Black swans and the Lindy Effect both play here. Sometimes hitting big with an startup more than compensate the loss of the failed ones. And odds of staying out increases with surviving time. It is not totally random that this happens, but maybe for a lot it could be only noticeable on hindsight.
In my own experience, it seems like the ones that provide frequent investor updates on a regular schedule are the ones that are most successful. There's almost a direct correlation between how often I hear from a company and how successful they are. It's probably related to the fact that providing monthly investor updates forces a regular cadence of accountability.
There is also a significant time factor involved. The longer a startup has been alive, the more likely it is to have a bigger exit. Startups that go to zero tend to do so fairly quickly. And startups that end up 10x take quite a while to get there (YouTube would be a major exception to this, reaching 1.6 billion in just 1.5 years).
The harder to predict ones are the ones in the middle. The less than 1x returns could happen quickly or take a decade.
When you have unfixable business problems (which are usually along the lines of "Nobody wants our product", "Our founding team doesn't care anymore", "There is no reason for our company to exist", or "We can't possibly make the economics work"), then those are the startups that tend to go dark.
I think the only truly unfixable problem here is "Our founding team doesn't care anymore".
Plenty of companies have made successful pivots, even later stage. It gets harder and harder the larger you grow of course, but it's always possible. Most startup deaths come from a lack of motivation. Everything else is a side effect of that.
Well yes, if they are sending me investor updates once a month and then stop, that's bad. But usually before they stop, the updates at least have a list of problems, and if there is a fix we can work on it together I can help them find someone who can.
The point is, if you hold yourself accountable to your investors for an update once a month, you're also holding yourself accountable to yourself and your team to track those things and adjust.
> Startups that go to zero tend to do so fairly quickly.
I wish this were true. Far too many founders are willing to stick it out in hopes that if they just keep building, sales will come. Of course, it doesn't, so they waste a decade on what could have been two years.
I've seen this a few times, also. There's hope that the big sale is only another month or two out. More often than not, it never happens. Meanwhile, small sales happen, they trickle in, but nothing that moves the needle. Pretty soon you waste 5 to 10 years.
Those are the ones that usually have a less-than-1x-but-not-zero exit though. They make enough to stay alive and eventually throw in the towel.
Doesn't always happen that way of course, but from what I've seen, the zero exits are the ones that burned hard quickly and then couldn't get more funding but never found any PMF.
Most of the good ones start with their most current blurb "we make X for Y", which helps me remember who they are and also makes sure I'm on message when I talk to others about them.
Then it has runway and burn rate (how long will they still be alive if nothing changes).
Then it has KPIs that matter to their business, usually the ones they are tracking for themselves. Monthly active users, change in daily actives, number of widgets produced, etc.
Then sometimes a hiring plan. If they tell me who they are looking for I can sometimes help.
Then highlights, lowlights, and asks.
Those are usually the best ones because it means they are tracking these things and it also means if there is a place where I can help I can get it from the investor update.
Firstly, I never said it was always true, and secondly, I have a really hard time believing you, because at least every VC I've ever worked with asks their startups for an update every three months.
I find it really hard to believe you got to a $1B valuation without ever having anyone ask you for an update.
I have five institutional investors and none of them have ever asked for updates. There isn't much point before Series B, since good early-stage investors are actively involved with the company anyway.
Back in our Seed days we sent out monthly updates to everyone, angels included, but now we don't. That's what board meetings are for.
Right, and my point was that you had someone to be accountable to on a regular basis, so it helped keep you motivated and on track to produce results to report.
I think a lot of people are missing the point. When the company first gets funded, things are always going well. Companies that establish a cadence of monthly investor updates at that time tend to do better because they know that in one month they need to have something to put in the update, so they work towards that.
- 25% of investments make zero return (i.e. 100% write offs)
- 25% produce a return greater than zero but less than 1x (i.e. are losses)
- 25% produce a return between 1x-3x
- 15% produce a return between 3x-10x
- 10% produce a return of 10x or greater
If you bucket the first two as "zeros" or near zeros, the third one as "something you wish you hadn't invested in" and the last two as good investments, you get to roughly the same 1/3, 1/3, 1/3 that I like to use.
so breaking even is bad all of a sudden... and who needs a return greater than 0-1x when everyone's getting paid and you have a little on the side for emergencies?
