[NY_Entrepreneur]

I don't quite 'get it': So, "Could you expand on your answer a little, please".

You seem to be saying that the key is "traction", significant and growing rapidly.

Then it sounds like someone who was just featured on the TV show 'Diners, Drive-ins, and Dives" and has significant 'traction' growing rapidly would get a VC investment?

Or so could someone who opened a pizza shop in a hot, new shopping mall.

So, it sounds like nothing about the core technology, Buffett 'moat', potential business size, or business planning is relevant?

Then, suppose the business is a new Web site. Suppose the founder gets from his ISP a static IP address and 15 Mbps upload bandwidth. Suppose his largest Web page can be sent for less than 200,000 bits. Suppose he half fills his bandwidth 24 x 7 for

     ( 15 * 10**6 ) / ( 2 * 200,000 ) = 37.5

pages sent per second. Suppose he sends three ads per page and gets $1 per thousand ads displayed (CPM). Then his revenue would be greater than

     1 * 3 * 37.5 * 3600 * 24 * 30 / 1000 = 291,600

dollars a month. Now just why would he accept equity funding?

Net, it sounds like, for an entrepreneur, when equity funding might help, his project is 'too early', and, by the time the funding is available, the VCs are too late.

So, it sounds like VC funding is for where (A) the business has suddenly encountered some problem and needs cash fast or (B) the founder wants to take some cash off the table and not for usual business formation.

Then back to the restaurant: All across the US, restaurants and Main Street businesses get built without VC funding, and commonly those businesses need much more in capital equipment, ovens, site renovation, trucks, etc. than a Web site filling 15 Mbps upload bandwidth. So, if those businesses don't need VC funding, why do new Web sites?

[tptacek]

Comment threads where 'pg talks about how he or others decide to make equity investments seem to draw out responses like this one, which all seem to amount to "nuh-uh, it's super hard to get funding".

Well, respectfully, no shit. None of these firms are charities. Every new founding team in the world --- I think literally every one of them --- discovers the seeming chicken/egg problem of traction and money. Think about it; if that problem didn't exist, everyone on HN would have a funded startup.

VC firms will make speculate on a new team if that team has impossible-to-ignore traction. They'll speculate on an unproven business model if the team has an impossible-to-ignore track record. Where are the instances where successful VC has ever speculated on both at the same time?

You lay out a scenario here illustrating that by the time you have enough traction to (you think) satisfy Wilson or Graham, you won't need them anymore. Bully for you! The same thing happened to us, and hundreds of other startups; it's called bootstrapping. If you can bootstrap, you should; you'll keep more control and ownership.

But I should point out that lots and lots of companies that bootstrap themselves to a comfortably thrumming business end up taking VC in the long term, for the same reason a conservative poker player is eventually going to bet heavily on pocket aces. Eventually you come across an opportunity that begs you to scale up quickly and buy market share. Part of the point of bootstrapping is to allow you to be choosy about the hands you play.

In the meantime, stop complaining about investors not giving you the time of day. It's silly. There are things to complain about regarding investors, but not handing free money out to unproven businesses isn't one of them. Investment firms are themselves businesses (they aren't investing their own money!) and their responsibility isn't to you or even the startup system; it's to their LPs.

[NY_Entrepreneur]

"nuh-uh, it's super hard to get funding".

I never suggested any such thing. But I WAS being critical: PG's description amounted to saying that VCs want to get on the plane only after it has already left the runway. Although I didn't say it, I suspect that, then, what PG is saying is not all that close to how VC funding works. I wasn't being critical about it being "super hard" to get funding but just about the apparent contradiction in what PG wrote.

The VCs can do what they want. As Mark Suster has illustrated with some graphs and data, over the past 10 years the VCs have been doing poorly, and about half the partners are 'unemployed' as VCs.

So, I can't 'look up' to the VCs as business experts. They have MBAs; pseudo-great, I've been an MBA prof. Some VCs have had some startup experience, maybe in 'biz dev'. Pseudo-great; I helped start one of the most successful VC funded companies in history. And as IT experts, I have to look down on nearly all of VCs (although YC is an exception) so far I'd need a Hubble telescope to tell them apart. I've taught computing in two research universities, published peer-reviewed original research in computer science, mathematical statistics, applied mathematics, and artificial intelligence, and helped ship two commercial products from Yorktown Heights.

Any way it goes, I have to build a successful business. So does every entrepreneur on Main Street who opens a pizza shop, auto body shop, grass mowing service, etc.

So, as you wrote, by the time I've built a successful business, say not an "unproven" business, I would be able to sell a fraction to a VC. Okay. Just why I'd want to do that escapes me.

Or, the day before I take a VC check I have a 'proven' business, say, half filling 15 Mbps upload bandwidth with revenue close to $300 K a month and own 100% of it. The day after I take a VC seed check, I have $100 K -- $500 K more cash in the bank, that is, revenue from 1-2 months, where it took me much longer than 2 months to get the seed check, own none of my company, have to get my fraction of 'my' company back on a four year 'vesting' schedule, and can be fired by the Board at any time. Bummer.

