for the moon" seems like a reasonable strategy when you're making the investment. However, certainly at some point while they were burning through that $36 million it became evident that "moon" was no longer a viable destination. Why wouldn't everyone be aligned with making the adjustments needed to get back to default alive? Something is clearly better than nothing. Now if it got to the stage where the CEO no longer wanted to operate at the reduced scale (and nobody else would take the role) or the product couldn't support itself at the reduced scale, then closure may have been the only option. It's just that the "moon or bust" mentality doesn't seem like something that should be set in stone for the life of the company.

streetcat1 3y ago
Because this is not what the VC wants. The VCs are diversified across many startups and frankly make most of their money from tail event startups in their portfolio (e.g. Uber / Facebook). Since they don't know which startup will be the tail event, they don't want a profitable business, but a max growing business. This is different from the bootstrap model.
- paulryanrogers 3y ago
  Then why not sell it as a viable business? Or would it be too costly to trim it back and execute the sale?
  - gtirloni 3y ago
    It's about perspective. What to you (and pretty much anyone else) looks like a business that just needs adjustments to reach profitability, to the VCs it's profile maintenance work for little relative benefit in the long-term. The chances of that company turning 10-20x profits in the next few years is basically zero and they just cut their losses (in their view).
  - PeterisP 3y ago
    When it's still enough runway to trim it down, there's often still some hope of greater success - and a VC investor might believe that it's more valuable to have a 1% chance of it becoming a unicorn or a few percent chance of arranging some last-minute buyout, rather than pick up the 100% certain but low price it has as a non-growth business based on its revenue.
    - senderista 3y ago
      Yes, due to their large bankroll and diversified position, VCs can afford to be risk-neutral and only care about expected returns. Founders and employees obviously cannot be risk-neutral, ergo startups are a great bet for a VC and a terrible bet for anyone else.
      - wbl 3y ago
        The amount of VC-founder side deals that are possible is pretty shocking. Stuff like letting them cash out early.
        PeterisP 3y ago
        I don't really see why such a side deal would be possible - if the VC goal is to get the founder-manager to try for that narrow hope of few percent of major success and discourage them from settling for a lower-value stable business, allowing the founders to cash out would be counterproductive, it's in the VCs interests to ensure that founders personal financial motivation is aligned to theirs, that the founders are also motivated to go big or go bust. In essence, if the startup is slowing down and perhaps not going anywhere, then the standard existing deal with founders where the founders can cash out only if they enable to VCs cash out at a profit (for example, if they manage to pull out all the stops to make a failing startup look attractive to some bigger fool) is exactly what VCs want, and in such a situation the founders have no leverage to extract a compromise that's worse for VCs.
        wbl 3y ago
        The typical situation is the company has been around for a few years and the founder has some reasonable sounding expenses. Then the next round includes some cashing out as new investors join.
- deleted 3y ago
  [deleted]
- jongjong 3y ago
  I know this is the case but I wonder if this is a self-fulfilling prophesy. I can easily imagine an alternate reality where VCs invest more thoughtfully based on more careful analysis of companies and they would have a much higher success rate and end up with even higher returns without creating unsustainable wealth inequality.
  - TuringTest 3y ago