Welcome to the world of VCs. And, honestly, business in general the last decade or so. It feels very much like building a sustainable business is frowned upon. Build big and build fast so that you can cash out at max value, or just crash and burn.
It’s why your password manager can’t just be a password manager, it’s a subscription security product. Your cloud storage can’t just be storage, it has to be a more expensive document management system. So on and so forth.
It's not that building a sustainable business is frowned upon. But if you raise money from investors using a traditional note or equity purchase, then you have created the need for an exit. There are royalty-based options for raising money: you take money in return for an annual royalty payment for a fixed number of years plus repayment. It's similar to debt.
I know, but it’s all an ecosystem. I can refuse VC investment but if one of my competitors doesn’t then they have an order of magnitude more resources than me and they’ll edge me out of the market. So everyone ends up going down that road whether they want to or not.
Right. And even if you outcompete your competitor on product—say they're un-innovative and even slow such that they continually copy all your stuff, doing it with a year lag and less polish—they can still beat you because you're charging $X and they're "free" using the VC money at a huge CAC to outgrow you. That CAC may have no real path to coming down, but it's easy enough to describe highly unlikely ways it might—particularly when the investors and the execs are aligned on finding greater fools.
As unsustainable as their path might be—and it is on a few dimensions𐠒—they have options you don't. The obvious ones are buying customers long enough to last until exit and "re-financing" by showing the same VCs the same (high CAC-powered) numbers and extending the runway.
𐠒 It's unsustainable first financially (if you don't count the exit). It also (in theory) doesn't sustain/grow your team in an expertise or culture sense, the way that coming up with the features yourself trains some creativity and grit and might provide a greater culture win when things launch. And lastly if your customers base is there because it's free, then they'll leave when it's not free (or not cheaper than alternatives). You can definitely find all three of these as sweet summer child ways to care about business today, which I think is the point.
If your product’s value proposition is that fragile, that it can be eroded down to near nothing just via some schemer(s) with more money in the bank account saying ‘free’… then maybe it’s just not that big of an improvement over the status quo?
Silly take. If my product is worth $5 and I sell it for $6, that’s a sustainable business. If a competitor uses VC cash to subsidise their operation and charge $1 they can run me out of business, then they’ll charge $6. Or, hey, $7, why not.
But it has nothing to do with my products value proposition.
No it isn’t a sustainable business, because the competitive landscape, which it has to be sustained in, would now also include this group out to get you for whatever reasons, for some unknown period of time.
I think there's two ways to read this. One is that maybe a lot of startups are not improving the status quo today. Perhaps this is right. If so, I don't think it would negate the environment described.
If the intent is that solid value props can't be eroded in such an environment, I'm not sure I agree. The issue I think is less about value prop, it's closer to not having a moat. Or one that can't be bought anyway. People are paying for and using the product—so there's some value prop—but then it's being copied and sold for free (at a loss). The competitor may even pay to take customers. I'm not sure that stronger value props are inherently harder to copy or harder to buy users.
For the bootstrapping startup to win, it needs to find a product people want, create it from scratch, then find a non-money-based moat. The startup with the money can copy the idea, create it (benefiting from your blueprint), and then find the moat (with some capacity for it to be money-based).
In any case, I think the need for value prop lessens in this environment. If we're talking purely about getting paid and you have the option to do so via exit rather than only via profit, value prop becomes a means and maybe not even required one.
"Everyone" is getting paid? The investors aren't getting paid, and they are your business partners. So the return of greater than 1x is pretty important.
a 0x return would be them getting back what they invested, right? (otherwise pretend i said 1-2x)
everything above that is a pointless perversion when capitalism is killing our planet and the majority population has to suffer, just because someone somewhere wanted bigger numbers...
The point is that the successful businesses produce lots of value for people, and for risky bets to work out on average you need some to do very well to balance out the ones that do only OK.
