My startups perspective: I think it’s hard for people to understand the subtlety from all the memes and hearsay.

We hear that you need to talk to your users to understand what to build, but I’ve seen this fall flat on its face and lead to extreme confusion, several times now, when you’re not talking to your users as a matter of observing your product/business model against reality to then update the axiomatic thinking that (hopefully) lead you to its current iteration.

I’ve seen this play out as a cringy ask to “let us know if you think of any other features you might like” met with puckered faces from customers that essentially said “or how about not because my job isn’t to build your product?”

This is Henry Ford / Steve Jobs talking about faster horses. You’re not asking your customers what to build. You’re asking them to help you understand the reality against which your logic plays.

Then there’s the opposite, where a business marches forward because some axiomatic thinking has determined that the macro environment should support it, not updating itself against a pending catastrophe in cash flows that leads to cuts that further undermine its ability to exist even within its own framework.

Design and test from first principles, but operate for the pain of as many rounds as possible. Maybe one day you can truly optimize and it won’t hurt as much.

One of the worst examples I've seen is trillion-dollar corporations like Microsoft basically putting new features to the popular vote.

You can buy from them a cloud service to the tune of a million dollars a month, but if you notice a bug, they tell you to go try and drum up votes from other users on some public forum.

It's insane, to the point where you can point out that their own product A doesn't work with their own product B where literally the only purpose of A and B is to be used in combination and they'll go tell you to upvote a "suggestion" to fix it.

The hilarity of this is that votes (or customer opinions) are hugely biased when sampled like this. If a new product isn't out of beta yet, it has very few users to vote on its features. If a some subset of a product just doesn't work, then users ignore it and then it effectively zero users, so zero votes on its issues.

Potential users cast no votes.

There's also this joke that the absolute scariest thing ever is an user with an idea. As in:

"I need to go from A to B", so far so good, that's what we need to know an act on. Then the user has an idea: "What if midway I could change to a fresh horse?".

I mean, sure, yup, it's been done (changing horse midway to quickly deliver a letter)... But that's not how cars were invented.

You can often discover missing first principles by going the other direction. IE what companies were successful largely because they took VC money?

If one competitor is taking VC money and another is not, which is more likely to win the market?

This article seems to make the common error of destroying a fence before fully understanding why that fence was built.

- Money now is more valuable than the same money later.

- The above applies for all parties to varying degrees.

- Some operations are money-constrained.

- There are ways to move money forwards or backwards in time.

Now most businesses are not in a position to financially engineer all that much, rendering the response to a given situation per the above axioms rather simple.

However I agree with the piece in its insistence that you shouldn’t just look to the obvious categorical solutions — there may be some interesting opportunities to find in the cracks. This point was well outlined in the example of the restaurant owner securing a discount by pre-paying for ingredients.

I would love to hear some non-monetary examples of axiomatic reasoning failures. Whenever I reflect back on a process I led a couple of years prior, I am startled by my limited awareness of dynamics/risks/opportunities — even though I was confident at the time and it went well. These reflections make it clear to me that we are always missing useful information, and I further laud the author for acknowledging this fact.

Don't get me wrong -- they are works of philosophical art and among my favorite texts in all of philosophy.

But they also very much abuse the space between axioms to deduce truth which seems absolute but is incomplete.

- The government needs to take your money via tax on profits.

Result: Via fancy accounting, businesses can pretend not to have profits and avoid tax.

While cash flow comes into it, I think the primary axiom which is different (between VC and bootstrap) is the definition of success.

A bootstrap company is successful if it makes a profit, and remains in business. Some growth is nice, but there are plenty of one-man / familiy businesses to show that growth is not required.

By contrast a successful VC business goes out of business early, or with (these days) a multi-billion $ exit. Like a company that exits with a $50 million OVER investment is a failure.

If you want to win huge or nothing, then VC is the path to that. As a founder if you want to retire with money in the bank, then VC is "probably" not the right choice.

Of course the optimum might be a mix- take VC money till you're 30, if it doesn't work out you still have time to build a nest-egg the old fashioned way.

Is there something in the SAFE note or whatever, that says the startup MUST fail fast, go big or go home? It can grow methodically, can't it?

The closest explanation I've ever heard is that VCs do "signaling" in future rounds... but listen, if you have a few extra million dollars to grow your startup, and you still can't become profitable after that, then something's wrong with yoru business acumen, in my opinion. Anyone with a few million dollars is able to hire people and create a profitable product. What happens if a company pivots to being profitable "too early", what can the VCs do?

We were profitable (100s of K per year on revenue of a few million a year - small potatoes). Those numbers were growing steadily, even after the crash, but they weren't going to explode. We were given 30 minutes to collect our things and leave the building, but I suspect our founders knew a day or two earlier. They made a lunch reservation for all the employees that same day so we could say goodbye to each other, but we had to pay for it ourselves. It was a very strange experience.

That flavour of VCs don’t have time nor care. Maybe they had several more companies to close that day.

eg I'm certain that Google Inbox could have been a decent modest company on its own.

I learned from reading u/patio11 that there's a market for buying and selling small businesses. Is it weird that nothing like that has popped up for VCs/investors who want to divest from their non-unicorn companies?

A company is a different animal. Lawyers, bankers, suppliers, partners, accounts and so on. Lots of paper gets signed by founders and investors regarding ownership, liabilities ("for all debts current and future") and so on. When VC capital comes into the mix things get a LOT more complicated.

you can't just "give the company to the employees" because, frankly, that would be really bad for the employees (what liabilities are you taking on?) It'd also be really bad for current founders and investors. (There's likely paper floating around linking you to the company, and that doesn't go away just 'cause you lost interest etc.)

