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> By relying on private investors for a longer period of time, start-ups get more runway to figure out sustainable business models Can anyone explain, what is

> By relying on private investors for a longer period of time, start-ups get more runway to figure out sustainable business models Can anyone explain, what is the rough amount of runway that a company should need? For instance, are there rough estimates expected for when a company should be able to reach profitability depending on product type? I was watching the How to Start a Startup lecture on how to raise money (http://startupclass.samaltman.com/ http://startupclass.samaltman.com/) and was astonished about how many rounds of funding VC's expect to give out after seed funding (A, B, C, D rounds, the letters seem to keep going). I'm thinking of bootstrapping a company and easily also see the appeal of getting funding, in order to hire a team and get the product out faster. But why are so many rounds necessary? Is there some business or economics theory out there that would explain the amount of runway needed for each business or product type? For instance, if I were launching an ice cream truck tomorrow, I'd expect profitability in the very short term compared to say, something like SpaceX.

suprasanna 11y ago
As a quick 'part answer' to your question, a lot of the reasoning behind so many rounds for many companies is actively choosing to stay unprofitable by pouring would-be profits (and new investment dollars) into gaining more customers. The idea being that as long as you "know" you can get your customer to be worth more than you paid to acquire her, eventually your company will be profitable once you slow down (or hit a 'max') with user acquisition.
deleted 11y ago
[deleted]
- Loughla 11y ago
  Do you care to expand on that at all?
- tinkerdol 11y ago
  I don't know anything about investing, that's why I'm asking :) Tell me where to start.
  - solve 11y ago
    The goal is to maximize the predicted expected value of the stock price, based on all possible sources of value captured by the company, over an effectively infinite time horizon. Absolutely nothing else takes priority over that, except a few risk controls. The word "need" should never be said in this context. Maximizing expected value of the stock price through whatever means necessary is all that matters in this context. There is no requirement to meet profitability within a human lifetime. The timescale is effectively infinite, in many cases, and particularly the highest value cases that professional investors focus on. See Amazon, see NYC apartment rental costs versus purchase costs, etc. What's the simple formula for valuing a company? Nonsense, no simple formula should ever exist, if the markets are functioning properly.
    - tinkerdol 11y ago
      Thank you for your response. That's an interesting point, about an effectively infinite timescale, but to play devil's advocate, it can't be true. Greater than a human lifetime? Sure, but not infinite. Therefore, what timescales are we talking about and for which different types of businesses? To use your examples, I don't think anyone is expecting Amazon to be huge in 500 years. Or, if you don't agree with me, change that number to 5000 or 50,000 (point being, there is a limit). Therefore, it wouldn't make sense to indefinitely pour in investments as we wait for its successor or the singularity to take over; what is the litmus test to see if a company is actually healthy in the meantime? Let's define "healthy" as eventually returning more value than its investments, if you agree that the definition makes sense. Could you also expand on your last point? >Nonsense, no simple formula should ever exist, if the markets are functioning properly. I'm not sure what that means.
      - deleted 11y ago
        [deleted]
      - Retric 11y ago
        Time value of money is generally used to account for this. If you discount future cash flows by ex: 5%/year then a steady income of 1$/year forever is not worth infinite money. Instead it's worth ~20$ and you capture 1/2 of that in the first 14 years. Another approach is to assume a rate of failure etc, and build a more complex model, but it averages out to some discount on future cash flows.
zxcvvcxz 11y ago
> Can anyone explain, what is the rough amount of runway that a company should need? Depends on your goals. If you want to dominate the market and become a monopoly, then you need enough to outspend all your competitors while surviving. Meanwhile if you're starting a lifestyle business, you need only enough to put a roof over your head and get some food. > I was watching the How to Start a Startup lecture on how to raise money (http://startupclass.samaltman.com/ http://startupclass.samaltman.com/) and was astonished about how many rounds of funding VC's expect to give out after seed funding (A, B, C, D rounds, the letters seem to keep going). Because if VCs are funding a company, they want the company to be on the former end of the spectrum I just described. Anything tech with network effects demands a clear winner these days, there is such a huge difference between a Facebook and a [insert 2nd place competitor here]. Think of it like an arm's race: the rounds are necessary because others are raising the rounds. Others are raising the rounds to maximize the resources they can throw towards winning the market exclusively. The underlying principle that creates this dynamic are winner-take-all network effects, as mentioned. People are going to open up only 1 app for a particular function, is it going to be yours? A lot of people talk about bootstrapping and "lean startup" and lifestyle businesses with great praise. And for a particular set of goals, these are excellent strategies. But there's also a sense of looking down on these huge VC-funded mammoth companies trying to dominate the market ("they don't even build elegant tech, they just throw tons of money at the product"). But see this is where the real War of Business is being fought, that's where Ubers and AirBnBs are being created. Either one of those could've stayed a small niche local lifestyle business. You might find interesting the following Ben Horowitz article: http://allthingsd.com/20100317/the-case-for-the-fat-startup/ http://allthingsd.com/20100317/the-case-for-the-fat-startup/
- tinkerdol 11y ago
  Thanks for the response! Let's assume we want to dominate the market and not create a lifestyle business. Isn't it a benefit of a more lean/bootstrapping style to be forced into finding a product people love faster (rather than burning money marketing the product)? For instance, what about eBay as an example of a side project that really took off. Are such instances really anomalies?

