Reflecting on My Failure to Build a Billion-Dollar Company

Really love this post. My favorite line is:

> Every month of less than 20% growth should have been a red flag.

I think that's pretty insightful. 20% growth is great for a normal business, of course; for a VC-backed startup it can show some warning signs about future hard decisions you might have to face.

I think there's certainly lots of discussion that has been had — and should be had — about "should I or shouldn't I raise money?", but there still are plenty of companies and founders who will raise VC, and paying attention to those early warning signs are important if that's the choice you make. It's important to worry about it each month and each week rather than the two months surrounding the raise of your next round.

These “metrics” are exactly why you see these venture backed SV companies engage in the behavior we saw posted all over the front page of HN yesterday (I.e. silently apply workers tips to their “guaranteed” pay and pocket the difference). But hey it’s an HN/SV unicorn, so there is too much investment that needs to be made back to fail now...and they have the perfect back story, rejected from YC until they personally delivered PG a 6 pack of beer and pretended they had a functional product.

It allows them to continue to make the representations of growth to future investors, the more buy in have from investors, the more you can continue these market/marketing manipulations (e.g. the fyer festival).

Of course the entire SV ethos encourages this behavior: move fast and break things, growth hacking, and fake it till you make it. It’s also built into the system that 9 out of 10 of these scams will fail, but every 10th scam can be offloaded to the public through an IPO.

Yeah it appears this is a perfectly fine and successful business... it just went through an odd route for someone to figure that out.

Those charts and numbers, all pretty good IMO. If someone came to me and said "Hey I (or we) made this thing here is what it does and the numbers." I'd be all about high fives and such. And yet at times they didn't think so based on the route they went, very interesting.

I always wonder if there is value lost in companies that are shuttered because something isn't the next big hit, or some private equity decides they want to cash out / break up a company that otherwise... would be just fine and would have continued contribute.

Actually 20% per year would be great for most businesses, which just shows what an outlier VC backed businesses have become.

This would be 9x per year. What are examples of companies with such a growth rate?

Indeed. GP said exactly that!

> The idea behind Gumroad was simple: Creators and others should be able to sell their products directly to their audiences with quick, simple links. No need for a storefront.

Then:

> For the type of business we were trying to build, every month of less than 20% growth should have been a red flag.

According to what metric? This isn't meant to be snarky, but that type of growth rounds out to about 900% over the course of a year. Even if it meant that they'd grow 20% in the first month and had profits plateau immediately (i.e. 20% -> 16% -> 14% -> 12.5%), that's still 240% growth over the first year. What kind of business expects 900% to be the minimum growth over the first year?

It's also an unsustainable growth rate. But of course, VCs know that. They just need something that can front load the growth like that and unload it on the public before that growth plateaus... or plummets.

Startups. To choose a recent one that turned big, Facebook was approaching such numbers: https://i.guim.co.uk/img/static/sys-images/Guardian/Pix/pict...

According to the metric of Social Media.

The Metric you have to meet now is Facebook's growth rate in the first few years of launching with high gross. 500% first year, 250% next year etc...

It is still baffling to me that the tech world has glommed onto a business model where steady growth and a solid core of loyal, happy customers is considered a failure.

Not even close.

If you start at 1 million users, 20% monthly growth for 9 years means you would have 13,375,565,248,934 users, or a little over 13 trillion.

It's called being "living dead" or "zombie", and it's considered worse than failure. smh

Yep. $1M ARR -> $9M ARR right after series A would kill 99% of startups :)

In b2b & esp enterprise, a solid co seems:

* Year 0, 1: $0K-$1M (e.g., POC money or OSS project at another employer) ...

* Year X: $1M ARR <-- series a territory

* Year X+1: $2-4M ARR (ideally 3X+)

* Year X+2: $5-10M ARR (2X+) <-- series b territory

* ...

* IPO: $200M+ @ 1.5X growth

That's based on recent IPOs. b/c big seeds and series a concentration, maybe diff for current crop?

The post resonates. It took us awhile on "0->X" b/c we do deep tech vs vanilla saas, and had to get it to the point we can start cranking on more pure-product stuff. So for deep tech co's, you either make no true product and flip, or do a lot of work before even getting to the real business journey.

Exactly - having enough capital to waste in this way IS a morality issue.

You don't need 20% monthly growth for 9 straight years, but for your first year and maybe the second after your Series A you do. Although I'd say 10-20% is more the range.

The reason this is true is that your investors are giving you a lot of money.

Think of it this way, I have a big idea, and I've turned that into a small product making say 10k a month. What I'm telling the investor is that I NEED these millions to turn this small product into the big idea, and that I'm ready to scale this out.

At the point I'm asking you for money, I'm representing that I have the product that the market wants. I'm representing the marking is huge, and that I need this investment to take advantage of it.

Its not unreasonable to say that with that kind of money I can take something that's making around 10k a month and turn that into 30-100k (10% to 20% MoM growth) a month in a year.

It is because a startup is an investment vehicle, not a business.

If someone had X amount of dollars they want to maximize the rate of return on that wealth. The point of growth in investing is that you can see the future before it happens and pocket the difference.

For example if I invest in company Y and they are growing at a certain rate, I can sell my portion of the company based upon expected future potential. If the buyer of my shares believes the company will become 30% larger in 5 years, that is not much more than they would earn if they had some investment that return 5% a year. If the buyer of my shares believes my stock will be worth 100% more in 5 years that would now be equivalent to a return of 15% a year.

