[HN Gopher] Meaningful exits for founders (2016)
       ___________________________________________________________________
        
       Meaningful exits for founders (2016)
        
       Author : freediver
       Score  : 85 points
       Date   : 2023-08-18 15:16 UTC (7 hours ago)
        
 (HTM) web link (medium.com)
 (TXT) w3m dump (medium.com)
        
       | yesimahuman wrote:
       | Regardless of where you sit on the line between ambition and
       | optimizing for founder outcomes, I think we can all agree first
       | time founders aren't thinking about the math here enough and are
       | far more susceptible to listening to what VCs say they should do
       | and care about. Having been in this position, all I can say is
       | I'm glad we didn't raise more money because we had far more exit
       | options. I really appreciate what Bryce and indie have done to
       | change the narrative here.
        
       | SandersAK wrote:
       | The reason there is not a lot of dialogue around this is because
       | the numbers don't work for all parties at the right time.
       | 
       | When you have a small founder team, you need capital for
       | essentially nothing to show. You can't raise that capital selling
       | the $170M exit dream to angels or a fund.
       | 
       | Conversely, VCs are assuming a 10% or less success rate across
       | their portfolio. And of that, maybe 2-3% of portcos really
       | returning everything.
       | 
       | So they don't have the luxury of shepherding 100 portcos to $170M
       | exits, since in reality, a $1b exit has a similar chance of
       | happening as a $170M exit. Which is to say very very low.
       | 
       | There's no magic sauce, no prime formula, no wizened or
       | sageinvestor. It's a shit show from start to finish. You're best
       | off finding investors who are on the same wavelength as you, and
       | focusing less on whether you hit a home run or a grand slam.
       | 
       | When you get to a place where you're printing cash or whatever,
       | then sure, make sure the math works out for you. But for 99% of
       | all founders, this question never comes, and they spend too much
       | time thinking about it.
        
         | foobiekr wrote:
         | So in the failure case, very little of it matters, but in the
         | success case the VC industry can be exceptionally predatory -
         | participating preferences, multipliers, etc. etc. etc.
         | 
         | Honestly, it takes no time at all to have clean term sheets and
         | you don't have the option to fix it later.
        
         | latchkey wrote:
         | Sage advice. Most startups fail, so squabbling over the numbers
         | has always seemed absurd to me. I'd rather see discussion along
         | the lines of "what happens after we do well" because you have
         | no idea of what "well" will be down the line.
        
       | santiagobasulto wrote:
       | This is a great post, but I think it fails to see one important
       | point...
       | 
       | > a founder selling at the Series D price of $210M, would make
       | the same amount of money at exit as they would have if they'd
       | sold for $38M after having only raised a seed round (...)
       | Lifetimes of work and risk lie between a Seed round and a Series
       | D round. And, despite increasing the value of the underlying
       | business 7x, the dollars at exit for the founder remain roughly
       | the same.
       | 
       | Even though the exit dollars might be the same, it's failing to
       | see two important points:
       | 
       | a) founders taking money off the table in early rounds. Founders
       | can sell part of their equity at their company just as a personal
       | "cash out" strategy. 1password founders took their Series A
       | mainly for this. b) the network capital gained at a Series D
       | company is NOWHERE near at a Series A company. It's impossible to
       | put a dollar amount to that, but it'd say your career will be
       | completely different from a successful Series A or Series D
       | company.
        
         | dublin wrote:
         | I'd take a solid cash cow producing producing value for
         | customers at an A-round size over growing it to D-round size
         | any day. Maybe because I've just been through enough of this
         | crap to know that yes, you want to make money with your
         | startup, but there are some things no amount of money can
         | compensate you for...
         | 
         | And a company spinning off a fair amount of cash can be grown
         | surprisingly rapidly organically, though it does take several
         | changes in how the company is run as it hits inflection points
         | (there are usually several!) due to growth (e.g. people,
         | processes, and effective business/marketing/sales oversight
         | become more important to grow beyond $6-10M/yr...)
        