My point is not that it's tough to get VC funding. Indeed, I MUST build a successful business, VC funding or bootstrapped. It's plenty clear, from what PG wrote and more, that once I've built a successful business, say, $300 K a month in revenue growing quickly, then I could get a VC check. And PG is saying that much before then, I can't get a VC check. Okay. Thems are the rules. Good to know the rules.

So, what was my point? Just that the rules as PG wrote them don't make much sense. I doubt that what he wrote is very close to the truth.

As an entrepreneur, I have to evaluate the potential of my business early on. Nowhere did PG mention that a VC will review that evaluation. Here he is mostly correct: One could count with shoes on all the VCs in the country who could evaluate or even direct the evaluation of the crucial, core 'secret sauce' in an IT business plan.

People have mentioned a similar point before: If VCs want to wait until there is significant traction growing quickly, now they risk waiting too long. That is, it used to be that, to get the traction, the company needed funding to write the software. Surprise: At least from Microsoft, once one understands the relevant parts of .NET, essentially all the code for a Web site, indeed, for much of commercial software, is already written, and all that's needed it a little, simple glue to join the .NET code.

Next, surprise: If usage grows, then can call up, say, Tiger Direct, get some parts, and plug together one heck of a 64 bit server for less than $1000. We're talking what, 4 AMD cores at 3.0 GHz for $100? A motherboard for $100? Main memory at $10 per GB? 2 TB hard drives for $100 each? A high end Antec power supply for $100? A case for $50? Some fans for $2 or so each? What'd I leave out?

Next, surprise: If usage is significant, just $1 CPM will throw off enough cash to buy servers enough to double capacity in less than two weeks. So, that's exponential growth. Bandwidth used to be really expensive. Surprise: Now where I live $15 Mbps upload with a static IP address costs $65 a month, and CAN use it for a Web site.

Fred Wilson has written on his blog that these changes are good for VCs. Maybe. And I continue to see the major successes taking VC funding and don't have a good list of successful bootstrapped companies.

Still, from what PG wrote, basically I've got to have, say, $300 K a month in revenue, growing quickly, to qualify for a Series A. But, in my case, that's just me and my team, two of whom have four legs, long tails, and long whiskers, and myself and I and a server at my left knee in my living room. For the server, I have one in a box in the next room. I also have an offer of a loan of one with 32 cores and 2 TB of main memory -- that used to be a lot of disk; now it's main memory! BELEIVE me, a 32 core server could send well over 35 pages a second from my Web site software! For the Microsoft software, their BizSpark program will let me, or essentially any IT startup, have the copies of Windows Server and SQL Server for free for a while.

Again, I'm not complaining that getting a VC check is too hard. Indeed, again, I need to build a successful business, say, $300 K a month growing quickly by myself. And, apparently PG would agree that with such a business I could get a VC check. Okay. But why then would I want to take a VC check?

Net, if I can ramp up to $300 K a month in revenue, I won't need a VC check. If I can't, I can't get a VC check. So, either way, there's no VC check. So, my point is, with PGs description, of what use are the VCs? Understand now?

[joshu]

You seem angry.

Traction isn't necessarily the same as revenue.

PG's view of the world isn't a universal rule.

[NY_Entrepreneur]

"You seem angry."

The reply by tptacek discarded the point I was trying to make and claimed that I was just complaining because, according to an uninformed claim of tptacek, I was having trouble raising equity funding. The goal of tptacek was to try to gain upper status via an insult. That was a personal attack for no good reason, and I was angry at tptacek. Otherwise, I'm not angry at VCs.

For PG's post, it seemed to be deliberately a bit far away from what VCs do. It's frustrating to see such from the other side of the table.

"Traction isn't necessarily the same as revenue." Well, one form of 'traction' is a lot of users, and in some cases can have that long before any revenue. Examples include the early months of YouTube, Facebook, and Twitter. So, they had a lot of 'unique eyeballs' per month, and the assumption was that there should be a way, somehow, to 'monitize' that. Maybe. Usually.

In my case, a lot of eyeballs mean a lot of Web pages served and, for my Web pages, a lot of ads displayed. Then a lot of eyeballs mean a lot of revenue and, in my case, nearly all that revenue pre-tax earnings. Or, yes, I thought of 'monitization' up front. My most important Web pages have been carefully designed to have a banner ad of 720 x 90 pixels across the top and some number of ads 300 x 250 pixels down the right side. So in my case, 'traction' and 'revenue' go together.

"PG's view of the world isn't a universal rule." Yes, that is a weak version of my main point.

Maybe some LPs have asked their GPs to fund only 'traction', but likely some VCs are still able to fund something off the back of a napkin if they really want to. Even if they could, to me that's a bit moot: VC funding or not, likely not, like anyone on Main Street, I still need to build a successful business. At one time, a shot of VC funding could have helped my project a little. But now I'm so close to going live that what VCs do is getting to be a bit irrelevant. I'm still in touch with some VCs in case my personal funding runs out, but my guess is that it won't. Lots of pizza shops get to earnings without VC funding, and my project should be able to, also.

