You are thinking from the perspective of an individual investor. For VCs, this kind of return is abysmal since it won't cover the 7/10 companies that went completely bust. In order to VCs to take high risks on early stage companies, they need the winners to return 100x so the fund even makes financial sense. It's one of the main reasons why VCs constantly push startups for hyper growth.
This is certainly better than losing the investment completely but I can't imagine the investors being too thrilled about this outcome.
Who cares if it's bad for VCs. They already get paid over 200k+ in carry every year for over 10 years. They are also not investing their own personal money.
The point is that if all startups behave like that, thr VC business model doesn't work out, will vanish, we will all have to stop playing the startup game since there is no one providing that kind of funding anymore.
No it won't. One case in either direction means anything.
The game is that VCs will adjust, then founders. Then VCs. Then founders ad nauseam forever. This is just one small piece of a giant play being performed by many in different ways every day.
Ha, venture math is pretty hilarious. VCs basically need to give back their investors a 300% return in 10 years to make up for the risk they handle. Eg. For a $40M fund that's trying to grow to $120M, $1M here and there doesn't really move the needle.
>> For VCs, this kind of return is abysmal since it won't cover the 7/10 companies that went completely bust.
Only very myopic VCs would think this way globally. If every business did this, it would be terrible. But each business is its own opportunity/set of circumstances, and forcing everyone to 10X+ is as equally stupid as cashing out $1MM on a four year term sheet on $2.5MM invested.
You must evaluate each opportunity individually to maximize profit and growth. The intentions can always be to shoot for hypergrowth, but if the probability drops below the profitability point, you shouldn't be forcing the issue. Terrible investors do this, and it happens fairly regularly, though it's slowing down as founders become a bit more intelligent with their options.
> Only very myopic VCs would think this way globally.
Might this be a (converse version of a) No True Scotsman fallacy?
Elsewhere in the thread, a comment [1] referenced an article [2] that details the return imperatives that VCs face. In particular, it details how small returns "don't move the needle".
OTOH, the article asserts that only 5% of VCs (misleading, if a percentage of number of firms instead of AUM) succeed in meeting this imperative, so I wonder how the other 95% still attract enough LP money.
>> In particular, it details how small returns "don't move the needle".
You never want small returns. But when you can choose a small return over basically a near-zero chance of losing all your money, it isn't that difficult of a choice - or it shouldn't be.
The point is that, to a VC, a small return is indistinguishable from losing all the (not "your", since they rarely have much, if any of their own money in it) money.
Given their economics, VCs have a very strong incentive (or an imperative, according to that article) for "forcing everyone to 10X+" (and I would argue it's more like 20x+), no matter how small the likelihood of that outcome. Without at least one outsized exit, they're a failure.
Put another way, their LPs aren't paying them to, in any way, play it safe. Near-zero chance isn't the same as zero.
So, yes, the choice for a typical VC isn't difficult. It's just the opposite of what you're proposing.
You've been couching your assertions in hyperbolic judgmental-sound terms, which I fear detracts from your point, but this seems to be the crux of it.
You have not, however, demonstrated the "math" in your viewpoint. Specifically, how does it work out, being sure to include risk (or probability) as a factor?
> otherwise it wouldn't be so hard to get funding for $1-2MM
That doesn't follow, as any difficulty can be adequately explained by (perceived) likelihood of an outsized return (100X+).
Are you sure you're not confusing VCs with lower (e.g. average) risk investors?
VCs must aim high, but a medium-size win isn't the same as going bust. It's still better to get a return with strong linear growth than to get nothing.
Didn't the investors have the choice to take the cash-out? I am actually surprised they agreed. It seems logical Buffer is not going anywhere, and growing, and an acquisition is still very much possible which would represent much larger returns.
How do you reconcile this advice and position yourself if the seed round is only enough to prove out whether the product can be built at all?
As an analogy, say I had the idea for a car when everyone is still using horses. I raised a seed round to build my car but the funding is only enough to build a car prototype that goes 10mph. At 10mph, there is obviously no product/market fit since horses are still faster and cheaper. However, the prototype proved out the technical challenges, so I know with more capital I'd be able to make a car that can go 80mph, making the horses obsolete. How would your post apply in this case?
I think there are certain companies with significant upfront capital requirements that first time founders will find it almost impossible to get funded. This is unfortunate and probably reducing overall innovation but I think the revolution that has caused first time founders to get funding has been software. Software has significantly reduced the upfront capital required to get a business off the ground. I think we Founder venture further and further away from pure software companies they are going to find fundraising much more challenging.
A company that comes to my mind is Kestrel Aviation. They had a great plan up front, founder pedigree, and experience. But they got distracted by hubris and stopped executing.
Launching a new general aviation company is massively capital intensive. They raised a bunch but failed to do anything that resembled shipping. They could have made individual parts, they could have sold kits. Any number of things.
Sometimes you have to start with the small pieces, or do services engagements. These things generate revenue, attract staff, and enable you to build the kind of organization necessary to do something capital intensive.
Trying to go to Mars as step one won’t typically work. Try to find business models for the components and assemble over time. My guess is that Elon Musk’s portfolio follows this model.
I think in that case your ability to raise additional funds will be dependent on the persuasiveness of your argument. The investors would need to believe that you have a viable plan, and that you are the person who can execute it. If they don't believe you are worthy of investment others may take inspiration from your work in their attempts to make the product a reality.
It is defined in the linked blog post and I believe it's a pretty good definition.
“The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can.”
In other words: your growth is so astonishing that it justifies paying >30% IRR to investors rather than growing from internal cash or borrowing what you can from a bank.
Chinese knockoffs are already in full speed at a much lower price. One of my friends saw an exact Navdy knockoff called Carrobot in China selling for only $400. Supposedly it worked pretty well and was already shipping back in February.
May I ask what exactly are you looking for in the replacement?
We are actually building a wearable that gives you full hand tracking without the need for line of sight. It's intended for AR/VR applications since it's just as precise as vision based products without all the downsides. But one thing that's personally important to me that we are incorporating into the product is the ability to turn any surface I touch into a trackpad. It basically gives me a portable trackpad anywhere I go and I can sit 10 feet away from my computer and use my leg or arms of the chair to control my computer. I'm curious what kind of usages you need from a product like this.
Well, I don't want to turn arbitrary surfaces into trackpads. I'd just like to be able to perform hand gestures in the air, above my keyboard. I don't need to perform them from across the room or anything like that. So that, to me, is the MVP- simply replacing my trackpad for gestures like pointing, clicking, dragging, zooming in MacOS.
But beyond that...
1. I don't want to wear anything on my hands.
2. I'd like to be able to program new gestures easily. Sort of like American sign language, I want to easily map a gesture to an action.
3. After replacing a trackpad, I'd want to be able to use my hands to manipulate a 3d environment. This requirement is pretty low on my list, because I never do anything in 3D. But it's necessary in the long run, once 3D applications become popular.
Same thing happened to me also.. This is one of those times when I really wished that my browser would tell me how the heck did I end up on this particular page..
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