       | benjaminwootton wrote:
       | I think for most founders, exiting with 100% ownership of a small
       | pie is a much better proposition than exiting with 10% of a large
       | pie IF you have that decision to make. The risk, hard work and
       | difficulty in the latter are exponentially greater.
        
       | graiz wrote:
       | The links referenced in the article didn't work, this was from
       | 2016. https://medium.com/jme-venture-capital/meaningful-vc-
       | exits-2...
       | 
       | I couldn't find the capshare post but there was a similar slide
       | deck from capshare:
       | https://www.slideshare.net/IanBeckett3/analysing-5000-startu...
        
       | dang wrote:
       | Related:
       | 
       |  _Meaningful Exits for Founders (2016)_ -
       | https://news.ycombinator.com/item?id=17486303 - July 2018 (23
       | comments)
        
       | logicallee wrote:
       | This is from seven years ago. The rules have changed. In today's
       | connected world, it is impossible to have a meaningful exit as a
       | founder. You cannot keep or enjoy any money, or raise a family,
       | or do something else after exiting as a founder.
       | 
       | Instead, you can look forward to a level of interference you
       | couldn't imagine, followed by immediate and lifetime torture by
       | dark forces who think it is wrong for anyone to have any money.
       | 
       | I now recommend founders simply don't take an exit, set their
       | salary at $1 and work all day forever for the love of the
       | business. For income, get a day job and don't be too successful
       | at it either.
       | 
       | The rules of the game have changed and founding a company as an
       | owner is all risk, no reward.
       | 
       | You can still found a business you are so passionate about that
       | you would be happy to be tortured for the rest of your life for a
       | chance to change the world in a positive direction.
       | 
       | If you would die for your business, it is still worth doing.
        
         | jonfromsf wrote:
         | What are you going on about?
        
       | ilrwbwrkhv wrote:
       | It's crazy that a series d exit would net a founder 7 million and
       | yet my bootstrapped business returned a 4 million profit for me
       | last tax year.
       | 
       | I think people need to learn more about how to scale a
       | bootstrapped business. Even when I was getting started, I read a
       | ton on VC funded businesses but not a lot on non VC funded
       | businesses.
       | 
       | I think there is tremendous amount of money to be made in
       | bootstrapping as well. I think a lot of indie hackers /
       | bootstrappers also think too small.
       | 
       | You can definitely make 100s of millions of dollars without VC
       | money. That part of reality has not been properly dispersed.
        
         | [deleted]
        
         | hodgesrm wrote:
         | This. In addition to better outcomes for founders it can be a
         | better outcome for the economy at large including but not
         | limited to customers and employees. As a whole society would be
         | better off with fewer Ubers & WeWorks.
        
           | idlewords wrote:
           | WeWork was a useful way to make SoftBank subsidize office
           | rentals for freelancers and small businesses; it had high
           | social benefit.
        
             | dublin wrote:
             | Given what WeWork charged, you can't convince me there was
             | much subsidy there, nor much social benefit.
             | 
             | "Cool offices" are something that should never even be
             | talked about by a founding team until they have several
             | spare million sitting in the bank. Until then, rent cheap-
             | ass real estate and buy second-hand office furniture. And
             | that's if you even have offices, which you may not need if
             | you're a software and/or services company. Nice laptops,
             | monitors, chairs, Zoom, GitHub, and Google subscriptions
             | are really cheap compared to real estate!
        
         | bitcurious wrote:
         | Would love to have you write about it. Seems like you have both
         | the experience and the appreciation.
        
           | ilrwbwrkhv wrote:
           | I wrote about it a bit here:
           | https://news.ycombinator.com/threads?id=ilrwbwrkhv#37180387
        
         | tptacek wrote:
         | It is straightforward to get a body-shop consulting business to
         | mid-7-figures.
         | 
         | In an acquisition of that business, you're going to get a very
         | low multiple on your forward revenue. That's because, in
         | general, you can't plug a body-shop consultancy into a bigger
         | sales machine and amplify the profits; sales and delivery in
         | those businesses are delicately balanced, and while they can be
         | scaled, they can't be _abruptly_ scaled by an acquirer.+
         | 
         | If you can bootstrap a product business, none of that caveat
         | applies. You should bootstrap if you can!
         | 
         | + _(but if your consultancy is throwing up 7 figure profits,
         | you might not care about its sale value; just run the company
         | for 10 years and bank the profits)._
        
           | dabeeeenster wrote:
           | What evidence do you have that it is "staightforward"? If it
           | was, everyone would do it.
        