If you have an ideological opposition to economic growth, then yeah, venture capital isn't going to make much sense to you. As was mentioned up thread, there are other funding sources better suited for people who aim to sustainably make 1-2x returns.
Actually, no. It's at least a > 1x return to make the investor whole.
Here's why: a dollar invested today has an opportunity cost for the amount of time it's not available for another investment. And the longer that dollar remains locked up, the bigger the cost.
If an investor chooses to invest in another investment--let's say a money market returning 5% annually, compounded--then anything less than that after N years is a bad investment. This is the calculus that investors make with every investment.
I know we aren't likely to agree about the ideology of capitalism, but consider that in a free and open market, investors are free to pick and choose the opportunities they want--including young, talented individuals with good ideas.
In a controlled market, investors would only be able to invest in what the "controllers" choose. By "controllers" I mean those who would be in charge, e.g. the government.
How many "controllers" do you trust to do the right thing and identify the young, little guy who has a great thing to share with the world?
Anything above a 2x return is necessary, because investors will have an entire portfolio of companies. About 66% of them do nothing at all. But a few will do well. And that results in a modest return, on average. Make your own simulated portfolio and do the math. You will see.
Getting a 260% (and this is a lower estimate) return might be great depending on the duration. If 10 years would be around 26% ROI. I wonder if there is any ETF that invests in all startups.
———-
Calculation below:
To calculate your net return based on the provided percentages and their associated returns, we need to determine the weighted average return for each category. The net return is the sum of all these weighted returns.
Here are the steps:
1. *25% of investments make zero return (100% write-offs)*:
- Return = 0
- Contribution to total = \( 0 \times 25\% = 0 \)
2. *25% of investments produce a return greater than zero but less than 1x (are losses)*:
- Let's assume the average return is 0.5x (midpoint between 0 and 1x).
- Contribution to total = \( 0.5 \times 25\% = 0.125 \)
3. *25% produce a return between 1x-3x*:
- Let's assume the average return is 2x (midpoint between 1x and 3x).
- Contribution to total = \( 2 \times 25\% = 0.5 \)
4. *15% produce a return between 3x-10x*:
- Let's assume the average return is 6.5x (midpoint between 3x and 10x).
- Contribution to total = \( 6.5 \times 15\% = 0.975 \)
5. *10% produce a return of 10x or greater*:
- Let's assume the average return is 10x (the minimum in this category).
- Contribution to total = \( 10 \times 10\% = 1 \)
### Total Net Return:
Summing all the contributions:
\[
0 + 0.125 + 0.5 + 0.975 + 1 = 2.6
\]
So, your *net return* is 2.6x or *260%* of your total investment.
This means, on average, you would get 2.6 times your initial investment overall.
>so breaking even is bad all of a sudden... and who needs a return greater than 0-1x when everyone's getting paid and you have a little on the side for emergencies?
I can give you $1M and in 6 years you give me $1M. Or I can put $1M in S&P500 and get back 2 million.
VCs aren’t just good guys who just like entrepreneurs. It’s an investment vehicle that competes with other investment vehicles. Anything less than a 3x return is “I went through a lot when I could have just put my money in SPY and slept soundly”
I think the most important thing a founder can learn before taking VC is understanding their business model.
One might look at this and think "huh 30% success is not too bad" missing the fact that this is from a VC perspective.
From a founder perspective, this is abysmal because the chance of you getting funded by the likes of a16z or YC is already really slim, about 1% according to YC.
So let me ask you something: would you embark on a journey if you knew your chance of success is 0.3%?
So many good startups go to oblivion, pandering to the VCs. Where they could have been more resilient on their own.
There's more success metrics to take away from a startup than just sticking around and creating a 3x or greater monetary return from an initial arbitrary valuation. If you were funded, you were getting paid something, if you were attempting something VCs funded, you were most likely trying something on the cutting edge in which case you are sure to have learned something novel in the space you will most likely to continue to work in.
