Comment by daft_pink
2 years ago
Maybe it's my business major background and my skepticism of all these tech companies that have no reasonable business model to make $'s, but unless there is an obvious need for investment like buying a large amount of real estate or machinery, why would you need VC money to build an app after you've already spent several months doing it?
It should run on it's own and not need investor money. You shouldn't be focused on getting VC's, you should focus on developing an app that actually turns a profit.
It's not that difficult. Anyways, I found your story really interesting. Good story :)
Because the SV VC business model isn't to build a traditional profitable business that beats the competition by providing a superior product/service for a competitive price. It is to dominate the competition by subsidizing the real cost to consumers, until you have taken over the market and can raise the price and lower the quality of the product/service.
Edit: Or the business model is to be acquired by a FAANG who fears they need to get into your area and care more about optics to their bosses/shareholders than how financially sustainable your startup is.
Does that even work as an investment model? The poster child for this has got to be Uber, and they've shown that this is a lot harder to achieve than it appears.
The huge wins have all been IPOs where the business is still growing/trying to dominate the market, and not where they're in that monetisation phase. At least that's what I've seen. I don't think there's a single case yet where the "dominate and then monopolise" plan has actually worked?
Work for whom? All of the early employees and investors in Uber have done very well.
Uber seems to have created a lot of opex (30k employees, high comp) setting a pretty high bar to reach profitability, and there are many substitute goods (planes, trains, your own car, bicycles, busses, walking). So they may not be positioned to truly corner consumers with prices high enough to reach profitability, even if they monopolize cabs.
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It worked for Facebook, but they were a lot more intentional about growth vs revenue.
Facebook and Youtube might qualify here
Amazon?
It works for management and executives, that's who it works for.
A less cynical take is that it allows you to run at a loss for a very long time as you build revenue and market share. This can be right up to the time that you exit.
> A less cynical take is that it allows you to run at a loss for a very long time as you build revenue and market share
You're saying the same thing as the grandparent comment and in various places in the world this would be considered dumping/subsidizing and illegal.
Yet here we are and the enshittification continues.
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The goal of most Silicon Valley founders isn't profit, but growth. Quickly increase users, quickly increase revenue, quickly increase headcount. Quickly become a large company which can be sold for billions.
Or, never reach sustainability and eventually go bankrupt - this outcome is actually still good for the founders since they probably walk away with millions in their pockets (from paying themselves seven-figure salaries).
The goal of most Silicon Valley founders isn't profit or growth, but exit.
Whatever gets them there fastest is the 2nd priority.
It’s growth… until the “plateau” phase of the Schumpeter economic cycle (~60 years), where entrenched actors raise prices and customers lose choice.
It "should" but in many cases it doesn't
If you have a great idea for an app or a product and you've started developing it but you need to hire more people to bring that idea to fruition. Rather than spending years of your own time and money to maybe get the idea off the ground, if other people like the idea and want to help contribute via an investment, why not?
Surely your business major would have described the idea of seeking an investment or capital via a business plan. The challenge is that these VC vehicles push this idea of providing an investment tenfold and they have their hands across large industries and portfolios. To the point where they can both invest when you grow and when you fail.
> if other people like the idea and want to help contribute via an investment, why not?
Indeed! But VC investors are a very different animal than other investors (who may not even be investing cash -- in my past ventures, more than half of my investors were my vendors who invested in my company via their products and services instead of money).
If you're starting the sort of business that needs an enormous amount of startup capital, then VC is where you turn. If not, then you're far better off going with normal investors.
What VC wants to see is not the same as what other investors want to see, and finding the right expectation to match your business goals is a critical part of success.
It was never about building sustainable businesses or even solving a problem or gap in the market. The only "problem" that needs solving is that someone wants to have an all expenses paid "startup founder" lifestyle for a few years, and some engineers want to build & tend to a playground where complexity is the core feature.
Doing so on your own dime (or a bank loan) is stupid. Doing so on the VC's dime is smart because you can not only walk off scot-free when the whole thing inevitably WeWorks into the ground, but can start over again in a different vertical.
Appreciate it :)
But yes, after learning a lot from my various startup scars, I don't believe I'll be seeking VC dollars for an app unless:
- I am creaking under success with an impossible cloud bill - I am a late-onset cofounder of an already successful co that needs and app
What's confusing about how having more money might let you hire more people to build more things or build things faster?
If something is an obvious winner - why handicap it by limiting investment to what it can make on its own?
What if it relies on network effects, or economies of scale?
> If something is an obvious winner
As much as founders think otherwise (they have to!), there is no such thing.
> why would you need VC money to build an app after you've already spent several months doing it?
As someone who raised VC money for a SaaS, the answer is that operating a SaaS requires employees. I had two choices - attempt to operate it myself and incur a lot of personal costs, or raise money to pay for those operating costs at no personal cost.
Contrary to the other posts, the goal was in no way to operate at a loss for a long period of time or to get some sort of exponential growth at all costs or whatever. It was literally "do I personally want to spend 10s of thousands of dollars and attempt to operate a complex system 24/7, or do I want to take literally 0 financial risk and be able to pay other people to help me".
> It's not that difficult.
Who is going to tell him/her?
Imagine it costs $3/month to provide the service to a customer and the customer is paying $3/month.
You can make a good case that most of your costs are fixed. So that if you have 100x as many customers it’ll cost you $0.03/month to provide the same service to the customers, but they still pay $3/month.
You need VC money to acquire customers and grow. Then your business will become profitable because of the economics of scale that are inherent to software.
One reason to seek funding early would be if you are in a competitive space and want to grow faster than your competitors.
A lot of venture backed companies aren't just building an "app". Spend some time looking through the portfolios of major VC firms, especially in life sciences and medical devices.
Yeah maybe handful of them. That too are also mostly lunatic ideas with little grounding in solid serious rigorous academic and scientific research with no feasible functioning product in sight or something financially viable on the horizon. It's not that they already have a research outcome that they need to "productize" with manufacturing and distribution channels.
Things like Neura Link, Carbon capture, fusion and such.
Most or close to 98% are just building an "app" or an app with a website such as yelp but for dogs, dogs but for cats or other tools that other founders should buy such as sales and leads management etc etc.
Mostly - meaningless.
You're coming off as very biased. My startup was certainly grounded in research and rigor, I even spoke with academics at universities about the work. In many ways, my project was productizing some state of the art CRDT research by applying it to a domain that is in dire need of solutions - information security.
Most founders I met were doing similarly well-founded work. You're thinking about a tiny fraction of the VC market - the moonshot startups that make the news. Most people are raising money around very reasonable ideas, of course, since VCs obviously have to minimize risk for some of their investments.
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Tech companies aren't cash flow businesses, though IMO they should be. When debt is cheap tech leans hard into pre-revenue funding. Now that interest rates are more reasonable tech companies have to actually show a profit, and most don't know how.
> Tech companies aren't cash flow businesses
Most actually are. It's just that the big ones tend not to be, and there are lots of startups that want to look and act like the big ones.
Yep that's totally fair, I could have clarified here. I was specifically thinking about the VC world in the context of this threat and would expect any tech companies interested in VC money would fall into the bucket of those big (or aspiring to be big) tech companies.
One example of profitable software that needs a large amount of capital are F2P mobile games where a large part of the business model is user acquisition for which costs can be substantial.
Because you need to spend millions in advertising to get your app installed by someone.
Next wave of ai companies require major $$$ to train; the game has shifted somewhat.