Ask YC: Expectations and Reality (Startups)
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This is as thorny a discussion as which language is the best one. And the ultimate answer is in the same vein: it depends, but the decision should always be driven by the customer. My company had revenue from month 2 and won a $100K business plan because of value we brought to customers. I still looked into raising money, but at the end of the day I reminded myself what I had always thought: I don't need to raise money, and changes that would make existing customers less pleased were on the way if I did. The company is growing fast and customers love it because we concentrated on them and ignored the startup hoopla when it conflicted with bringing value to customers. Ultimately, you should raise money if you think it is in your _customers'_ best interests.
0. Sorry I haven't replied Christmas came unexpectedly.
1. As always, the average level of the discussion here is far above average for the Internet.
2. Thank you for contributing your thoughts here. This is a deal-breaking issue for me and will determine whether or not I start a company or not.
3. It is not about greed, paranoia, or any malicious motivation. It's about doing something that's decently interesting to me, helpful to customers, and the necessary condition that you, knowing the most about the situation as a whole, should have ultimate control over the decisions that directly affect the user experience.
3 ways to maintain 100% control and 100% equity:
- borrow (credit cards, 2nd mortgage, family & friends)
- consulting gigs
- paying customers
In spite of all the talk about finance rounds, you CAN bootstrap and succeed. A little slower, a little surer.
It's a tradeoff. How fast you want to grow vs. how much you want to control. Your call.
- borrow (credit cards, 2nd mortgage, family & friends)
- consulting gigs
- paying customers
In spite of all the talk about finance rounds, you CAN bootstrap and succeed. A little slower, a little surer.
It's a tradeoff. How fast you want to grow vs. how much you want to control. Your call.
It's also a sure-fire way to fail. One thing nobody ever mentions about raising money: You're aligning your interests with some pretty powerful people. The fact is, nobody really wants you to succeed -- everybody is trying to make it themselves, too. But once you get investors, you get growth capital, advice, and a powerful ally, who knows people. The power of having other people who really want your business to succeed to can't be understated. It's:
- Good advice (with the right investor).
- Someone with connections who is constantly talking about you and trying to do good things for you.
- Another person you are accountable to (failure isn't just your own, that's too easy).
It all boils down to the type of business you are trying to make. If you'd be happy pulling in 200k of revenues after building a company for 2 years and being barely profitable with 2 full-time employees and other misc costs, then you might be able to bootstrap, maybe. If you're trying to grow a business fast, or grow a huge business, it's just not going to work.
- Good advice (with the right investor).
- Someone with connections who is constantly talking about you and trying to do good things for you.
- Another person you are accountable to (failure isn't just your own, that's too easy).
It all boils down to the type of business you are trying to make. If you'd be happy pulling in 200k of revenues after building a company for 2 years and being barely profitable with 2 full-time employees and other misc costs, then you might be able to bootstrap, maybe. If you're trying to grow a business fast, or grow a huge business, it's just not going to work.
"It's also a sure-fire way to fail."
7 million small business owners may disagree with you.
I do agree with the rest of your post. Nothing like having the many resources of well connected investors on your side.
Still, given the choice of having an investor or a customer on my side, I'd choose the customer every time.
I stand by my original post: Want control? Borrow. Want growth? Share.
7 million small business owners may disagree with you.
I do agree with the rest of your post. Nothing like having the many resources of well connected investors on your side.
Still, given the choice of having an investor or a customer on my side, I'd choose the customer every time.
I stand by my original post: Want control? Borrow. Want growth? Share.
If can consult with the same folks you want as customers there is a lot of synergy in your product development and you normally end up with better early cash flow and a better product. You don't provide much detail about the nature of your startup, but "small is beautiful" if you want to maintain control. Find a niche market that has a problem you bring unique value to.
Once it's more than just you in the startup--whether it's partners, employees, or customers--you will need to sell your ideas and to compromise to achieve your larger mission. If it's a work of art or a hobby then you can be in complete control and not worry whether it's salable or appreciated. But if it's a business it will involve negotiation and compromise.
The Japanese have a phrase "if he works for you, you work for him" that is a good precept when it comes to attracting and retaining employees. Many early stage startups are effectively volunteer organizations, so you need to think through how you are going to attract and retain the talent you need until you get to positive cash flow.
