First, this comment on Reddit isn't fundamentally better or more informed than any of dozens of comments that have expressed the exact same thing on HN. I'm not complaining, so much as again remarking about how "A Reddit's comment about $X" has become such a powerful signal of quality.
Second: there's a grain of truth† to the "bad decisions by VCs" or "working for VCs", but he's overplaying it in this comment. There's two countervailing forces here: (a) VCs don't care as much about which "flavor" their portfolio companies are producing than they do about the economics: there are indeed plenty of solid businesses you can grow that aren't VC-compatible. But you can't fault the VCs for that: when you took their money, you promised not to go down the slow path. And (b) when companies are doing well, VCs tend to get out of the way. It's when you're not doing well that the board's opinion starts to matter.
Third: The numbers he's using here set off alarm bells for me. He calls 1-10MM/yr companies "lifestyle" companies and "100MM+/yr" companies VC-style companies, and implies 10-100MM/yr businesses are in a no-mans-land. Uh, no? Companies doing 20-30-40MM/yr in revenue will probably have investors beating down their doors. I don't believe anyone is shunning companies doing 8 figure revenues.
† The first VC-funded company I worked at/cofounded was derailed by a crazy, VC-instigated decision to build out a CDN to go head-to-head with Akamai. But even then, our lack of traction is what set the scene for that dumb decision.
I've had multiple VCs call a potential 1-10MM/yr business a lifestyle business. The pressure to move away from that idea to something with a higher market cap is tremendous.
Regarding your second point, "you promised not to go down the slow path," I think that's true in most cases, but there is some VC money that's too easy to get, and the founder's don't really realize the promise they're making.
I feel like this is particularly true among YC startups, where it seems fashionable to take VC money right after demo day, regardless of other company factors (IE: traffic, growth, revenue, etc). The "invested in the team" argument works for YC and Start Fund, but it feels almost irresponsible for VC's to invest in first time entrepreneurs on the same premise. My sample size is tiny, but I think it puts far too many people in a situation they don't want to be in (which they'll realize X months down the road).
That last part is pretty controversial. Interested in other people's thoughts.
I may be misinterpretting the parent, but I don't think he was disagreeing with the assessment that a 1-10MM/yr business is a lifestyle business, but more that a 10-100MM/yr business is "no man's land".
Also, from my experience, founders do actively promise not to go down the slow path. It isn't some implicit agreement. When you pitch to investors usually 2 of the most common questions are "What is your growth plan?" and "What are your exits routes?". If you project to be a 10MM/yr business in 5 years, VCs probably won't pull the trigger, and if you told them 100MM/yr in 5 years you can understand why a VC would maybe think you aren't moving fast enough if you're an order of magnitude off that number.
As for YC companies, as I've heard many time on HN when there is a post about an investment or an exit, it's all about the terms and where the company is, however it seems from reading his essays like PG's advice is to be aggressive about taking money when you can get it, so that may permeate down to the YC companies so you could be right.
"But even then, our lack of traction is what set the scene for that dumb decision."
But that's exactly what may be the problem with VCs. Sometimes you'd have to go through a dozen of ideas before you find one works. If you're frugal enough and can keep the company afloat for a few years, you're likely to succeed in the end.
But VCs may push the company to burn all cash in the next 4 months pursuing the idea #2. And if it doesn't work - you're down and out.
Very few businesses have the very first idea paying off handsomely. This may make VC's capital a very high-risk proposition: you either hit the jackpot with your first idea or you end up with nothing.
No, you're mixing up a chicken/egg thing here. It's not the problem with VCs that, if you're frugal, you can make an early round last until you find the right idea. You can't have that early round money without promising a certain kind of return to the VCs. It's your fault (or, mine, in this case) that VC money has been put at risk.
You can't moralize about VC's "pushing the company to burn all cash". It's the VC's money you're talking about The VCs invest with the expectation that you're going to go for broke. That's the model. Most startups fail, even the carefully run ones. The 1-2 successes need to pay back the failures and then some.
They have a finite attention span. This naturally leads to them encouraging companies to try the idea that is only 20% likely to work but takes 18 months over the idea that is 40% likely to work but takes 4 years to work.
Regarding numbers, I believe he's talking about maximum potential revenue as determined by the market size.
VCs won't invest in companies they think can only grow so big because it's not enough returns for them. In that sense, he's correct - VCs won't blink at a business that has a theoretical maximum revenue in 8 figures.
Plenty of companies that cannot themselves beat 8 figure revenue numbers are worth many multiples of 8 figures to acquiring companies with better sales channels or strategic gaps.