           | dabeeeenster wrote:
           | "It is straightforward to get a body-shop consulting business
           | to mid-7-figures."
           | 
           | Sorry, no. This is demeaning. It's not easy and it's not
           | straightforward.
           | 
           | disclosure: Been running a "body-shop consulting business"
           | (also demeaning) for 21 years in London, started about a
           | dozen other businesses, 2 are 2MM+ rev/50% EBITDA profit
           | recurring revenue companies.
           | 
           | Please don't demean "consulting" or "agency" work. In my
           | experience it is _way_ more challenging to win and grow
           | business in those circles than it is in a well times SaaS
           | company. I learnt a LOT doing that for a long time. The work
           | is just as relevant.
        
             | whatshisface wrote:
             | They had to say it was straightforward because the previous
             | poster had said they had done it. That's how the cocktail
             | party works. ;)
        
             | tptacek wrote:
             | My background is in this kind of consulting work. I'm not
             | demeaning it.
        
         | gnicholas wrote:
         | > _It 's crazy that a series d exit would net a founder 7
         | million and yet my bootstrapped business returned a 4 million
         | profit for me last tax year._
         | 
         | I'd be curious which is rarer: a VC-backed business that exits
         | after series D, or a bootstrapper who nets $4M/year?
         | 
         | IMO both are unicorns!
        
           | dabeeeenster wrote:
           | Without question the bootstrapper. You almost never hear
           | about them but there are thousands of them out there. They
           | don't have huge PR VC teams behind them, hence you never hear
           | about them.
        
             | gnicholas wrote:
             | > _Without question the bootstrapper._
             | 
             | I think you mean the opposite, given the phrasing of the
             | question.
             | 
             | > _They don 't have huge PR VC teams behind them, hence you
             | never hear about them._
             | 
             | This seems like half an argument. I get that PR teams have
             | an incentive to talk about their company, which is why they
             | are in the news sometimes. But it doesn't explain why non-
             | VC backed companies that are swimming in cash would be so
             | elusive. Would they be in the news? Perhaps not -- though
             | they might still want to generate PR for themselves, to
             | grow their business.
             | 
             | But you'd think that people in the startup world, who spend
             | lots of time reading about startup strategies, examples to
             | follow, etc., would have heard of such companies if there
             | were many out there. I've been at this for a number of
             | years, and I rarely hear about bootstrapped startups that
             | are quite so successful. I guess PE folks would have a good
             | sense, since such businesses would presumably make great
             | acquisition targets.
             | 
             | And perhaps that's what keeps them so rare -- someone
             | making a couple million a year would rather sell the whole
             | thing for $20M and move onto their next thing (be it a
             | startup or a private beach), and there are plenty of
             | acquirers who are happy to make that trade.
        
               | dabeeeenster wrote:
               | There are thousands and thousands of private bootstrapped
               | business where the founders are banking 1-10M EBITDA
               | every year. You almost never hear about them.
        
               | dabeeeenster wrote:
               | Sorry yes - thank you - I meant bootstrappers are far
               | more common.
               | 
               | My main point is that there's an enormous amount of
               | survivor bias with VC backed companies. Bootstrapped: not
               | so much.
        
             | idlewords wrote:
             | Also there is a lot of risk and not a lot of benefit to
             | talking loudly in public about how much money you're making
             | as a bootstrapped business.
        
               | gnicholas wrote:
               | This thought crossed my mind. But wouldn't there be
               | chatter about this sort of thing within the startup
               | community, as bootstrapped businesses get snapped up?
               | There are podcasts like Built To Sell, which tell the
               | stories of small companies that have been sold. I've
               | noticed that many of them are service businesses, and
               | there aren't as many SaaS companies as I would have
               | expected. Presumably the incentive to keep quiet about
               | your lucrative niche would end after you've sold the
               | business?
        
