If you want to be frugal and grow responsibly, you have to do it without VC money.
What would he say now?
Tons of old pg essays sound straight from something like Indie Hackers or Microconf with their "avoid raising VC money" angle. He even literally predicts the death of VC in web SaaS, saying "investors aren't worth the trouble": http://www.paulgraham.com/divergence.html .
His YC cofounder Jessica Livingston wrote a book "Founders at Work" and about half the founders in the book are bootstrappers (DHH, Joel Spolosky, Craigslist). The other half are mostly founders recounting horror stories of interacting with VCs.
Compare that to modern YC where there are videos where they say _everyone_ should consider applying to YC with the _only_ exception being people that want to bootstrap. Modern Startup School says: "Without startup funding the vast majority of startups will die." (https://www.ycombinator.com/library/4A-a-guide-to-seed-fundr...).
There's something very important to note which is that YC did not change the deal from 125k for 7% to 500k for 7%. It's still 125k for 7% plus 375k worth of equity on your next raise. Which only makes sense if there is a next raise. So obviously they discourage bootstrapping since their whole model has been built around you raising at least one more round after YC.
Seems a pretty simple case of "follow the incentives." YC basically became more of a traditional VC over time. And I think pg was still closer to a founder in the early 2000s, from a founder perspective, it's more of a set of tradeoffs whether you should bootstrap or seek VC. But from a VC's perspective, obviously they want you to seek VC since they can't get involved if you bootstrap and bootstrapped startups won't get the outsized returns they need.
My opinion is, pg is a smart guy, there's still a ton of wisdom to learn from in his essays, but as with every other person on the planet, consider their motivation and incentives for telling you what they're telling you.
Not that I disagree with your assessment on pg's incentives and YC's change in position over time, but the environment for software startups is also materially different now that affect you whether you take VC money or not.
Key costs like hosting are way cheaper, back then you probably had to rack server in a data center, now you can deploy a free/cheap PaaS with a free/cheap database while you find PMF.
Marketing is way cheaper, social media is a grind but it's a game you can play to acquire users/customers for _free_.
There's more stuff going on online, more people, more businesses, more everything. Think about the entire "creator economy", other bootstrappers, Shopify sites, etc.
Yeah some stuff has gotten harder, more platforms, higher UX standards. But on the whole I'd rather bootstrap in 2023 then 2010.
Check in with me in a year though.
Back in the day I have delivered several different cheap 1U rackmount servers to data centres. Once took one - using public transport - to whatever suitable spot in the Docklands in East London. Travelling on the DLR with a server under one arm was a a memorable experience.
Long story short: you can do a lot from a $1000 server, if you put your mind to it.
Yet these days it seems PaaS is better, (over-)paying GCP/AWS/Azure, while you grope around to find a product that will sell for $$$ before your cloud credits run out?
It wasn't the greatest thing in the world, but it was dual-core, 2GB RAM, 160GB HD. I ran a small forum, email server, and a couple buddies used it for shells and running whatever PHP apps they wanted.
An $80 Linode these days only has 16GB and 320GB.
Here's what you can get for $89+: https://www.hetzner.com/sb?price_from=89
For 92 euro: 128 GB RAM, 3 TB SSD, 8 core i9-9900K, unlimited bandwidth.
You get 50x value for the 2009 price.
If in 2009 you served 480p videos that was fine, now you have to serve 4k or you will look like a tool. Various grumbling about JS bloat is optional.
free marketing through effort is by no means a new concept.
( and it's not free. )
But this bias is there. I'd wager if YC started HN today, it wouldn't be called HN. That name is uniquely related to the times YC & PG came into.
It's a bit like trusting an insurance broker's opinion on your own personal insurance necessity -- it'd be unsurprising to me for a broker to tell me that I need the most comprehensive (expensive) plan that they sell.
If you’ve taken VC, you had a bad VC. Otherwise, this misconstrues most VCs’ advice in a downturn, which is to prioritise staying alive.
The defining difference between a startup and small business is scaling potential. If you can’t grow, you shouldn’t take VC.
Usually not. Most small businesses have geographic limits to their scaling potential. That said, yes, there are niches where small businesses will beat a start-up competitor, at least in the short run.
VC is expensive capital. The same dilemma exists for companies that issue high-yield debt.
> there are ways to scale even without that level of pressure but VC doesn't allow that
Genuine question: what is this?
More time. There are examples of bootstrapped businesses that may be took a decade to get to first few million which will be dead in VC terms. But they continued and got to 100s of Millions. VC model would tell them to kill it if after a decade, they were doing a lousy couple million in revenue even if on the right path with PMF.
Isn't the criticism of the last decade of VC that it backed many of these?
Everything changed and I’ve seen it change from a small agile business with nice people to a baby corporation with up or out mentality, useless processes everywhere, harassment methods from HR department. In one year, VC money created as many millionaires as employee burn-outs.
If things don't go well, it would probably be hard to raise money for a future startup, due to the reputational damage of not having followed the VC playbook.
If things go fine, the VCs would probably say you could have grown even faster by spending faster. And what's considered a 'fine' outcome for you (selling for $15M with 1/3 for you) is not considered 'fine' for a VC whose model requires bigger wins — even if they take much longer.