Borrowing money is a recipe for getting started but you have to have a realistic plan for how you will pay it back. This is why investors are so demanding as well, most don't really want to run your company, they just want a return on their investment.
In the end it's positive cash flow that allows you to maintain control, and whether it's from consulting or from product sales it's from paying customers. And they exercise a fair amount of control in their own way.
So if you want to be in control I would stop developing and start selling, making sure that someone wants to pay for what you are planning to build.
Once it's more than just you in the startup--whether it's partners, employees, or customers--you will need to sell your ideas and to compromise to achieve your larger mission. If it's a work of art or a hobby then you can be in complete control and not worry whether it's salable or appreciated. But if it's a business it will involve negotiation and compromise.
The Japanese have a phrase "if he works for you, you work for him" that is a good precept when it comes to attracting and retaining employees. Many early stage startups are effectively volunteer organizations, so you need to think through how you are going to attract and retain the talent you need until you get to positive cash flow.
Borrowing money is a recipe for getting started but you have to have a realistic plan for how you will pay it back. This is why investors are so demanding as well, most don't really want to run your company, they just want a return on their investment.
In the end it's positive cash flow that allows you to maintain control, and whether it's from consulting or from product sales it's from paying customers. And they exercise a fair amount of control in their own way.
So if you want to be in control I would stop developing and start selling, making sure that someone wants to pay for what you are planning to build.
Long time listener, first time caller. Sorry that I didn't put the Ask YC (didn't know if it added it automatically or not).
I finally found a few potential cofounders, quit my job, and started working obsessively on my ideas. I'll have a demo in a few weeks and I need to make a decision about whether or not I actually want to go through with this.
My main concern is with the funding/stock/control issue. Ignorant or not, I (and the other founder hackers) need to have complete control over things from top to bottom. I am certainly open to suggestions & advice from a board, but the decisions ultimately have to rest with me.
In your experience, has this been an issue? Is this an unrealistic expectation?
I finally found a few potential cofounders, quit my job, and started working obsessively on my ideas. I'll have a demo in a few weeks and I need to make a decision about whether or not I actually want to go through with this.
My main concern is with the funding/stock/control issue. Ignorant or not, I (and the other founder hackers) need to have complete control over things from top to bottom. I am certainly open to suggestions & advice from a board, but the decisions ultimately have to rest with me.
In your experience, has this been an issue? Is this an unrealistic expectation?
From what I've seen, most Angels will be fine in and "advisory" role, and don't expect to be given the right to make decisions for the company.
But with money raised by serious venture capital firms, they definitely expect more control. It isn't so much direct as it is indirect. The VC firms will have control over a significant portion (if not a majority) on the Board of Directors. As such, they'll likely have power to hire and fire top-level managers. Including yourself. Therefore, while you're not obligated to obey them, you'll be more inclined to follow their advice since your job is, essentially, in their hands.
That, in its essence, is why you should 1) avoid VC cash unless completely necessary, and 2) pick your VC firm carefully (don't always go with the highest valuation or biggest name).
But with money raised by serious venture capital firms, they definitely expect more control. It isn't so much direct as it is indirect. The VC firms will have control over a significant portion (if not a majority) on the Board of Directors. As such, they'll likely have power to hire and fire top-level managers. Including yourself. Therefore, while you're not obligated to obey them, you'll be more inclined to follow their advice since your job is, essentially, in their hands.
That, in its essence, is why you should 1) avoid VC cash unless completely necessary, and 2) pick your VC firm carefully (don't always go with the highest valuation or biggest name).
Do you need funding? If so, you're going to lose some control.
In all seriousness, the odds of finding an investor who will hand over money with no strings attached are miniscule -- most investors (quite reasonably) want to avoid the "I think I should get a big bonus this year... oh look, the company has run out of money, too bad guys" scenario. (And this scenario isn't necessarily quite so blatant -- sports teams, for example, are notorious for "losing" money while they funnel inflated contracts to other companies with the same owners.)
That said, not all companies need funding. Do you have enough money saved to let you survive while you write code? Can you avoid capital costs and long-term leases by working out of your home(s) and renting servers instead of buying computer hardware?
If you can bootstrap, do it. If not, accept that you're going to have to give up some control; and try to find the funding which will let you retain as much control as possible.