         | legendofbrando wrote:
         | I'm curious about the nature of your business, $4M in profit in
         | a year is really impressive. What business are you in?
        
           | nemo8551 wrote:
           | They strap boots.
           | 
           | To be honest I'm amazed there is that amount of money in it
           | but they must be very good at it.
        
         | Aeroi wrote:
         | Could you share what market or type of business you are
         | running? I always have a difficult time wrapping my head around
         | starting a business in a large market with clear market winners
         | ($1B+ Rev.)
        
         | randmeerkat wrote:
         | > Even when I was getting started, I read a ton on VC funded
         | businesses but not a lot on non VC funded businesses.
         | 
         | Any suggested reading for the non VC funded business?
        
           | rwalling wrote:
           | Zero to Exit Start Small, Stay Small The SaaS Playbook
           | 
           | Startups for the Rest of Us podcast YouTube.com/MicroConf
           | 
           | Indie.vc Tinyseed.com
        
           | k1w1 wrote:
           | We have been able to bootstrap Aha! from zero to over $100
           | million in annual revenue without any external funding. We
           | have written about some of our experiences at
           | https://www.bootstrap.company/ and
           | https://www.aha.io/blog/collection/bootstrap-movement.
        
           | waprin wrote:
           | Not a successful self-funded entrepreneur but Im working on
           | it and I've studied a lot of the greats.
           | 
           | DHH and Jason Fried blog and books like Rework
           | 
           | Arvid Kahl is a successful software bootstrapper and has a
           | few great books and a bootstrapper newsletter
           | 
           | Everything by Rob Walling is focused on software
           | bootstrappers, and his associates brands / YouTube channel,
           | Microconf community etc
           | 
           | Indie Hackers podcast , interviews, and website
           | 
           | Founders at Work is written by a YC founder but ironically
           | had lots of bootstrapped interviews like Craigslist and Joel
           | Spolsky (Trello)
           | 
           | Patio11 blog is classic
           | 
           | MJ Demarco is non tech and writes more "motivational" style
           | books about bootstrapped entrepreneurship
           | 
           | Once you go down this rabbit hole you'll discover many more .
           | Especially since bootstrappers love making content about
           | their experiences as it's marketing and potentially more
           | revenue (what DHH calls "selling your byproducts")
        
           | ilrwbwrkhv wrote:
           | Not a lot that I can find. Essentially businesses are about
           | making bets about what reality will look like in the future.
           | So the better modeling you can do of reality, the more
           | successful you can be. Earnestness is a strong word in my
           | dictionary when it comes to testing ideas these days. I
           | started seeing success when I stopped lying to myself and
           | became earnest after over a decade of failure.
        
         | dublin wrote:
         | THIS! I have been a founder and/or CTO for around a dozen
         | startups. Two exited successfully by M&A, but they made only
         | enough money to offset the others I lost my ass on. (One of
         | those was due to being 20 years too early - that product might
         | sell well, now...)
         | 
         | I'm no longer interested in a doing a startup for someone else
         | to own and control. (My biggest startup mistake was hiring an
         | experienced CEO and COO to run my dream startup. The person
         | with the vision and dream needs to be calling the shots, and
         | hired guns are only just that... Passion for the product is
         | _really_ important!)
         | 
         | Although I love startups, they are hard and take a LOT out of
         | you. It's not worth the hit to your life (and your
         | family's!)just to make a pile of equity/money for some
         | ungrateful trust fund kid or a VC partner who thinks their crap
         | doesn't stink just because they happened to be in the right
         | place when their first startup hit big.
         | 
         | VC investment is fundamentally parasitic. If you're building a
         | software/services startup, you almost never really need VC - if
         | you can build a product company without it, do so. I live in
         | Austin, where there are a LOT of startups and startup people.
         | Out of all of them, I know _one_ inventor /technical founder
         | who thinks that taking VC was really worth it, and didn't get
         | screwed over by being liquidated to death. That's not a real
         | good showing for the VC guys. Just sayin'...
        
