This is largely good advice, but… I find that in 2021 the capital environment has become so much easier compared to even 5 years ago, some of this advice feels a little out of date. Yes investors want a company that can scale 1000x, but these days I’m hearing a lot of VC interest in companies whose ceilings are probably in the $50-250M range, and who are offering pretty good terms. You don’t need a unicorn exit for that, you “only” need to make a product that works with a degree of traction, and then get acquired by a bigger player. As long as you don’t raise too much that can still make for a nice outcome for all involved.
It’s really astounding how much money is chasing so little return right now.
There's a huge unstated detail there: to access that non-unicorn capital you need to be recurring revenue SaaS. The older focus on unicorn outcomes allowed for more creative revenue models and higher risks. Companies that don't have revenue really figured out but have an ultra compelling product can get unicorn-targeted funding.
The VC interest in these smaller companies is predicated on the revenue and valuation multiple predictability that comes alongside recurring revenue SaaS. Much lower risk for an investor. The margin structure of these types of companies is a nice bonus. If you're a founder trying to get access to this reduced-target capital you need to have 10%+ monthly recurring revenue growth, gross margins above 70%, and ideally a clear acquirer.
One of the things that bothers me about the startup ecosystem is how much it's oriented around VC. There's nothing wrong with VC, but you also have to understand that they have a specific business model and are looking for only a specific type of startup to invest in. They want the companies that are small enough that they can buy a big chunk for relatively cheap, and ambitious enough that they might possibly have ultra 1000x unicorn growth. They know that most will fail; that's fine, they intend to make it all up on the superstar.
It's perfectly fine to start a company that's only going to grow 10x or 20x best-case. VCs won't be interested in you, but that's fine, you don't necessarily need investment.
"It's perfectly fine to start a company that's only going to grow 10x or 20x best-case. VCs won't be interested in you, but that's fine, you don't necessarily need investment."
I'm not saying this is your fault and I get where you're coming from. But saying 'only' 10x-20x growth is 'fine' as if that's something to be embarrassed about... Yeesh, talk about messed up perspective...
By my reckoning, if you're generating value, have a sustainable business and are giving people gainful employment that in and of itself should be reward enough.
Robber: “that’s where the money is. What, do you want me to rob libraries?”
VC have money. Spending other people’s money is a frequent pastime. If SoftBank is willing to give you $100m to expand the reach of your IRC replacement, why wouldn’t you take it? Combine this with companies that are built to be sold to one of FAANG (ones that try to solve an actual customer’s problem but mostly just enough to catch the eye of a giant and sell to them) and you have SV.
The sibling comments go immediately to the evils or virtues of VC as though that were justification to stay small or go big, but this comment captures the vast majority of small business activity that produces thriving economies and stable lives for owners and workers alike. I have friends who opened automatic garage door repair shops. They are a two-state business and live comfortably and are engaged in the lives and wellbeing of their employees.
Disruption is glamorous but small is foundational.
I’m sorry I feel like we should clarify your numbers. VC money hopes for 10x or 20x as a goal and is quite happy to have that in their portfolio. If you are a 1x-5x company that isn’t enough return for the equity risk.
1000x is an anomaly and would make one fund round do exceptionally well compared to all others but most funds don’t ever get that kind of investment return.
>It's perfectly fine to start a company that's only going to grow 10x or 20x best-case. VCs won't be interested in you, but that's fine, you don't necessarily need investment.
But is that a startup at that point or just a small business ?
"I am especially against co-working spaces but if you must join one, first walk in and just listen. If it is quiet maybe people are actually working. But if it is loud, run for dear life!"
> More startups would succeed if they were bull-headed about keeping the customer and the problem the same but changing the solution. This is why passion matters. You are unlikely to pivot quickly through lots of different problems or customer types if you care deeply about the initial problem you set out to solve.
What would be some examples of companies that did and did not do this?
we are drowning in demand as we have manual processes. Multiple times our CEO (cofounder) has threatened to quit because the demand is too much and she has had a hard time finding people that can do the job. We had to put a minimum order size in to reduce the number of orders and we are still hitting records. We also temporarily stopped taking orders for items that require the most "order processing" time.