Consider going to work for any other company, let's say a publicly traded one for simplicity - if you work there for 5 years, and the stock price stays flat adjusting for inflation, is whatever you did objectively non successful? Of course not, in this case you would judge your success based on what you shipped + your own career growth. I don't see why you should look at it any differently from a founder or early startup employee perspective in retrospect (though believing this before starting is probably not healthy as if you believe in the VC recipe you should really be abiding to success as a forcing function).
For 100% bootstrapping to avoid "pandering to VCs", your success metric is narrower (you have to achieve monetary success in a rigid, often short, timeframe) and your risk threshold is lower thus the successes on the learning side/pushing tech forward are less likely.
It’s disingenuous to claim that the success rate is .3%. The success rate for the first stage (pre-vc) of venture might be one percent, and the success rate for the next stage (post) is 10 to 25%, depending on how a founder perceives success.
These rates are independent. You can’t aggregate them because the level of effort to secure VC funding is very different from the level of effort required to take a funded start up to unicorn heights.
If I understand your argument to be that startups are relegating themselves to the trash bin because they’re attempting to get attention from venture capitalists at the expense of some fundamental “goodness”, some data supporting that point would be helpful. But that’s not what’s in the article.
this is where the dichotomy between VC-funded startups and bootstrapped ones is so apparent.
e.g [1]- https://x.com/robwalling/status/1825973229296533609 for TinySeed 43% of founders exited for a million or more.
small money to VC's but to individuals it's the difference between working for 5 or so years, or a lifetime.
as a founder, you can only invest in one startup at once or maybe 2 if pushing it. but a VC gets to invest in hundreds of startups at once.
In addition, notice that this business is considered a failure for the VC while for the founders and employees it may be a perfectly fine business.
So, roughly 1/3 are failures and 1/3 are unicorns. But then there is a full 1/3 of startups where VCs and founders are completely misaligned.
Taking VC money takes your "success" numbers from 2 in 3 to 1 in 3 as a founder. That's a huge drop.
The number one credo of a startup is "You have to be alive to be lucky." Sure, the VC wants you dead within 5 years, but lots of businesses burble along with "merely profitable" for many, many years until they hit their lucky event.
I havent been involved in startups in a number of years but at the time when i was the trend was to give a bunch of 20-somethings with an interesting product idea a few million dollars and let them have at it. I wondered then and I still wonder if early stage investors would see better returns if they provided a little more boots on the ground support through either getting an adult into the room or training or whatever.
Well that's kinda the whole idea of Y Combinator, isn't it? Sometimes you really do need to be blind to all the pitfalls to take your lucky shot at it, but adding some prior experience into the mix can help you not shoot yourself in the foot along the way.
I'm wondering if the investment size is normalized here? I.e. are these all ycombinator like $500K investments or is there wide range? If there is a considerable range, is there any correlation to investment size?
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[ 3.1 ms ] story [ 104 ms ] threadThere is also a significant time factor involved. The longer a startup has been alive, the more likely it is to have a bigger exit. Startups that go to zero tend to do so fairly quickly. And startups that end up 10x take quite a while to get there (YouTube would be a major exception to this, reaching 1.6 billion in just 1.5 years).
The harder to predict ones are the ones in the middle. The less than 1x returns could happen quickly or take a decade.
Startups give frequent investor updates if things go well.
Startups are alive longer if things go well.
Things going well is the cause, not the other way around.
Especially when it is a company that regularly sends an update on the same day every month. Those aren't always rosy.
When you have unfixable business problems (which are usually along the lines of "Nobody wants our product", "Our founding team doesn't care anymore", "There is no reason for our company to exist", or "We can't possibly make the economics work"), then those are the startups that tend to go dark.
Plenty of companies have made successful pivots, even later stage. It gets harder and harder the larger you grow of course, but it's always possible. Most startup deaths come from a lack of motivation. Everything else is a side effect of that.
The point is, if you hold yourself accountable to your investors for an update once a month, you're also holding yourself accountable to yourself and your team to track those things and adjust.
I wish this were true. Far too many founders are willing to stick it out in hopes that if they just keep building, sales will come. Of course, it doesn't, so they waste a decade on what could have been two years.