         | clark-kent wrote:
         | Thats impressive. Do you mind sharing some tips that helped you
         | scale your bootstrapped business to 4million profit?
        
           | ilrwbwrkhv wrote:
           | I am not a good writer that's why I do not do blogs and stuff
           | but I will try:
           | 
           | 2 fundamental ideas: Distribution & Supply Chains
           | 
           | Distribution:
           | 
           | You need to secure distribution before your company can grow.
           | Which means essentially a lead list or people you can reach
           | in bulk or manually by walking down the street. You need at
           | least 500+ such connections.
           | 
           | The goal of the initial distribution is iterating on your
           | core value proposition. Core value proposition is a binary
           | statement which should be answerable by hell yes or no by
           | your distribution. So iterate on the statement on the first
           | 100 till you get to a hell yes on the binary question. That
           | question should also become the heading of your landing page
           | above the fold.
           | 
           | Supply Chains:
           | 
           | To deliver the product you need to think in supply chains. If
           | you have played factorio or such games this will make more
           | sense to you.
           | 
           | You need a constant supply chain of potential customers
           | (distribution from above). You need a constant supply chain
           | of great employees. You need a constant supply chain of new
           | income streams in your product.
           | 
           | A good product delivers value at first touch. That is through
           | strong UX and clear demarcation. Every feature should exist
           | to deliver the core value. So you need to reject a bunch of
           | designs, product ideas, customer feedback to make sure that
           | you are only delivering value.
           | 
           | Other thoughts:
           | 
           | I can only speak of core technology businesses. If you are
           | selling data, you are not a tech company, stop acting like
           | one. Just put stuff in a spreadsheet and sell that.
           | 
           | Use a strongly typed language like Golang or a highly
           | expressive one like Ruby for your backend. Choose extreme
           | languages such as Imba or Steel Bank Common Lisp (which I
           | built on initially before switching to Golang) for maximum
           | advantage.
           | 
           | Make sure that you have a potential market of at least a $100
           | million flowing through.
        
             | pablo24602 wrote:
             | Thank you for your insight- leaving a comment here to come
             | back to later.
        
           | cj wrote:
           | (Not the original poster but have a similar background).
           | 
           | #1 advice for engineer-founders is to always be questioning
           | whether coding is the best leveraged use of your time.
           | 
           | As a bootstrapped engineer founder, I spent _way_ too many
           | months (years?) coding non-stop, even after we got past PMF,
           | despite having the revenue to hire engineers to replace me
           | day-to-day. These days I do zero coding, and am still equally
           | happy and fulfilled. At least for me, spending days coding
           | was a really easy way to feel productive, but it wasn 't the
           | best use of time compared to hiring, marketing, sales,
           | company culture, etc.
           | 
           | #2 advice for founder-engineers: after you're able to stop
           | coding, remember that your product is worthless if no one
           | knows about it or if no one is using it. Once you get product
           | market fit into a good place and have revenue traction, it's
           | time to spend your nights thinking about marketing and sales
           | rather than code.
           | 
           | TLDR: always make sure you're spending your time in the most
           | highly leveraged areas. Hiring and delegating. Coding is
           | rarely the highest leveraged area your time can be spent.
        
             | waprin wrote:
             | Thanks for sharing.
             | 
             | I think the #1 thing most bootstrappers struggle with is
             | finding the right market, idea, validation etc. As much as
             | people say "ideas are overrated" I increasingly think
             | that's not true, it's that a good idea has to include
             | things like "can realistically get done by a self-funded
             | tiny team and make revenue soon" which the "idea guys"
             | rarely have.
             | 
             | As far as not coding too much, I'm increasingly finding
             | this true. One thing I've noticed is that most non tech
             | founders outsource development and most technical founders
             | don't even though technical founders can outsource far more
             | efficiently since they can play more of a "tech lead" role
             | rather than hand it to a dev shop. I really regret not
             | hiring designers sooner since I'm bad at it and there's
             | tons of affordable talented designers on Upwork.
             | 
             | Still, hiring is a little nerve wracking since it eats into
             | your runway. It's really tough to know when to burn money
             | or time when you have minimal or no revenue. After PMF ,
             | hiring makes sense but before then it's really ambiguous
             | how to make that call.
        