We are currently building the features that will automate more of the manual processing to free up time. But everyday I feel bad as I see the order count going up knowing the CEO is miserable. The CEO wants to do fundraising but is helping to process orders (the orders are complex) so doesnt have time.
He's being a bit of a stickler here about product-market fit.
I wonder if there are any counterexamples, where we can say that there is strong product-market fit without an immediate tsunami of demand.
What about the case where purchases tend to be large but infrequent or consist of long-term contracts? In that case, wouldn't you be able to say that you've identified product-market fit at some point earlier than when the actual purchases are made?
Keep in mind Michael Seibel is a co-founder of Twitch. Twitch is on extreme end of the monetization scale where it's success depended entirely on whether they could add free users fast enough to justify sufficient investment to bridge the gap until they could monetize via ads.
The other end of the spectrum is enterprise software. In between you have self-service SaaS, premium consumer, and freemium consumer products. Each of these has very different requirements for what traction look like, all of it significantly less a pure ad-driven monetization like Twitch.
The other dimension is how big you need to be to be considered successful. VCs need massive scale, and the bigger you grow the harder it is to maintain momentum, so it's gotta look really juicy at early stage to justify the growth. YC is not a VC, but as the premier incubator that feeds into the SV VC ecosystem they definitely have that lens.
The definition of product-market fit indicates that it is about strong market demand, so it would seem that the tsunami of demand is required.
That does not mean a successful business requires product-market fit. Weak market demand can still provide a great business and strong market demand is not a guarantee of business success.
One can always play the game of semantics, of course.
I think you know it when you experience it, but on the engineering side it feels like an uncomfortable level of demand that you know your product can’t really handle yet. So for example, you’re turning entire categories of people away - or ignoring their bug reports / feature requests - because you literally don’t have time to write the 500 lines of code needed to support their use case yet (and you’re busy doing the same thing for another cohort with higher willingness to pay).
The “drowning” description is apt because living through that is stressful and uncomfortable, even though it can also be exciting and have fun moments. Especially great are the moments you discover a 1-hour hack that can unblock something you and your team thought was going to take 2-3 weeks to accomplish, and what a relief that is to “fast forward” in time.
Any measurable consistent demand that can be seen on a monthly basis - assuming net lifetime value >0 is really, really good.
The problem with SaaS growth is that it's a function of customer acquisition, marketing etc..
But once you account for that, if customers are sticking around (low churn) and the acquisition/revenue works out, then if you contemplate what 'compound interest' means - and the necessity of a 'large market' - then it's probably a good investment, it just depends on the terms.
I have the same question. Additionally, to me the term "drowning in demand" is relative to the current size of the business. Drowning in demand for Walmart is different from downing in demand for a convenience store.
If you have to ask, you aren't drowning in demand. Sounds trite, but it's true, you'll know it when you experience it, hard to give numbers around such an increase in demand.
[+] [-] burlesona|4 years ago|reply
It’s really astounding how much money is chasing so little return right now.
[+] [-] code_biologist|4 years ago|reply
The VC interest in these smaller companies is predicated on the revenue and valuation multiple predictability that comes alongside recurring revenue SaaS. Much lower risk for an investor. The margin structure of these types of companies is a nice bonus. If you're a founder trying to get access to this reduced-target capital you need to have 10%+ monthly recurring revenue growth, gross margins above 70%, and ideally a clear acquirer.
Not affiliated with this group, but this article explains in more detail: https://leadedge.com/why-we-like-saas-businesses/
[+] [-] ufmace|4 years ago|reply
It's perfectly fine to start a company that's only going to grow 10x or 20x best-case. VCs won't be interested in you, but that's fine, you don't necessarily need investment.
[+] [-] 0x4d464d48|4 years ago|reply
I'm not saying this is your fault and I get where you're coming from. But saying 'only' 10x-20x growth is 'fine' as if that's something to be embarrassed about... Yeesh, talk about messed up perspective...
By my reckoning, if you're generating value, have a sustainable business and are giving people gainful employment that in and of itself should be reward enough.
