[graycat]

IMHO, the key remark is:

"When are you ready to raise a Series A?"

"The snide answer is that you are ready to raise an A when you can convince a VC to give you a term sheet. The more nuanced answer is when you have achieved compelling enough intermediate milestones that convince VCs that cash is your constraint to scaling your business. In other words, you have something that works, and all it takes is pouring money on it to grow it much, much bigger."

The rest is assuming that VCs don't know how to read or think and need some exciting experience as in some movie.

A big problem for the VCs is that for a lot of the good information technology startups, by the time the startups have the revenue the VCs want, the startups will also have plenty of cash to grow. Why? Because the associated computing is now so cheap and, for a Web site with a lot of traffic, revenue from ad networks is so easy to get.

[kornish]

> Why? Because the associated computing is now so cheap and, for a Web site with a lot of traffic, revenue from ad networks is so easy to get.

Obviously this is only true if the company makes money from ad revenue. Most startups* don't. Even with an ad revenue model, there's always an opportunity cost to not having more capital. Just because you may bring in revenue which you reinvest back into the business, doesn't mean you couldn't grow faster by having more to spend on hiring, marketing, sales, etc.

It's not the right decision for every company. But if you've already raised seed-round VC, it probably makes sense for yours.

* Following the definition in http://www.paulgraham.com/growth.html

[graycat]

I've posted a lot of long, detailed posts at HN. Here I was trying to be brief.

Yes, I remember the Paul Graham definition about a "startup" being designed to grow fast. He is welcome to his opinion, but, sorry, I don't accept his definition and believe that relatively few people do.

> Obviously this is only true if the company makes money from ad revenue.

Well, you quoted what I said in rebuttal: "for a Web site with a lot of traffic, revenue from ad networks is so easy to get." So, I was talking about a Web site.

And for more in rebuttal, my sentence before had:

"A big problem for the VCs is that for a lot of the good information technology startups, by the time the startups have the revenue the VCs want, the startups will also have plenty of cash to grow."

So, I qualified with "good" and "information technology".

Uh, a "good" one is not to start from nothing to compete with iPhone!

Now, mostly the juicy "good information technology" startups are ad supported Web sites, e.g., be another Google or Facebook.

> Even with an ad revenue model, there's always an opportunity cost to not having more capital.

Equity capital brings overhead "costs" beyond belief: You and your team own 100% of your company and, with the first equity check, become a Delaware C-corp with a BoD that now controls the company. With common term sheets, you and your team suddenly go from owning 100% to owning 0% with a vesting schedule to get back to, maybe, 35%. But due to the loss of control, the BoD can fire you and your team at any time for any reason or no reason and before much of your stock is vested. And, for the vested stock, it is likely illiquid but has tax due you can't afford. You just had your company taken from you for next to nothing. And, for the BoD meetings, accounting reports, auditing, legal charges, etc., guess who pays for those, including the first class airline seats, limo service, 4 star hotel nights, high end meals, etc. for the BoD members for the meeting?

> Just because you may bring in revenue which you reinvest back into the business, doesn't mean you couldn't grow faster by having more to spend on hiring, marketing, sales, etc.

A company that has the traction VCs really like will likely be generating enough cash that cash is not a major constraint on growth. Below let's see some relevant arithmetic:

An example is Plenty of Fish, long just one guy, owned 100% of the company, had two old Dell servers, ran ads just from Google, and had $10 million a year in revenue, nearly all pre-tax earnings. Eventually he deliberately hired some people and sold out for $500+ million. IIRC, he never took an equity check.

That's the startup case more like I had in mind, but I was being brief.

But we can have some more arithmetic:

IMHO, for the "good information tecnology" startups now, your model of the need for cash is outdated and past. Even if some cash could be helpful, the C-corp and BoD overhead, time, effort, cost in cash, loss of control, etc. are really not worth it, that is, are way too much to pay for the cash.

My central point was that for "good information technology" startups, the VCs are out of date, behind the times, and essentially out of business or at least well on the way.