               | akomtu wrote:
               | It's not hard to come up with a highly profitable, but
               | morally bankrupt idea. It's anything that serves those on
               | the top of the food chain: a new creative way to enchance
               | the survelliance machine, etc. But most of the engineers
               | are firmly attached to the ideas of truth and goodness,
               | and so they struggle with ideas that also fit their moral
               | constraints. Big firms understand this, and create a
               | layer of fake goodwill to shield engineers from the
               | reality of what pays their salary. That being said,
               | morally upright and profitable businesses exist, but it
               | takes some nontrivial intuition to invent one.
        
       | [deleted]
        
       | KaiserPro wrote:
       | One thing that would be helpful to add to this post:
       | 
       | 1) the chances of your company making it to series B
       | 
       | 2) the chances of you as a founder actually making any money.
       | 
       | Much of the startup "legend" of massive exits, everyone making
       | lots of money, is exactly that: legend.
       | 
       | VCs batch startups together because >90% will fail. Of those that
       | do make it out of the incubator in any meaningful way, you can
       | expect another 80% mortality over the next two years.
       | 
       | Say you get aquihired, you're not going to get much of a share
       | payout, if at all.
       | 
       | Even if you get blockbuster hired (ie bought for 250million)
       | you're probably going to get golden handcuffs rather than "fuck
       | you" money upfront.
       | 
       | Same for an IPO, your shares will be converted, but you can't
       | exercise them until after n years.
        
       | bsuvc wrote:
       | TLDR: dilution is a thing and investor incentives are not always
       | aligned with founder, when it comes to early exit opportunities.
       | 
       | ---
       | 
       | But...
       | 
       | I don't think there are really a lot of opportunities to exit at
       | $38m in the early stages of a startup, even if your valuation
       | says it is possible on paper. There just isn't much of a market
       | for companies at that stage of growth.
       | 
       | Imo, the more likely scenario is for a startup to either 1. fail
       | to raise and run out of money, or 2. Become self-sustaining, but
       | never successful enough to achieve a meaningful exit for the
       | founders or investors, basically a "zombie" company that may
       | never exit.
       | 
       | In the second case, it is the investors that get screwed, as the
       | founder has made a nice lifestyle business out of their
       | investment. I think most investors realize this is one of the
       | outcomes though, so "screwed" is probably too harsh of a term to
       | use to describe it.
        
         | ClumsyPilot wrote:
         | > founder has made a nice lifestyle business out of their
         | investment
         | 
         | It's perfectly reasonable that one might have a medium size
         | business supporting the local economy. It's a shame that VC
         | model is hostile to this outcome.
        
           | bsuvc wrote:
           | Bootstrapping is a fine alternative to VC and more
           | appropriate for many businesses.
           | 
           | But it isn't hostile to want a return on your investments,
           | and investors are not operating as a charity to support the
           | local economy, although that does incidentally happen as a
           | result of investments.
        
         | yesimahuman wrote:
         | The second case isn't probably good for founders either. I
         | don't think it would be easy to convince investors to let you
         | take cash out of the business to any meaningful degree, but I
         | suppose that depends on how much control you have over the
         | business at that point.
        
       | Joel_Mckay wrote:
       | This sums up the experience:
       | 
       | https://www.youtube.com/watch?v=V12ZAZ4Jn8Q
        
       | ChrisArchitect wrote:
       | (2016)
       | 
       | Shared under different urls
       | 
       | Anything new since?
        
       | khazhoux wrote:
       | I'd love to see a similar analysis for non-founders. I.e., the
       | other N-2 people at the startup. Like, how many hundred-millions
       | or even billions will exit have to be before you get $500k as the
       | Nth employee of a typical Series A/B/C/D?
        
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       (page generated 2023-08-18 23:00 UTC)