I get what you're saying, but a rock in the middle of the desert makes more money (or at least loses less) than most startups. The attempt to achieve greatness, even if they fail, that startups shoot for is noteworthy. At least it is to me. Taking on something risky and convincing someone(s) that your thing is worth a multi-million dollar investment is impressive.
To add to this, any business that targets $100MM or less a year in terminal velocity revenues will basically be uncontested from VC backed start ups. At the risk of generalizing, VCs these days don't have interest in businesses whose exit price is less than $5-$10B.
But VCs are still investing in startups that do what DistroKid does. Those startups all take a percentage of royalties. So there's probably a sense of "if we release the new Jay-Z record, we'll make that $100MM revenue..."
DistroKid doesn't take any percentage. While we're leaving money on the table, the hacker in me (in the HN sense) kinda feels good that we're f*cking it up for everyone. At least I hope that's what we're doing. \m/
You're competing with what's possible rather than merely what exists today. DistroKid is better technology and a hint at the great future of the cloud. Congrats!
I'm not a VC, so take what I say with a grain of salt, but while the numbers look a bit high to me, they are probably in the ball park for SF VCs. I use to work with startups in the Ottawa Canada area about 15 years ago. Even at that time, they might give you $1-10 million in seed money, with %20 ownership, expecting a 20:1 exit. So they'll want $20-200 million back, which means your valuation has to be in the $100 million to $1 billion range. If you're not showing how to have $10's of millions in sales in the next 5 years, they have absolutely no interest in you. (Well, in those days, the main exit was a buyout from the big guys, so having an "industry disrupting" demo was the other thing to do and was much cheaper to build).
These days, if you are looking to build a "niche" business with $10 million a year in sales, I think you'll have absolutely no competition from VCs. If you're looking at $100 million a year in sales, I think you'll butt up against the "failed" VC funded companies. And larger than that, I suspect you'll be getting quite a lot of competition.
There are definitely angels who will fund smaller projects, but I think you still have to show an open ended potential. For example, I worked with one startup that had only $100K seed money and was looking for a quick $3-5 million exit. I've never actually seen any of these be successful, because $100K represents only a year of development costs, so companies usually reimplement good ideas in house.
Again, I'm not an expert in this area, but I have always thought that bootstrapping a sustainable business has been hugely undervalued for the last 20 years or so. Everybody is so focused on putting hundreds of millions in their pockets that they turn their noses up at mere millions. Lots of opportunity in this space.
Aren't there a decent number of companies out there that take 1-5 million in funding and then 'bootstrap it' from there? This seems like a fairly reasonable middleground where you get some cash to help you get over the initial hump and form a team but still have to focus on building a sustainable business asap.
Or are companies who seem to be on that trajectory avoided by seed investors even when the fundamentals look good?
I've gotten so tired of the VC model. It produces nothing. Just company after company of the same rehashed ideas (or worse still, good ideas) that are doomed to failure because they can't eat the world.
I wouldn't work at a VC unless I had literally no other options, and if I ever start a business, I'm doing it the way the author here did: honest work for honest wage. Maybe I won't get any Ferrari's but at least I'll have my dignity.
You aren't alone. The current VC model is destructive because of it's wasting capital at perhaps the most riskiest and inefficient way of producing alpha on other people's money-spraying & praying.
I don't know all the ins and outs but I have to echo the sentiment that it is better to make $1 for every $0 spent than $1 for every $2 spent. The latter makes zero economic sense. Any fucking idiot can spend money and make negative ROI. But the market dissonance is being fueled by low interest capital.
We are going to see history repeat again this year and when the water goes out, we'll see who's been swimming naked. They'll be back for the next bubble.
I'm convinced these bubbles are engineered who make money from the ride up and the ride down. Pump & dump on a national level but of course the men who play Gods need not play by the same rules they enforce on lowly mortals.
You will be able to buy a used Ferrari as they depreciate fairly quickly unless they are rare. They aren't built with longevity in mind and the parts do not depreciate in prices (expect to pay a Honda s2000 for clutch and F1 paddle shift pumps).
It's not really accurate to say that the VC game makes $0.50 on the dollar. If that was true, they wouldn't be in business. They make money by hitting grand slams--throwing out a BS number here--every 30 times at-bat. That's all they need. What's unfortunate about the VC model is that 29 out of those 30 at-bats is made on the backs of people who genuinely believe that they have a strong chance of being that grand slam. It's those startup founders who end up with the grey hair and circles under their eyes. As long as their are optimistic dreamers, there will be VC patrons.
Except it's not 1/30, it's more like 1/300 which still sounds generous to me.
As for founders with grey hair, I admire their passion, but I didn't get to where I am now by lighting both ends of my life candle on fire for a 1/300 chance of being better off. Fuck that noise. I'd rather have a life and be poor.
There is nothing in the VC model that says you have to run your business like an idiot if you take VC money... You can still run your business lean and keep your dignity. However, if you take VC money you need to realize that the VC wants liquidity and a ROI in ~7 years. So, if you want to run a small business that brings in ~$2M a year, don't go try raise a huge VC round at a high valuation. That probably would not work out well for either party.
> So, if you want to run a small business that brings in ~$2M a year, don't go try raise a huge VC round at a high valuation. That probably would not work out well for either party.
I'm curious, how would that negatively impact the founder?
If the founder still has a controlling interest what leverage do the VCs have to tell him that $2m/year in profit is not enough and to make him risk it for more?
If you can retain board control there isn't a ton of leverage unless the VC wants to hurt your business out of spite... in which case you picked the wrong partner.
What the VC can do is ignore you, in which case why did you take VC money when you intended to pass up the networking opportunities? What if you change your mind about raising another round of funding in three years but you already burned the bridge?
You should also remember that your cofounders will be on the board. Often the VC only needs to convince one of them you need a change in direction. A lifelong friend as cofounder will stab you in the back without a second thought if they smell a billion dollars at stake. Hence the advice to be careful about who you get into business with.
Or just don't take VC money in the first place. Then: Networking doesn't come with strings attached (or money), you have zero incentive to grow too fast, and there's no reason that you MUST make 2 billion dollars or shut down the business.
Seriously I've lost count of how many useful services have shut down because they couldn't eat the world, because just making really good money but not incredible ALL THE MONEY wasn't good enough. And for what? Some time in the public eye and a ton of money to blow on dumb shit like San Francisco offices that reduce productivity and a metric assload of hardware you didn't need in the first place.
It cuts both ways though. I am sure there are even more useful services out there that you never heard of because they didn't have enough money to market or distribute their product. The VC route and bootstrapping each have their advantages/disadvantages.
If you take money at a high valuation, the VC will only be happy if you try to grow the company significantly and exit at some multiple of that valuation. If the founder decides not to do that, then one of the largest shareholders in the company (the VC) will be angry. At a minimum I imagine the founder would be negatively impacted by losing some of his/her reputation in the investing space and having angst knowing that he/she took a VCs money and then ignored the VCs interests. At worst, there could be issues at the board level and loss of control of the company.