So here comes the trick. Even 10% a year would be a great rate of return. So I can sell my shares at a premium. Pocketing the 5% today as opposed to waiting 5 years. If I can pocket 7% or even 10% of that would be even better. Now if this company will be worth 500% more in 5 years, you can see how I would stand to make a large amount of money today by selling my asset that will be worth much more later.

With a company growing at a normal speed, there is not much of a premium I can extract for future growth to a potential buyer of my shares.

In your first few years your base is going to be low, is it a bad month if you went from 1000 to 1100 customers instead of 1200?

The way I think about things is that there is some market with a size Y (or, size X now, but with the hope it will grow to Y). You need to service a certain percentage of that market to achieve economies of scale that make a business worthwhile, and capture enough that you have some sort of moat. In the presence of VC-money, that percentage has to be high enough that there's an upside to investors.

Given that goal and the idea that you only have so much runway to get there, because you'll either run out of money, or risk a competitor capturing the market. As long as you are on the right trajectory things are good.

The reason that I think monthly growth is a poor metric because it's looking at the delta and ignoring the goal. It doesn't matter if you hit 10-20% or more every month if you aren't going to capture the total market you need to succeed. Also number of customers is a poor proxy, because you can have a weak business model and lose money on most transactions as demonstrated by Pets.com.

Indeed. I guess I should say, I understand the appeal for investors, I just don't get why so many founders are getting suckered into it.

I suppose the investors are selling them a dream of fame, fortune, and early retirement, shored up with the implication that "if all these financial wizards want to invest in me, I must be on the right track." The fact that the investor expects most of his investments to fail, because he only needs one big success to wipe out all the failures, is glossed over.

>I always wonder if there is value lost in companies that are shuttered because something isn't the next big hit, or some private equity decides they want to cash out / break up a company that otherwise... would be just fine and would have continued contribute.

Of course there is, but you have to compare it with the opportunity cost of working at something world-changing.

For the individual maybe I get that.

But even from an individual perspective, I gotta think there are folks who would be fine working at a more ... not world changing business too. But these companies sometimes get shutdown or torn apart because they're not something else.

Let's run some numbers. Say you are VC putting in $1M in 100 companies. To your great luck all companies become self-sustaining lifestyle business. By definition, lifestyle business is making just enough for comfortable lifestyle of founder, so may be $300K/yr pre-tax. Let's say founder decides to give back 10% of $300K as return on investment. At that rate, it would take 33 years for VC to just recoup his original investment.

I wanted to illustrate this because it is necessary to understand why things are the way are. Lifestyle businesses is not viable for VC funding. You add on risk profile (i..e 80% of companies won't even become profitable) you get the only outcome that one or two super-hits needs to occur to cover for rest of the failures. Also remember that even with this strategy most VC funds are not even as profitable as S&P500 index.

20% growth per month in itself has such a non-meaning. It really depends on where you are coming from.

If you start with 10 users in month 1 all you need is 90 users in month 12 to have 20% MoM growth. Well, that's doable.

If you start with a million though you need to have 9 million by the end of said year. Tougher to find 8 MM new users than 80, don't you think?

If you're someone like Facebook with a billion users, good luck finding 9 Billion after 12 months of growth ;)

Yup. In reality, it tends to be something more like a 4/3/2/1 split. If you are a VC and invest in 10 companies, 4 will fail outright within 5 years, 3 will be somewhere between zombie companies and lifestyle businesses (both of which are effectively negative ROI for a VC), 2 will be modest successes, and 1 will be a massive success.

Yes, but hopefully your average founder will wise up to the following: The chances of you being super successful, happy and content are much higher with a "lifestyle business" than a VC funded one.

Why?

Well, the biggest issue is that VCs can diversify (as you point out, have a lot of bets counting on a few successes), while founders can't.

I think for the vast, vast majority of people, there are greatly diminishing returns after a certain amount of money. That is, if you have a 1/10 chance of having a $10 million payout, vs a 1/1000 chance of a $100 million payout, I think most people would take the former. Put another way, most people are willing to take a good deal of risk for "fuck you" money, but fuck you money for most people is MUCH lower than what VCs expect with a unicorn.

Since VCs do always need to swing for the fences, they invariable will say no to ideas that don't have a huge potential market. My belief is then that there are a number of "mid market" businesses, i.e. ones catering to smaller niches, that have a lot of potential but have lower competition than huge, winner-take-all type businesses.

But when VCs are criticized for obsessing over hyper-growth, we're not really talking about $300K/yr businesses. We're talking about $5M/yr businesses that are forced to try and become $500M/yr businesses or go bust, rather than stabilizing at a lower level.

> That is, if you have a 1/10 chance of having a $10 million payout, vs a 1/1000 chance of a $100 million payout

1/10 chance of $10mil is higher expected value than 1/1000 of $100mil. Of course anybody sane will take the former and not the latter.

I think you'll find the tune different if the latter had been 1/1000 chance of $1 billion.

> I just don't get why so many founders are getting suckered into it.

because they either don't understand what's being done to them (after all, VCs can be very smooth talking), and the prospect of faster wealth gains for the founders also doesn't help.

But again my whole point is that expected value is itself a very poor metric to use for this decision, precisely because a founder doesn't get many "swings at bat" like a VC does. Even in the case where the expected value is the same, the fact that the actual value leads to 0 for all but the very, very, very luckiest/skilled means you get St. Petersburg paradox-like results.