I agree that the mere promise of eventual $10MM/yr revenues is probably not an appealing pitch. But the reality of $10MM/yr revenue is wildly different. If you're bringing in $10MM/yr, you can probably do whatever you want.
[Companies with 8 figures of revenue] are worth many multiples of 8 figures to acquiring companies with better sales channels or strategic gaps. <-- this is probably the most important sentence written on HN in July.
Let's say that you've built up, from essentially nothing, enough of a presence in your industry that you're selling $10 million a year of SaaS. That's only 10k accounts at a blended average of $100 a month -- far less if, like many SaaS companies, you make a significant whack of your money on custom enterprise deals that are not on the pricing page.
Now consider this company from the perspective of a Fortune 500 like, say, Intuit:
1) They have software which exists.
2) Their software creates clear value for customers. They have 10,000 people signing their praises and case studies up the wazoo. We know people will pay $100 a month for it -- we have copious, audited financial statements that prove that.
3) Oh yeah, we're a Fortune 500 company. Launching a new product costs us $250 million and we could fail to produce something that both achieves technical success and produces any value for anyone anywhere. Assuming we do, selling to our built-in base of hundreds of thousands of customers is what we do best.
Intuit can totally justify spending, say, $300 million to buy $20 million a year of revenue and the opportunity to 20x that by selling it to everyone who has ever heard of Quickbooks. Or mid 8 figures for something which has, say, a million a year in revenue.
We ran into this mindset in early meetings with some VCs once-upon-a-before-we-decided-to-bootstrap. We had some market validation, and didn't forsee needing much money to go from our humble launch to national presence (at the time we would have struggled to spend even $150k).
But by asking for a low figure, it seemed to signal that we didn't see ourselves as the next $100 million business (the horror!). As an experiment, we doubled the number in subsequent discussions and got a far more positive response. In the end we decided that getting early investment wasn't for us.
I completely appreciate where the more skeptical VCs were coming from, though. If you're going to spend the same amount of your time working with a group of people long-term, you might as well put that time into a company that is eventually worth billions instead of millions.
There's actually raw mechanical economics feeding into this: it turns out to be hard for VCs to find good places to put money at risk, and also a giant pain to be on lots of boards. Invest/dont-invest can sometimes be more or less binary, and if true, desired-amount=maximum.
Couldn't agree more with this point. This is something that many people, the OP (or post writer included), seems to always miss.
VC isn't an emotion game that is driven by jealousy - any more than any other business is driven by jealousy. It's driven by simple economics.
In order for a fund manager to return any money, they have to look for the deals that will compensate for 66% of their deals that go sideways (or tank). Ironically, some probably push all of their portfolio companies to try and achieve this which leads to an increase in the number of companies they have that goes sideways.
But I hardly think they are all sitting around saying..."Gosh Darnit...I never got into Facebook...so here is $5M, add on this Facebook feature."
People that think like that, you can usually tell from having a 10 minute conversation with them. If you take their money after that, then that's your problem. Money comes with strings.
Once you understand what VCs are looking for, it makes it easier for you to align your goals with theirs.
That's why Github never raised money until just now...because they understand the economics that VCs are looking for. They believe, rightfully so, that they have a strong chance of being that company for them.
A16Z, doing that deal, could easily be one of the best moves they ever did. That was a stroke of genius, all around.
First, this comment on Reddit isn't fundamentally better or more informed than any of dozens of comments that have expressed the exact same thing on HN. I'm not complaining, so much as again remarking about how "A Reddit's comment about $X" has become such a powerful signal of quality.
Second: there's a grain of truth† to the "bad decisions by VCs" or "working for VCs", but he's overplaying it in this comment. There's two countervailing forces here: (a) VCs don't care as much about which "flavor" their portfolio companies are producing than they do about the economics: there are indeed plenty of solid businesses you can grow that aren't VC-compatible. But you can't fault the VCs for that: when you took their money, you promised not to go down the slow path. And (b) when companies are doing well, VCs tend to get out of the way. It's when you're not doing well that the board's opinion starts to matter.
Third: The numbers he's using here set off alarm bells for me. He calls 1-10MM/yr companies "lifestyle" companies and "100MM+/yr" companies VC-style companies, and implies 10-100MM/yr businesses are in a no-mans-land. Uh, no? Companies doing 20-30-40MM/yr in revenue will probably have investors beating down their doors. I don't believe anyone is shunning companies doing 8 figure revenues.
† The first VC-funded company I worked at/cofounded was derailed by a crazy, VC-instigated decision to build out a CDN to go head-to-head with Akamai. But even then, our lack of traction is what set the scene for that dumb decision.