suprasanna 11y ago

As a quick 'part answer' to your question, a lot of the reasoning behind so many rounds for many companies is actively choosing to stay unprofitable by pouring would-be profits (and new investment dollars) into gaining more customers. The idea being that as long as you "know" you can get your customer to be worth more than you paid to acquire her, eventually your company will be profitable once you slow down (or hit a 'max') with user acquisition.

deleted 11y ago

[deleted]

Loughla 11y ago
Do you care to expand on that at all?
tinkerdol 11y ago
I don't know anything about investing, that's why I'm asking :) Tell me where to start.
- solve 11y ago
  The goal is to maximize the predicted expected value of the stock price, based on all possible sources of value captured by the company, over an effectively infinite time horizon. Absolutely nothing else takes priority over that, except a few risk controls. The word "need" should never be said in this context. Maximizing expected value of the stock price through whatever means necessary is all that matters in this context. There is no requirement to meet profitability within a human lifetime. The timescale is effectively infinite, in many cases, and particularly the highest value cases that professional investors focus on. See Amazon, see NYC apartment rental costs versus purchase costs, etc. What's the simple formula for valuing a company? Nonsense, no simple formula should ever exist, if the markets are functioning properly.
  - tinkerdol 11y ago
    Thank you for your response. That's an interesting point, about an effectively infinite timescale, but to play devil's advocate, it can't be true. Greater than a human lifetime? Sure, but not infinite. Therefore, what timescales are we talking about and for which different types of businesses? To use your examples, I don't think anyone is expecting Amazon to be huge in 500 years. Or, if you don't agree with me, change that number to 5000 or 50,000 (point being, there is a limit). Therefore, it wouldn't make sense to indefinitely pour in investments as we wait for its successor or the singularity to take over; what is the litmus test to see if a company is actually healthy in the meantime? Let's define "healthy" as eventually returning more value than its investments, if you agree that the definition makes sense. Could you also expand on your last point? >Nonsense, no simple formula should ever exist, if the markets are functioning properly. I'm not sure what that means.
    - deleted 11y ago
      [deleted]
    - Retric 11y ago
      Time value of money is generally used to account for this. If you discount future cash flows by ex: 5%/year then a steady income of 1$/year forever is not worth infinite money. Instead it's worth ~20$ and you capture 1/2 of that in the first 14 years. Another approach is to assume a rate of failure etc, and build a more complex model, but it averages out to some discount on future cash flows.

zxcvvcxz 11y ago

> Can anyone explain, what is the rough amount of runway that a company should need? Depends on your goals. If you want to dominate the market and become a monopoly, then you need enough to outspend all your competitors while surviving. Meanwhile if you're starting a lifestyle business, you need only enough to put a roof over your head and get some food. > I was watching the How to Start a Startup lecture on how to raise money (http://startupclass.samaltman.com/ http://startupclass.samaltman.com/) and was astonished about how many rounds of funding VC's expect to give out after seed funding (A, B, C, D rounds, the letters seem to keep going). Because if VCs are funding a company, they want the company to be on the former end of the spectrum I just described. Anything tech with network effects demands a clear winner these days, there is such a huge difference between a Facebook and a [insert 2nd place competitor here]. Think of it like an arm's race: the rounds are necessary because others are raising the rounds. Others are raising the rounds to maximize the resources they can throw towards winning the market exclusively. The underlying principle that creates this dynamic are winner-take-all network effects, as mentioned. People are going to open up only 1 app for a particular function, is it going to be yours? A lot of people talk about bootstrapping and "lean startup" and lifestyle businesses with great praise. And for a particular set of goals, these are excellent strategies. But there's also a sense of looking down on these huge VC-funded mammoth companies trying to dominate the market ("they don't even build elegant tech, they just throw tons of money at the product"). But see this is where the real War of Business is being fought, that's where Ubers and AirBnBs are being created. Either one of those could've stayed a small niche local lifestyle business. You might find interesting the following Ben Horowitz article: http://allthingsd.com/20100317/the-case-for-the-fat-startup/ http://allthingsd.com/20100317/the-case-for-the-fat-startup/

tinkerdol 11y ago
Thanks for the response! Let's assume we want to dominate the market and not create a lifestyle business. Isn't it a benefit of a more lean/bootstrapping style to be forced into finding a product people love faster (rather than burning money marketing the product)? For instance, what about eBay as an example of a side project that really took off. Are such instances really anomalies?