[tptacek]

Sorry you feel that way. You may just be in the crossfire of a bunch of other similar threads. Meanwhile, it sounds like you have little to be upset about, since your business is doing so well.

[NY_Entrepreneur]

You keep assuming that my concern here is my business. It's NOT. My concern was just being clear on just what the heck VCs do.

VCs are welcome to do what they want. While I have very little respect for all but a tiny fraction of VCs, I am not angry at any of them although I believe that here PG was not accurate.

VCs and my business are close to mutually irrelevant.

From all I can tell, my business is doing well, but, yes, I will be happier when I am getting $300 K+ a month in revenue.

"Crossfire", what VCs do in general or nearly always, etc. are getting to be nearly irrelevant for everyone: Just a short look at the finances of a VC and see that VCs need 'home runs'. All the rest is low grade work or just a waste of time, effort, and money. But there are only a few 'home runs' each decade in all IT VC in the US. So, 99 44/100% of what VCs 'do' is irrelevant, for all concerned. In particular, what is 'usual' is irrelevant. And for the VCs, 'patterns' are irrelevant.

The major failing of VCs is that they do not have effective criteria to select the 100 - (99 44/100) of interest, or even the candidates. So, about all they can do is follow the herd of the 'usual', draw their 2%, and hope a home run comes out of the blue. That's the key reason on average they are not making much if any money.

That lack of effective criteria is in wildly strong contrast with essentially everything in serious applications of science, in engineering, and in technology outside of VCs.

My criteria that get me to invest my effort are nothing like those of the VCs, usual or otherwise. On this point, I'm standing on solid ground, and the VCs are standing in a swamp.

It looks like Darwin will have the last word.

[simonw]

What an odd comment.

The difference between a restaurant and a technology startup is that a startup is "an organization formed to search for a repeatable and scalable business model" - http://steveblank.com/2010/01/25/whats-a-startup-first-princ...

As for your static IP address example... a company that is serving 38 pages a seconds with 3 ads and a $1 CPM isn't exactly a trivial thing to build. If you do build that without taking any investment, good for you! You've bootstrapped your company. I imagine you'll find that you need a lot more than a static IP address and 15 Mbps upload bandwidth to get there though.

[NY_Entrepreneur]

"an organization formed to search for a repeatable and scalable business model"

I've read that some dozens of times from Blank.

Sounds like a guy opening a pizza shop knows better what he's doing than the IT startups Blank is talking about!

Not all IT startups have to be less well directed than a pizza shop! Bluntly, for a well planned startup, I conclude that Blank is nearly always wrong.

I helped start a company, now world famous. In my offer letter I was promised stock. Later the COB said that the amount would be $500,000. I never got the stock. That stock would be worth about $500 million now. Yup, I missed out. But I did get some startup experience. Got'a tell you, what Blank said didn't describe what we were doing at all. We always knew JUST what our business model was, and we were correct from the beginning to the present. It wasn't tough to know. Sometimes Blank is seriously wrong.

"You've bootstrapped your company." From what PG wrote, sounds like I don't have much choice: No matter what "more" it takes, I have to have it done before a VC will write a check. But, then, as you said, I will already have "bootstrapped" my company.

"I imagine you'll find that you need a lot more than a static IP address and 15 Mbps upload bandwidth to get there though." Sure. The point about the static IP address and the 15 Mbps upload bandwidth was just to illustrate that by the time I've got the "more" done and am ready to go live, we're not talking bucks big enough to eat up an average Series A. Instead we're talking much less cash that it would take to keep a new pizza shop going for the first week.

My point isn't how much an entrepreneur needs to do. My point is that by the time the entrepreneur has gone live, gotten significant traction, and has the traction going, and, thus, qualified for VC funding, if he can half fill 15 Mbps upload bandwidth, then he won't want to take VC money.

Put more simply, PG is saying that the VCs want to get on the plane after it has already left the ground. Okay by me. I'm just trying to understand the rules of the game.

I didn't mention it, but my guess is that the severe rules PG is describing have been 'suggested' by the LPs.

[rdouble]

Then it sounds like someone who was just featured on the TV show 'Diners, Drive-ins, and Dives" and has significant 'traction' growing rapidly would get a VC investment?

In New York, they probably would.

[NY_Entrepreneur]

It would be one heck of a super sandwich for Fred Wilson to do so! Maybe if the restaurant were right there on Union Square and did lunch deliveries in the area and had some fantastic sandwiches and pitched Fred after several beers!

So, net, my point is that PG's claim of "traction" is incomplete. That is, also needed is something in IT. Then we also have to conclude that being in IT is not enough, that what the IT 'business idea' is will also be important. Then we arrive at why I mentioned restaurants: PG omitted mention of the IT business idea. Sufficient? Heck no. Necessary? Likely nearly always. Should it be mentioned? Likely.