    > an alternate reality where VCs invest more thoughtfully based on more careful analysis of companies and they would have a much higher success rate and end up with even higher returns without creating unsustainable wealth inequality. Unlikely. The problem of that view is that, when you're handling large uncertainty, you don't know which projects are the ones you should cancel and which ones to nurture. Past performance is a terrible indicator for lucky shots. See the Talent-Luck simulation for instance.[1] You measure a population of projects affected affected by random events and profiting proportionally to talent, and the projects that end better off are the ones that chain multiple beneficial lucky strikes, with talent having little influence past a minimum level. And the way to maximise gains over the whole population is setting a small flat subsidy for all, allowing everybody to explore their talent even after a wrong turn. 1 https://www.inc.com/chris-matyszczyk/so-youre-smart-but-youre-not-rich-this-eye-opening-new-scientific-study-tells-you-why.html https://www.inc.com/chris-matyszczyk/so-youre-smart-but-your...
    - jongjong 3y ago
      >> And the way to maximise gains over the whole population is setting a small flat subsidy for all, allowing everybody to explore their talent even after a wrong turn. I don't think that's what VCs did. It looks more like they dumped millions of funding on a tiny number of hand-picked companies and used short term traction as the main metric and they equated profitability as anti-growth, failing to realize that, without demanding profits, growth could be produced artificially using money/advertising and that it doesn't mean that users actually want to use the product in the long run. Profitability is how you know that users want to use a product; otherwise a company could just 'launder' investment money to their users somehow and of course nobody will refuse free surplus value and hence they will attract users... Until the investment money runs out and the surplus value stops being handed out to users. Just think of Uber investors subsidizing rides as an example, as soon as that subsidy goes away, there's a good chance it will start declining. Uber is still unprofitable.
- firecall 3y ago
  I had to search up what a Tail Event Startup was :-) TIL a new term :-)
wheels 3y ago
> Something is clearly better than nothing. That's not a major component of venture backed startups. For a company that has already been written off as a failure, often the board members that represent the VC would rather not have to stay involved and keep showing up for meetings -- they could be elsewhere; there's an opportunity cost.
- solatic 3y ago
  It's not like a board seat is this magic item that is stuck to you and you can't get rid of of you tried. If a VC had truly written off the company, and board meetings are not worth their time anymore, they can just resign their seat.
girvo 3y ago
> Something is clearly better than nothing. To you and I, this is patently obvious. This is not true however for VCs. In a lot of them, they'd prefer you fail entirely rather than limp along making 1x, 1.5x their investment. Zeroing out is preferable sometimes, weirdly.
- ska 3y ago
  > Zeroing out is preferable sometimes, weirdly. It's not even weird. A "live" project requires effort, and that has opportunity cost.
- lesam 3y ago
  Do you have any sense why this is true? I get preferring (10x or 0x) to (1.5x). I don’t get preferring a near-certainty of 0x to some recovery of their capital with a pivot to selling a smaller-but-sustainable business. Is it something like they’re measured by LP’s (or someone?) on only non-zeroed investments?
  - rjzzleep 3y ago
    Don't VC companies basically gamble with other peoples money? So yes, the person that actually put the money into the fund might want 1x or 1.5x out over 0x, but for the VC firm it doesn't matter, right? It's not their money to begin with.
    - vidarh 3y ago
      LPs in a VC fund know very well what the fund is incentivised to deliver. I worked for one, and our LPs would aggressively write low performers down to zero. It didn't matter to them either. Obviously wouldn't turn it down if still possible once all else has failed, but retaining even a fraction of a percent shot at a higher return was what mattered most, even knowing it was extremely unlikely. Investors in these funds are diversified - they invest in VCs to take the high risk bets. They invest elsewhere for the steadier, lower risk returns.
  - deleted 3y ago
    [deleted]
otteromkram 3y ago
I'm surprised they didn't hire you as an advisor. Maybe they would still be solvent if they did.
berniedurfee 3y ago
You’re being way too reasonable! A stable, self-sustaining business is for mom and pop corner pizza shops. Tech companies want to disrupt and destroy everything in their market segment or die trying. I wish there were more companies that would focus on stability, sustainability and longevity. But in my experience lack of rapid growth is a mark of failure for most companies.

