[tinkerdol]

> By relying on private investors for a longer period of time, start-ups get more runway to figure out sustainable business models

Can anyone explain, what is the rough amount of runway that a company should need? For instance, are there rough estimates expected for when a company should be able to reach profitability depending on product type?

I was watching the How to Start a Startup lecture on how to raise money (http://startupclass.samaltman.com/) and was astonished about how many rounds of funding VC's expect to give out after seed funding (A, B, C, D rounds, the letters seem to keep going).

I'm thinking of bootstrapping a company and easily also see the appeal of getting funding, in order to hire a team and get the product out faster. But why are so many rounds necessary?

Is there some business or economics theory out there that would explain the amount of runway needed for each business or product type? For instance, if I were launching an ice cream truck tomorrow, I'd expect profitability in the very short term compared to say, something like SpaceX.

[suprasanna]

As a quick 'part answer' to your question, a lot of the reasoning behind so many rounds for many companies is actively choosing to stay unprofitable by pouring would-be profits (and new investment dollars) into gaining more customers. The idea being that as long as you "know" you can get your customer to be worth more than you paid to acquire her, eventually your company will be profitable once you slow down (or hit a 'max') with user acquisition.

[zxcvvcxz]

> Can anyone explain, what is the rough amount of runway that a company should need?

Depends on your goals. If you want to dominate the market and become a monopoly, then you need enough to outspend all your competitors while surviving. Meanwhile if you're starting a lifestyle business, you need only enough to put a roof over your head and get some food.

> I was watching the How to Start a Startup lecture on how to raise money (http://startupclass.samaltman.com/) and was astonished about how many rounds of funding VC's expect to give out after seed funding (A, B, C, D rounds, the letters seem to keep going).

Because if VCs are funding a company, they want the company to be on the former end of the spectrum I just described. Anything tech with network effects demands a clear winner these days, there is such a huge difference between a Facebook and a [insert 2nd place competitor here].

Think of it like an arm's race: the rounds are necessary because others are raising the rounds. Others are raising the rounds to maximize the resources they can throw towards winning the market exclusively. The underlying principle that creates this dynamic are winner-take-all network effects, as mentioned. People are going to open up only 1 app for a particular function, is it going to be yours?

A lot of people talk about bootstrapping and "lean startup" and lifestyle businesses with great praise. And for a particular set of goals, these are excellent strategies. But there's also a sense of looking down on these huge VC-funded mammoth companies trying to dominate the market ("they don't even build elegant tech, they just throw tons of money at the product").

But see this is where the real War of Business is being fought, that's where Ubers and AirBnBs are being created. Either one of those could've stayed a small niche local lifestyle business.

You might find interesting the following Ben Horowitz article: http://allthingsd.com/20100317/the-case-for-the-fat-startup/

[tinkerdol]

Thanks for the response!

Let's assume we want to dominate the market and not create a lifestyle business.

Isn't it a benefit of a more lean/bootstrapping style to be forced into finding a product people love faster (rather than burning money marketing the product)?

For instance, what about eBay as an example of a side project that really took off. Are such instances really anomalies?

[zxcvvcxz]

Well I think it's pretty standard for these types of companies to start as a small project, as a founder's inkling of something people would want. It's not like millions of VC money is being raised before that even happens. Except for some cases of stupidity, like Color or Clinkle; those are the anomalies IMO.

What we're discussing is where to take the venture/project after figuring out, "Holy shit, there are probably millions willing to pay money for this, we've hit gold." Most ventures don't have that moment - or even worse, miss that realization if it's true.

So the smart ones start arming up -- getting those big VC dollars to grow the venture as fast as possible before someone else realizes what they've done and tries to do the same. I can pretty much guarantee you there existed direct AirBnB competitors around 2010 or so. But how many of these got funded by Sequoia? How many had a global vision they had to make happen? This money, and the strong status signal of investor confidence, attracted talent, which let them continue building and outpace all of their competitors whom we've never even heard of.

Anyways, that's what I've observed in a nutshell: hit on something big with experiments at a small scale, and then fund like there's no tomorrow. Because for all but one of these type of companies, there isn't.