So, for some arithmetic, to add detail, can get a motherboard for $100, an 8 core processor with 64 bit addressing and a 4.0 GHz clock for $125, max it out with 32 GB of DDR3 ECC main memory for about $320, get 2 TB hard disks for about $70 each, a high end power supply for about $100, a case for about $50, high end case fans for about $100, and lots of high end software for free.

I'll do the arithmetic for you -- $825. With cables, keyboard, screen, Windows 7 Professional 64 bit, more hard disks, etc., call it $1500 total.

But that's 8 cores at 4.0 GHz and processor caches big enough that mostly don't need to worry much about DDR3 main memory cycle time. Besides the DDR4 memory has, yes, faster clocks but more clock ticks per access.

That puppy should be able to send 10 relatively simple (that's the only good kind) Web pages a second, supported by quite a lot of SQL Server back end work. Call it 4 ads per page sent at $1 per 1000 ads sent.

For the arithmetic, I'll multiply that out for you: That's revenue of $103,680 a month, from one $1500 server. The ISP? Say the simple Web pages send for 500,000 bits per page for 5 Mbps upload data rate. Gee, my ISP is giving me 25 Mbps upload data rate by default.

Okay, that's $103,680 a month in revenue. For a solo founder company -- hopefully. Now just why in heck does that founder need equity cash? They own 100% of the business, say, as a Subchapter S or LLC; why the heck do they want a Delaware C-corp and BoD? They don't!

If the Web site can't get users enough to permit sending 10 pages a second, then likely the traction is not enough for VCs to want to invest. But if the site is sending 10 pages a second with $100+K a month in revenue, then no way will the founder want, need, or take the equity cash. No way.

Sure, in the old days, with a team of five cofounders, with credit cards maxed out, all five spouses pregnant, paying Silicon Valley housing costs, and using Sun servers, equity cash would be very welcome.

Now it can be a solo founder, no credit card debt, no pregnant spouse, cheap housing costs far from Silicon Valley, and the main server parts for the $865, and that's a very different world.

I was being brief, but that's the world I was describing.

[kornish]

To reiterate, seems like the business you're describing fits a pretty narrow profile: free bootstrapped site making money from ad revenue and growing by word of mouth and organic SEO (to minimize marketing spend). That is a phenomenal way to run a company, and if you can pull it off, you have my sincerest congratulations – however, you're likely not the target audience for the post above.

For software companies which don't follow your model (i.e. most of them) OR businesses which are aiming to trade growth for profit (a perfectly valid business strategy, see $AMZN), cost of hardware is almost _never_ the limiting factor compared to cost of labor. And to pay for labor at a loss, one may need to look for equity funding since banks won't extend debt to high-risk seed-stage businesses.

Your assertion as to the desirability of trading growth for profitability is entirely orthogonal, and the arithmetic about cost of server maintenance vs revenue - while informational - seems to miss the point entirely.

There will always be companies so great that VCs need to beg them to take money, but one only has to spend a day in Palo Alto coffeeshops to see that generally demand goes the other way.

[graycat]

> growing by word of mouth and organic SEO (to minimize marketing spend)

How else? I never saw an ad for Google, Facebook, Snap Chat, Drudge Report, Instagram, Twitter, or Plenty of Fish. More generally, I'm unsure just what significant bucks should be spent on marketing a startup such as I described. I can see trying to have some stories in some parts of the media and various other forms of publicity, but actual marketing, and as you also mentioned, sales, what's to do?

E.g., I was a B-school prof and across the hall from me was the guy who did, IIRC, the Pillsbury Dough Boy ads -- it was something that famous and novel he did. I've done high end applied math optimization for several cases of marketing. So, from that marketing, I see no connection with the startup I described.

For SEO, I doubt that Google did that! Nor Facebook, Snap Chat, Instagram, Twitter, Drudge Report, Plenty of Fish, etc.

Sure, if I type into the Google one line text box

KVR1333D3E9SK2/16G

I'll get a lot of hits of sellers and can believe that Google got SEO $ for that keyword. So, there may be hits from Amazon, Newegg, eBay, Tiger Direct, Memory4Less, and Kingston, and I can believe that Google got $ for those.

