> According to the CEO's linkedin post, they were basically trying to keep up appearances of being a 200 person company until some greater fool bought them out, which appears to have failed.
Because that is what startups do. 80% of startups that are "successful" follow this pattern
You shoot for the moon, if you don't take massive risks, then you won't be rewarded.
It sounded like they were about to be bought out or aquihired, but it fell apart at the last moment (It's not uncommon)
> Far better to be a growing, profitable 50 person company than a cash-burning Potemkin unicorn.
because probably they looked at the pipeline and realised that if they wanted to deliver the features/customer growth they needed, they required 200 people to get there.
"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.
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.
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.
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.
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.
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.
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).
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.
> 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.
>> 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.
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.
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?
I've worked at a VC, and consider that it is a low margin business until/unless you returns significantly above your targets. You get a management fee, which is a low yearly percentage of the invested amounts, and then you get carry - a proportion of the returns above a set target for the fund as a whole.
But carry doesn't kick in until you start exiting - for a typical VC fund it takes many years. (I left a year ago, and we were 6 years in when I left; I retained a portion of my carry rights, but still won't know for a couple more years how much I get if I get anything at all)
And surviving on the management fees after the initial phace of placing the investment requires being lean and not putting effort into your low performers.
Meanwhile while a 1.5x is better than nothing, a company that sells at 1.5x is likely to be near 0x for you, because odds are high that to get there there'll be one or more funding events along the way to help that happen at/triggering terms that will dilute you massively. And odds of failure remains high.
And you need the 10x or 100x's, but the low ones means little - most successful funds pay back the entire initial investment from just a couple of investments, and make their return on a couple more. Quite often a single "fund returner" carries the entire fund.
A small recovery here and there at makes almost no difference.
So even a 1% chance of salvaging a "moonshot" is better - most cases where you get back less than 1x is going to be a rounding error of your funds overall performance.
A VC is not where to get capital of you want to pull back and pivot when things get tough.
(And yes, you should keep that in mind if taking a job at a VC backed company as well, and it's part of why stock/options should be on top of your normal salary, not compensating for a low one, unless you get founder-level stock amounts, and even then, think it through; I once almost torpedoed a VC deal as a founder because I demanded a commitment to raising salary levels after the next raise, and I don't regret it for a moment because life would have sucked without it)
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.
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.
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.
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.
Oh indeed. But the problem is, you are the CEO, you are being told by your investors that you need more product market fit. This means selling more shit. PMF is the driver of value (we have x thousand/million/billion customers, therefore we are valuable)
That means you need more velocity. Which means more people.
More sales, more presales engineers, more subsidies to undercut the competition.
You have to remember that VCs are rarely there to make sustainable businesses, they are there to make valuable assets that can be sold. Even the nomenclature reflects this, startups are in batches. Because out of a set of 100, you expect 90 to fail after two years.
They could have done layoffs like almost every startup and big tech company did in the past few years. They could have gone there with 50 good employees. Gumroad almost went bankrupt then came back from the ashes.
>80% of startups that are "successful" follow this pattern
Doesn't this sound like selection bias? If every other startup follows this shoot fornthe moon plan then yeah it just becomes a self fulfilling prophecy
> But everyone is following the runbook as if they were the successful 1% (not even the successful 5%, they all act as if they are the top 1%)
I think it's because that's what makes sense from the VC's perspective. To the VC each startup is a lottery ticket with a low probability of an outsized success and a high probability of failure.
You can burn the startup as hard as you can, because the cost is primarily borne by the startup and the founders. If the startup fails it doesn't matter much to the investor because the portfolio is constructed to be resilient to a large number of failures.
What the OP is getting at is: if you look at this from the startup/founder's perspective isn't that kind of a huge waste? And yeah, it is. But I think the idea is that startups and founders aren't pets, they're cattle.
We are, of course, assuming that they grew the main dev group to 100, rather than creating a new team, for a new product.
The biggest issue is that product and project management isn't taught well. There isn't a wealth of easy to understand literature. The stuff thats available tends to be LLM level waffle.
you can hire consultants, but they also tend to speak in business vague, without offering specific advice.
Sadly, what you need are experienced PMs, lead engineers and business types. They are hard to find, and tend to come late to startups.
It is possible to grow a company from 25 devs to 100 and keep velocity. But it requires planning, clear communication and clear process to make sure that people are not spinlocking or re-inventing the wheel. I know its possible, because I've been at a place that's done it.
Because that is what startups do. 80% of startups that are "successful" follow this pattern
You shoot for the moon, if you don't take massive risks, then you won't be rewarded.
It sounded like they were about to be bought out or aquihired, but it fell apart at the last moment (It's not uncommon)
> Far better to be a growing, profitable 50 person company than a cash-burning Potemkin unicorn.
because probably they looked at the pipeline and realised that if they wanted to deliver the features/customer growth they needed, they required 200 people to get there.