Doesn't always happen that way of course, but from what I've seen, the zero exits are the ones that burned hard quickly and then couldn't get more funding but never found any PMF.
Or: what are the main KPIs you’d like to see?
Then it has runway and burn rate (how long will they still be alive if nothing changes).
Then it has KPIs that matter to their business, usually the ones they are tracking for themselves. Monthly active users, change in daily actives, number of widgets produced, etc.
Then sometimes a hiring plan. If they tell me who they are looking for I can sometimes help.
Then highlights, lowlights, and asks.
Those are usually the best ones because it means they are tracking these things and it also means if there is a place where I can help I can get it from the investor update.
I find it really hard to believe you got to a $1B valuation without ever having anyone ask you for an update.
Back in our Seed days we sent out monthly updates to everyone, angels included, but now we don't. That's what board meetings are for.
They probably never asked because you were already providing it.
My point was that they didn't ask because they were good investors and actively involved with the business, so they already knew what was going on.
I never said anything about formulaic investor updates.
It’s why your password manager can’t just be a password manager, it’s a subscription security product. Your cloud storage can’t just be storage, it has to be a more expensive document management system. So on and so forth.
As unsustainable as their path might be—and it is on a few dimensions𐠒—they have options you don't. The obvious ones are buying customers long enough to last until exit and "re-financing" by showing the same VCs the same (high CAC-powered) numbers and extending the runway.
𐠒 It's unsustainable first financially (if you don't count the exit). It also (in theory) doesn't sustain/grow your team in an expertise or culture sense, the way that coming up with the features yourself trains some creativity and grit and might provide a greater culture win when things launch. And lastly if your customers base is there because it's free, then they'll leave when it's not free (or not cheaper than alternatives). You can definitely find all three of these as sweet summer child ways to care about business today, which I think is the point.
But it has nothing to do with my products value proposition.
VCs don’t even need to exist for this to occur.
So I didn’t mention anything regarding VCs and market distortions or lack thereof?
If the intent is that solid value props can't be eroded in such an environment, I'm not sure I agree. The issue I think is less about value prop, it's closer to not having a moat. Or one that can't be bought anyway. People are paying for and using the product—so there's some value prop—but then it's being copied and sold for free (at a loss). The competitor may even pay to take customers. I'm not sure that stronger value props are inherently harder to copy or harder to buy users.
For the bootstrapping startup to win, it needs to find a product people want, create it from scratch, then find a non-money-based moat. The startup with the money can copy the idea, create it (benefiting from your blueprint), and then find the moat (with some capacity for it to be money-based).
In any case, I think the need for value prop lessens in this environment. If we're talking purely about getting paid and you have the option to do so via exit rather than only via profit, value prop becomes a means and maybe not even required one.
Of course loyalty is not perfectly sticky, nor can it ever be, but then again enticements can not be perfectly attractive either.
everything above that is a pointless perversion when capitalism is killing our planet and the majority population has to suffer, just because someone somewhere wanted bigger numbers...
If you have an ideological opposition to economic growth, then yeah, venture capital isn't going to make much sense to you. As was mentioned up thread, there are other funding sources better suited for people who aim to sustainably make 1-2x returns.
Here's why: a dollar invested today has an opportunity cost for the amount of time it's not available for another investment. And the longer that dollar remains locked up, the bigger the cost.
If an investor chooses to invest in another investment--let's say a money market returning 5% annually, compounded--then anything less than that after N years is a bad investment. This is the calculus that investors make with every investment.
I know we aren't likely to agree about the ideology of capitalism, but consider that in a free and open market, investors are free to pick and choose the opportunities they want--including young, talented individuals with good ideas.
In a controlled market, investors would only be able to invest in what the "controllers" choose. By "controllers" I mean those who would be in charge, e.g. the government.
How many "controllers" do you trust to do the right thing and identify the young, little guy who has a great thing to share with the world?
Anything above a 2x return is necessary, because investors will have an entire portfolio of companies. About 66% of them do nothing at all. But a few will do well. And that results in a modest return, on average. Make your own simulated portfolio and do the math. You will see.