[+] [-] IgorPartola|4 years ago|reply
Robber: “that’s where the money is. What, do you want me to rob libraries?”
VC have money. Spending other people’s money is a frequent pastime. If SoftBank is willing to give you $100m to expand the reach of your IRC replacement, why wouldn’t you take it? Combine this with companies that are built to be sold to one of FAANG (ones that try to solve an actual customer’s problem but mostly just enough to catch the eye of a giant and sell to them) and you have SV.
[+] [-] jvanderbot|4 years ago|reply
Disruption is glamorous but small is foundational.
[+] [-] boringg|4 years ago|reply
1000x is an anomaly and would make one fund round do exceptionally well compared to all others but most funds don’t ever get that kind of investment return.
[+] [-] satvikpendem|4 years ago|reply
[0] https://indiehackers.com
[+] [-] moonchrome|4 years ago|reply
But is that a startup at that point or just a small business ?
[+] [-] arbuge|4 years ago|reply
"I am especially against co-working spaces but if you must join one, first walk in and just listen. If it is quiet maybe people are actually working. But if it is loud, run for dear life!"
[+] [-] aazaa|4 years ago|reply
What would be some examples of companies that did and did not do this?
[+] [-] achenatx|4 years ago|reply
We are currently building the features that will automate more of the manual processing to free up time. But everyday I feel bad as I see the order count going up knowing the CEO is miserable. The CEO wants to do fundraising but is helping to process orders (the orders are complex) so doesnt have time.
[+] [-] Kinrany|4 years ago|reply
[+] [-] jawns|4 years ago|reply
I wonder if there are any counterexamples, where we can say that there is strong product-market fit without an immediate tsunami of demand.
What about the case where purchases tend to be large but infrequent or consist of long-term contracts? In that case, wouldn't you be able to say that you've identified product-market fit at some point earlier than when the actual purchases are made?
[+] [-] dasil003|4 years ago|reply
The other end of the spectrum is enterprise software. In between you have self-service SaaS, premium consumer, and freemium consumer products. Each of these has very different requirements for what traction look like, all of it significantly less a pure ad-driven monetization like Twitch.
The other dimension is how big you need to be to be considered successful. VCs need massive scale, and the bigger you grow the harder it is to maintain momentum, so it's gotta look really juicy at early stage to justify the growth. YC is not a VC, but as the premier incubator that feeds into the SV VC ecosystem they definitely have that lens.
[+] [-] yblu|4 years ago|reply
[+] [-] randomdata|4 years ago|reply
That does not mean a successful business requires product-market fit. Weak market demand can still provide a great business and strong market demand is not a guarantee of business success.
One can always play the game of semantics, of course.
[+] [-] bingohbangoh|4 years ago|reply
[+] [-] ttymck|4 years ago|reply
[+] [-] api|4 years ago|reply
The obviously it varies by sector and type of product but say for a typical SaaS.
I’ve seen a lot, just curious about what people here think.
[+] [-] burlesona|4 years ago|reply
The “drowning” description is apt because living through that is stressful and uncomfortable, even though it can also be exciting and have fun moments. Especially great are the moments you discover a 1-hour hack that can unblock something you and your team thought was going to take 2-3 weeks to accomplish, and what a relief that is to “fast forward” in time.
[+] [-] jollybean|4 years ago|reply
The problem with SaaS growth is that it's a function of customer acquisition, marketing etc..
But once you account for that, if customers are sticking around (low churn) and the acquisition/revenue works out, then if you contemplate what 'compound interest' means - and the necessity of a 'large market' - then it's probably a good investment, it just depends on the terms.
[+] [-] malshe|4 years ago|reply
[+] [-] satvikpendem|4 years ago|reply
[+] [-] agustif|4 years ago|reply
[+] [-] tomcooks|4 years ago|reply
signups you get per day > signups you can process per day
[+] [-] bserge|4 years ago|reply
I see it all the time, these services definitely have a product market fit. It's just very small.
[+] [-] adolph|4 years ago|reply
A: Another pie.