No VC is telling companies to just to wastefully hire people they don't need. That wastes money and creates friction and bigger problems inside of a company.
They do tell you to hire aggressively, and you often present them with a model that shows _how_ you will use the money you raise, and sometimes you hire too many people on accident. But no VC is pounding their fists on the table telling founders to explicitly go hire people that aren't needed. That's directly against the interest of both the founder and the investor.
1. According to Zeihan, who points out that with the retirement of the boomers their 401k accounts that have been funding all this money are going to get cashed out and withdrawn, reducing the amount of money for lending, leading to an overall capital contraction.
If you're pre-seed stage, in Silicon Valley, and the founders have a "good" background (the right companies, knowing the right people, etc), then sure you might raise a small round. If you're any later than that, or anywhere else in the world, you need results, and results don't come as easily in a recession.
Depending on your segment it may be easier to sell products in a recession. Tools which cut cost and are below a certain monthly spend actually become easier.
Hiring is MUCH MUCH easier.
Raising money is harder.
I can start a business without an investment round, but not a startup? Is it a startup if it involves tech, a business if not? What if they use SOME tech, but not necessarily innovative tech? Or is this one of those 'you know it when you see it' kind of things? Has the term startup become a buzzword like "optimize" or "synergy"?
Seriously asking, not being snarky.
edit: thank you, for the responses that clarifiesthe distinction
Some of the causes and effects:
1. New business may have a proven business model, customers, product, market. Startup may have to find or create any of those
2. New business may have some capital to build/invest itself (I've worked in a restaurant, saved up, now opening my own). Startup is based on idea/people/work, but likely has no internal capital
3. Both have risk; but in some ways New business risk is known & understood. Startup's risk may be as undefined as their product/market.
The answer around me seems to be that a startup comes out of an idea without the capital worked out. That the equity they have to offer is worth nothing, unless they execute the plan with money they don't have.
If you have the capital worked out, you can go ahead into the business phase of the process right away, where profitability is king and there's no plan needed to answer the "how to raise more?" question.
A lot of what we associate with startups is the justifications towards raising and a lot of what we see from a "business" is geared towards margins.
For instance, better margins by extracting more profits on a lower revenue is better for one, but looks bad for the other.
Most small businesses do not plan to grow very quickly.
Startup incubators would rather have their 999 startups go broke and the 1000th become "next Google" than have average RoI on all 1000.
A startup is an organisation in search of a scalable, profitable and repeatable business model.
(Scalable is relative but at minimum exponential. Linear growth does not a startup make.)
The above definition has helped me delineate between a tech smb and what one feels is a “startup”.
When you start your startup, you are by definition pre-PMF. There is only a weak relationship between what you spend and what comes out the other side. Once you're post-PMF this changes and you may need to jack up the spending in order to grow as quickly as possible.
Lots of companies screw this up and scale up spending when they're pre-PMF. In 2021 those companies could keep raising, but now they're probably going to die.
I'm sure this depends on the business but I'd say if you need a lot of marketing spend in order to experiment it's a sign that you may not be enough of an expert on where to find your customers and you either need to find a way to gain that expertise or pivot to an area where you already have it.
If a startup doesn’t need the capital to grow, they’re not likely to take on VC funds. If they do, the startup will need to sell equity, which based on funding round have norms based on equity given for capital received. If the startup is frugal with the capital still manages to hit growth targets and reach an acceptable liquidity event for the VC, then any in spent capital would only add to the valuation of the company.
Is that common, no, but it does happen; if it does, generally means founders gave up equity unnecessarily.
Somewhat amusingly now that the capital environment has shifted dramatically, we have investors coming around who used to give us side-eye for being discerning and fastidious (and also our investing resources early to acquire government & adjacent customers), but now they treat us like secret geniuses or something. Because we have a reasonably stable baseline to build from. We're aligned with key markets that continue to spend money even during down markets and recessions. Not to mention we're also not in crisis having to massively disrupt progress and morale by laying off a bunch of people (in fact we're hiring, though still judiciously of course), which is HUGE since team and execution is everything.
(a) Work at a big co, save a boatload of money, quit after a few years, and then fund it yourself without the bullshit coffee chats* and 18-month clock.
(b) Work somewhere that has good work-life balance, pays you enough, is okay with you spending your free time doing something that doesn't compete with the company, and then build it on the side until it makes enough money to replace your day job, and only then quit your day job.
* There are good VCs out there, but 95% of VCs will waste your time, and you'll have to wade through them in your search for funding. The amount of coffee chats you'll go through will literally destroy your company because you won't have time to do real work.
However, a long-lived, yet non-home-run business is actually a negative in a VC portfolio. Because of the nature of VC, they need big wins to give returns to their fund investors. Their model intentionally decreases average success probability for a business as a filtering mechanism to find big wins as quickly as possible, so they can provide those returns to their own investors on an acceptable timeline.
This has always seemed incompatible with the VC model, which involves raising a ton of money, putting the company on an 18 month clock, spending the money so you can hit key milestones, and then raising even more money when the clock runs out.
I have heard of a few companies that were on the VC track, raised money, and stayed frugal. But my impression is that investors want to see you swing for the fences, which involves spending all the money they invested, and fast.
How common is it for startups to buck this trend?