by ssharp 3y ago

streetcat1 3y ago

Because this is not what the VC wants. The VCs are diversified across many startups and frankly make most of their money from tail event startups in their portfolio (e.g. Uber / Facebook). Since they don't know which startup will be the tail event, they don't want a profitable business, but a max growing business. This is different from the bootstrap model.

paulryanrogers 3y ago
Then why not sell it as a viable business? Or would it be too costly to trim it back and execute the sale?
- gtirloni 3y ago
  It's about perspective. What to you (and pretty much anyone else) looks like a business that just needs adjustments to reach profitability, to the VCs it's profile maintenance work for little relative benefit in the long-term. The chances of that company turning 10-20x profits in the next few years is basically zero and they just cut their losses (in their view).
- PeterisP 3y ago
  When it's still enough runway to trim it down, there's often still some hope of greater success - and a VC investor might believe that it's more valuable to have a 1% chance of it becoming a unicorn or a few percent chance of arranging some last-minute buyout, rather than pick up the 100% certain but low price it has as a non-growth business based on its revenue.
  - senderista 3y ago
    Yes, due to their large bankroll and diversified position, VCs can afford to be risk-neutral and only care about expected returns. Founders and employees obviously cannot be risk-neutral, ergo startups are a great bet for a VC and a terrible bet for anyone else.
    - wbl 3y ago
      The amount of VC-founder side deals that are possible is pretty shocking. Stuff like letting them cash out early.
      - PeterisP 3y ago
        I don't really see why such a side deal would be possible - if the VC goal is to get the founder-manager to try for that narrow hope of few percent of major success and discourage them from settling for a lower-value stable business, allowing the founders to cash out would be counterproductive, it's in the VCs interests to ensure that founders personal financial motivation is aligned to theirs, that the founders are also motivated to go big or go bust. In essence, if the startup is slowing down and perhaps not going anywhere, then the standard existing deal with founders where the founders can cash out only if they enable to VCs cash out at a profit (for example, if they manage to pull out all the stops to make a failing startup look attractive to some bigger fool) is exactly what VCs want, and in such a situation the founders have no leverage to extract a compromise that's worse for VCs.
        wbl 3y ago
        The typical situation is the company has been around for a few years and the founder has some reasonable sounding expenses. Then the next round includes some cashing out as new investors join.
deleted 3y ago
[deleted]
jongjong 3y ago
I know this is the case but I wonder if this is a self-fulfilling prophesy. I can easily imagine an alternate reality where VCs invest more thoughtfully based on more careful analysis of companies and they would have a much higher success rate and end up with even higher returns without creating unsustainable wealth inequality.
- TuringTest 3y ago
  > an alternate reality where VCs invest more thoughtfully based on more careful analysis of companies and they would have a much higher success rate and end up with even higher returns without creating unsustainable wealth inequality. Unlikely. The problem of that view is that, when you're handling large uncertainty, you don't know which projects are the ones you should cancel and which ones to nurture. Past performance is a terrible indicator for lucky shots. See the Talent-Luck simulation for instance.[1] You measure a population of projects affected affected by random events and profiting proportionally to talent, and the projects that end better off are the ones that chain multiple beneficial lucky strikes, with talent having little influence past a minimum level. And the way to maximise gains over the whole population is setting a small flat subsidy for all, allowing everybody to explore their talent even after a wrong turn. 1 https://www.inc.com/chris-matyszczyk/so-youre-smart-but-youre-not-rich-this-eye-opening-new-scientific-study-tells-you-why.html https://www.inc.com/chris-matyszczyk/so-youre-smart-but-your...
  - jongjong 3y ago
    >> And the way to maximise gains over the whole population is setting a small flat subsidy for all, allowing everybody to explore their talent even after a wrong turn. I don't think that's what VCs did. It looks more like they dumped millions of funding on a tiny number of hand-picked companies and used short term traction as the main metric and they equated profitability as anti-growth, failing to realize that, without demanding profits, growth could be produced artificially using money/advertising and that it doesn't mean that users actually want to use the product in the long run. Profitability is how you know that users want to use a product; otherwise a company could just 'launder' investment money to their users somehow and of course nobody will refuse free surplus value and hence they will attract users... Until the investment money runs out and the surplus value stops being handed out to users. Just think of Uber investors subsidizing rides as an example, as soon as that subsidy goes away, there's a good chance it will start declining. Uber is still unprofitable.
firecall 3y ago
I had to search up what a Tail Event Startup was :-) TIL a new term :-)

wheels 3y ago

> Something is clearly better than nothing. That's not a major component of venture backed startups. For a company that has already been written off as a failure, often the board members that represent the VC would rather not have to stay involved and keep showing up for meetings -- they could be elsewhere; there's an opportunity cost.

solatic 3y ago
It's not like a board seat is this magic item that is stuck to you and you can't get rid of of you tried. If a VC had truly written off the company, and board meetings are not worth their time anymore, they can just resign their seat.

girvo 3y ago

> Something is clearly better than nothing. To you and I, this is patently obvious. This is not true however for VCs. In a lot of them, they'd prefer you fail entirely rather than limp along making 1x, 1.5x their investment. Zeroing out is preferable sometimes, weirdly.

ska 3y ago
> Zeroing out is preferable sometimes, weirdly. It's not even weird. A "live" project requires effort, and that has opportunity cost.
lesam 3y ago
Do you have any sense why this is true? I get preferring (10x or 0x) to (1.5x). I don’t get preferring a near-certainty of 0x to some recovery of their capital with a pivot to selling a smaller-but-sustainable business. Is it something like they’re measured by LP’s (or someone?) on only non-zeroed investments?
- rjzzleep 3y ago
  Don't VC companies basically gamble with other peoples money? So yes, the person that actually put the money into the fund might want 1x or 1.5x out over 0x, but for the VC firm it doesn't matter, right? It's not their money to begin with.
  - vidarh 3y ago
    LPs in a VC fund know very well what the fund is incentivised to deliver. I worked for one, and our LPs would aggressively write low performers down to zero. It didn't matter to them either. Obviously wouldn't turn it down if still possible once all else has failed, but retaining even a fraction of a percent shot at a higher return was what mattered most, even knowing it was extremely unlikely. Investors in these funds are diversified - they invest in VCs to take the high risk bets. They invest elsewhere for the steadier, lower risk returns.
- deleted 3y ago
  [deleted]

otteromkram 3y ago

I'm surprised they didn't hire you as an advisor. Maybe they would still be solvent if they did.

berniedurfee 3y ago

You’re being way too reasonable! A stable, self-sustaining business is for mom and pop corner pizza shops. Tech companies want to disrupt and destroy everything in their market segment or die trying. I wish there were more companies that would focus on stability, sustainability and longevity. But in my experience lack of rapid growth is a mark of failure for most companies.