But your numbers are 1/2, 1/4, 1/4. I think you're being a bit optimistic.
If I confused 50% and 1/3rd in public I’d be mortified.
———-
Calculation below:
To calculate your net return based on the provided percentages and their associated returns, we need to determine the weighted average return for each category. The net return is the sum of all these weighted returns.
Here are the steps:
1. *25% of investments make zero return (100% write-offs)*: - Return = 0 - Contribution to total = \( 0 \times 25\% = 0 \)
2. *25% of investments produce a return greater than zero but less than 1x (are losses)*: - Let's assume the average return is 0.5x (midpoint between 0 and 1x). - Contribution to total = \( 0.5 \times 25\% = 0.125 \)
3. *25% produce a return between 1x-3x*: - Let's assume the average return is 2x (midpoint between 1x and 3x). - Contribution to total = \( 2 \times 25\% = 0.5 \)
4. *15% produce a return between 3x-10x*: - Let's assume the average return is 6.5x (midpoint between 3x and 10x). - Contribution to total = \( 6.5 \times 15\% = 0.975 \)
5. *10% produce a return of 10x or greater*: - Let's assume the average return is 10x (the minimum in this category). - Contribution to total = \( 10 \times 10\% = 1 \)
### Total Net Return: Summing all the contributions:
\[ 0 + 0.125 + 0.5 + 0.975 + 1 = 2.6 \]
So, your *net return* is 2.6x or *260%* of your total investment.
This means, on average, you would get 2.6 times your initial investment overall.
I can give you $1M and in 6 years you give me $1M. Or I can put $1M in S&P500 and get back 2 million.
VCs aren’t just good guys who just like entrepreneurs. It’s an investment vehicle that competes with other investment vehicles. Anything less than a 3x return is “I went through a lot when I could have just put my money in SPY and slept soundly”
I think the most important thing a founder can learn before taking VC is understanding their business model.
From a founder perspective, this is abysmal because the chance of you getting funded by the likes of a16z or YC is already really slim, about 1% according to YC.
So let me ask you something: would you embark on a journey if you knew your chance of success is 0.3%?
So many good startups go to oblivion, pandering to the VCs. Where they could have been more resilient on their own.
Consider going to work for any other company, let's say a publicly traded one for simplicity - if you work there for 5 years, and the stock price stays flat adjusting for inflation, is whatever you did objectively non successful? Of course not, in this case you would judge your success based on what you shipped + your own career growth. I don't see why you should look at it any differently from a founder or early startup employee perspective in retrospect (though believing this before starting is probably not healthy as if you believe in the VC recipe you should really be abiding to success as a forcing function).
For 100% bootstrapping to avoid "pandering to VCs", your success metric is narrower (you have to achieve monetary success in a rigid, often short, timeframe) and your risk threshold is lower thus the successes on the learning side/pushing tech forward are less likely.
These rates are independent. You can’t aggregate them because the level of effort to secure VC funding is very different from the level of effort required to take a funded start up to unicorn heights.
If I understand your argument to be that startups are relegating themselves to the trash bin because they’re attempting to get attention from venture capitalists at the expense of some fundamental “goodness”, some data supporting that point would be helpful. But that’s not what’s in the article.
e.g [1]- https://x.com/robwalling/status/1825973229296533609 for TinySeed 43% of founders exited for a million or more. small money to VC's but to individuals it's the difference between working for 5 or so years, or a lifetime.
as a founder, you can only invest in one startup at once or maybe 2 if pushing it. but a VC gets to invest in hundreds of startups at once.
In addition, notice that this business is considered a failure for the VC while for the founders and employees it may be a perfectly fine business.
So, roughly 1/3 are failures and 1/3 are unicorns. But then there is a full 1/3 of startups where VCs and founders are completely misaligned.
Taking VC money takes your "success" numbers from 2 in 3 to 1 in 3 as a founder. That's a huge drop.
The number one credo of a startup is "You have to be alive to be lucky." Sure, the VC wants you dead within 5 years, but lots of businesses burble along with "merely profitable" for many, many years until they hit their lucky event.