In all seriousness, the odds of finding an investor who will hand over money with no strings attached are miniscule -- most investors (quite reasonably) want to avoid the "I think I should get a big bonus this year... oh look, the company has run out of money, too bad guys" scenario. (And this scenario isn't necessarily quite so blatant -- sports teams, for example, are notorious for "losing" money while they funnel inflated contracts to other companies with the same owners.)
That said, not all companies need funding. Do you have enough money saved to let you survive while you write code? Can you avoid capital costs and long-term leases by working out of your home(s) and renting servers instead of buying computer hardware?
If you can bootstrap, do it. If not, accept that you're going to have to give up some control; and try to find the funding which will let you retain as much control as possible.
Yes, it's unrealistic.
Here are things that founders could do that might upset an investor:
1. Selling your company to someone else for a tiny sum. 2. Issuing stock in peculiar ways. 3. Issuing stock to yourselves without any vesting plan. 4. Jacking up your own compensation at the expense of runway.
Much of the "control" they want is to keep you from doing something unethical. Some of the control they want is to keep you from compromising their investment.
There are plenty of great stories where entrepreneurs had such a great idea/startup that they were able to push for pretty great terms (Google).
The best way to insure control is to insure that you don't NEED the investment.
Here are things that founders could do that might upset an investor:
1. Selling your company to someone else for a tiny sum. 2. Issuing stock in peculiar ways. 3. Issuing stock to yourselves without any vesting plan. 4. Jacking up your own compensation at the expense of runway.
Much of the "control" they want is to keep you from doing something unethical. Some of the control they want is to keep you from compromising their investment.
There are plenty of great stories where entrepreneurs had such a great idea/startup that they were able to push for pretty great terms (Google).
The best way to insure control is to insure that you don't NEED the investment.
It's not an unrealistic expectation at all, as long as you never raise a serious Series A. Once someone gives you a bunch of money, you have to listen to what they say, even if you still own 70% of the company.
Unless you have bona-fide, proven successes (plural), you'll probably end up losing ultimate control at some point, and it will probably be the best thing for everyone involved.
Why do you need to maintain control? Greed? Paranoia? The idea is too complex for others to understand? (note: none of these are good reasons ;) )
As a leader, you should always strive to ensure that you can be replaced, and that the company can and would continue without you. This is often a big hurdle for many entrepreneurs to wrap their head around, but it is almost always critical to the success of the company.
In the beginning, the founders maintain full control simply because they are the only ones that fully understand the idea and market. Over time, you need to do less innovation, and more operation of the business. Founders rarely make good full-time CEOs, and "professional CEOs" rarely make good founders, but they both play their part in the on-going success of the company.
Why do you need to maintain control? Greed? Paranoia? The idea is too complex for others to understand? (note: none of these are good reasons ;) )
As a leader, you should always strive to ensure that you can be replaced, and that the company can and would continue without you. This is often a big hurdle for many entrepreneurs to wrap their head around, but it is almost always critical to the success of the company.
In the beginning, the founders maintain full control simply because they are the only ones that fully understand the idea and market. Over time, you need to do less innovation, and more operation of the business. Founders rarely make good full-time CEOs, and "professional CEOs" rarely make good founders, but they both play their part in the on-going success of the company.
> Why do you need to maintain control? Greed? Paranoia? The idea is too complex for others to understand? (note: none of these are good reasons ;) )
Note that maintaining control is different from hoarding all the money. The people who understand it best should be in control, regardless of how much equity they give to investors. This is not just in the early stages -- look at Steve Jobs calling the shots at Apple.
> As a leader, you should always strive to ensure that you can be replaced, and that the company can and would continue without you.
That's just not how startups work, at ALL. Losing a founder basically dooms a startup.
It only applies much later on, when the company has a huge bankroll and a life of its own.
Note that maintaining control is different from hoarding all the money. The people who understand it best should be in control, regardless of how much equity they give to investors. This is not just in the early stages -- look at Steve Jobs calling the shots at Apple.
> As a leader, you should always strive to ensure that you can be replaced, and that the company can and would continue without you.
That's just not how startups work, at ALL. Losing a founder basically dooms a startup.
It only applies much later on, when the company has a huge bankroll and a life of its own.
And even then, sometimes you still need Steve Jobs.