But sellers of

KVR1333D3E9SK2/16G

are not "good information technology" startups or candidates for Series A VC funding.

And for VC funding, there's another huge point: What the usual, even what is common on some Sand Hill Road coffee shop, etc. is essentially irrelevant. Instead, necessarily, especially if take the Paul Graham definition, the only things that are relevant are the really rare, literally once in a decade, exceptions. Here, too, the VCs are stuck-o because they have nearly none of the background to judge what will be so exceptional. The NSF, DARPA, and many departments at MIT, Princeton, and Stanford do at least on the technical parts. But IMHO, the technical parts should be so powerful, solve so well such an important problem, that they are about all that matters and isn't just trivial. The VCs don't agree yet. Tough for the VCs.

You raised the issue of labor: Well, I'd strongly recommend a founder to be a solo founder. This way he is forced to understand all of his business, and a good founder to be CEO needs to do that. Also he saves big bucks. He never has a "co-founder dispute" wastes essentially no time in meetings.

You raised the issue of hiring: Well, for a solo founder before any equity funding with $100+K a month in revenue, he can hire. Let's see: $120K a year is $10K a month plus some overhead, and can cover that a few times for the $100+K a month in revenue.

For hiring a rock star, full stack programmer, for me, no way. In my startup, I'm the rock star. And for the work of my startup, essentially no one in startup land, in a Silicon Valley coffee shop, computer science major, experienced developer, etc. has any hope of competing with me. Why? What's crucial for my startup, although the users will never know this, is some original applied math I derived, complete with theorems and proofs, from some advanced pure/applied math prerequisites. That's not programming, full stack programming, rock star programming, ugrad computer science, AI/ML, or chaired full prof of computer science work.

For the programming, sure, for my startup I did that, all of it. It was no big deal and doesn't make me a rock star or full stack programmer. Instead I just used the Windows .NET Framework, Visual Basic .NET (I don't like the C-like syntax of C#), ADO.NET for database, ASP.NET for the Web pages, TCP/IP sockets and object instance de/serialization for program to program communications, etc. Simple stuff. Visual Basic .NET? Fine with me. I'm thrilled with it. While I've programmed in a lot of languages, including C, I've never touched C++, C#, Python, Java, or JavaScript and won't unless I have a need to. I've never touched Linux or Unix and don't plan to. So, I'm no rock star, full stack programmer and see no need to be. Then I see no need to hire any rock star, full stack programmers.

I believe that in a few weeks I can teach any talented, interested experienced computer user how to use a good text editor, Visual Basic .NET, ASP.NET, ADO.NET, simple cases of SQL, TCP/IP sockets, and de/serialization quickly. For joins and foreign keys, so far I don't have any! Each index I have is clustered and, thus, as fast as possible. For the crucial, high end, original technical stuff, that's my job and easy for me, and I couldn't hire for that work anyway.

So, for my startup, hiring, no problem. There will be a delay of a few months getting new people up to speed and nicely productive. I'll hire anyone, fresh out of high school or retired with 40 years in the computer industry or 40 years in anything.

If I need some high end technical info, I'll call Microsoft and pay them. So far I haven't had to.

Currently my code is in alpha test. It's 24,000 programming language statements in 100,000 lines of code for a Web server, a Web session state server, and two back end, highly technical compute servers. They communicate with TCP/IP, etc. They are all single threaded, and the queuing is from just the TCP/IP FIFO queuing. IIRC, the default maximum queue length is 10, but likely I could increase that to 100 and have plenty of slack. In the end, in general, the way to keep queues and stacks from overflowing is just to slow the responses to the users; the software and server farm architecture should exploit this fact.

I will soon add a log server to replace my current usage of what Microsoft has for a Web site log server that I don't like. The many places in my code that write to the log need not be changed; instead I'll just change the one function they all call. Writing the log server will take me an easy afternoon and will be just from removing some cute usage of a collection class from my Web session state server and adding a print statement.

Basically, then, the production code is written -- I thought of it, designed it, and wrote it, all in one stroke, no prototypes, no refactoring. Everything worked just as planned.

For being "narrow", essentially every promising startup is necessarily "narrow".

[kornish]

Wow.