At some point it's all just too complicated and too scary for the old owners and the new owners etc. Basically the risk (to all) just exceeds the potential value of what is there.

Then there's agreements with banks, suppliers and so on, which can on occasion be "non-transferable" so it's not even just as simple as creating a new structure and moving all the IP into that.

I'm speaking generally here - your mileage will be vary a lot depending on the exact circumstances.

You're looking for something in legal paperwork with Terms & Covenants that for some reason is unstated in public discussions.

The real underlying reason your idea of "just take the VCs money and do the opposite of what the investors want" isn't common is that it goes against the founders' personal integrity of doing business honestly. This means the founders not lying to VCs when they make presentations with the reasons for raising capital. I.e. the founders forecast TAM Total Addressable Market for revenue, forecast costs for servers and employees, explain their ambitions for growth, etc. The type of founders trying to get in front of VCs to convince them to fund their startup are supposed to be a self-selected set entrepreneurs who inherently want to grow fast and don't need VCs telling them to do so. If honest business dealing is the premise, then there's no need to "trick" the VCs into wiring them millions into the startup's bank account and then tell them "oops, I lied in my presentations and now that I have your money, I just want to grow slow at my own pace."

Your question can also be modified to ask about a VC fund's intentions: "Why can't a VC fund raise money from LP (Limited Partners) and then just live off the guaranteed 2% management fee instead of taking risky investments and possibly losing money?" -- What stops VCs from doing that is the venture capitalist's personal integrity when asking the LP for money.

With that said, there can be a difference in legal mechanisms between an angel/seed round with no board seat taken by a VC -vs- Series A with a VC on the board. At later stages, the board can outvote the founders and/or fire them.

edit: swapped Basecamp for Wistia, because Basecamp did not take VC money.

I have personally seen a handful of people in tech and tech influencers argue that if people had all their basic necessities met, then they wouldn't be motivated to do anything and they would just play video games all day.

To me, this is a profoundly privileged opinion to have that follows this exact same hyper-idealistic thinking pattern. It comes from these "first principles" that are naive at best. In reality it is more so the bias of the person showing through, we can analyze these systems, look at the data and we won't be coming to these conclusions.

These "first principles" are not based on data or understanding. They are based on emotions, personal experience and biases. ie "I was lazy as college student, therefore all people are lazy.. therefore if people had their needs met, they would also be lazy like I was... therefore depriving people of basic necessities is actually the justified thing to do" I say from my multi-million dollar house in North Dakota with my 300k a year salary and cushy full-time youtube platform.

Hyperbole much? The mainstream arguments against UBI are nothing like this, because we already have systems in place to give starving people food.

We’ve learned both that if you …

1) provide free housing people will use it

2) fine/jail people for camping on the street and in parks it works as a deterrent

Why not both?

I feel lazy right now but feel free to find your own sources for the points above. The jailing one is from a study done in the Nordic states…last I remember.

They literally created a new product out of thin air that they are untethered to in terms of time or specs (except that it has to be able to accelerate with the force of a jet engine?) to “unlock” millions of dollars of cash flow to fund current operations. (I imagine this to be the brainchild of Zach Kirkhorn.)

I don’t know how many startups can employ “pre-order” tactics with their lack of brand power, but the basic essence is probably useful.

Saying "give me money now for something later", making it vague and then not delivering isn't new or genius. It's something which is illegal, and this will be found to be illegal, once there's political will to investigate/prosecute.

It's certainly not fraud if you are making progress towards delivering at some nebulous future date, and there was no contractual delivery date in the pre-sale.

It's debatable whether it's fraud if the initial pre-sale expressedly included the possibility of non-delivery (i.e. Kickstarter).

Only legally, this is basically just fraud with legal disclaimers covering your ass, there's no integrity here and no intention of delivering anything more than the hyperloop.

Caveat emptor exists because ultimately it's the buyer's decision whether or not to take an offered deal.

If some people were dumb enough to agree to a disadvantageous contract with Tesla... well, world's full of fools.

The skin-in-game principle is a pithy way of talking about principle-agent risks. That is to say, it is a problem for the people fronting the money, not the people on the receiving end. The people on the receiving end are strictly better off (ignoring that they're going to have to trade away control to get the money, obviously - they have strictly more options in the short term). And the people giving the money will still invest despite that, because they need to take risks to earn money - their strategy is to take risks to earn a premium, so they're looking for sensible risks to take.

Just to nitpick (and not detract from the article) this point:

> Once you have less skin in the game, it is easier to make bad decisions. The author argues this is due to a) having a capital buffer to cushion you, and b) having more time to waste.

I actually don’t think this holds true. It’s possible to make bad decisions BECAUSE you have skin in the game. Would you take a 60% bet if the downside was losing your home? Would you do it if the cost was someone else’s home, that person owned an entire city and they’d given you that home for the express purpose of placing those bets?

I saw something like this when the founders at my work promoted someone else to be CEO and, a little while after, took cash out the business (legally) with the express purpose of derisking themselves. They recognised that they weren’t able to take the necessary risks to push the business forward, so appointed a CEO with less skin in the game and reduced their own exposure.

It paid off.

Taking on capital reduces risk for the founder which makes it more likely they will take better long term decisions. There is a balance obviously - if you give me a billion dollars for my pitchdeck I will certainly feel reduced risk but that may be offset by the risk the owners of the billion now take on.

But yeah, the flaw is thinking hungry people make good long term decisions

This is hackernews, and we, as an audience live in a little bubble where the only right way to do business is by disrupting a market and becoming the next Google, Microsoft or Apple. Just like some of the contemporaries that originated from this subculture here like; Stripe, Reddit and openAI.

There are many ways of doing business. The original article had a sound strategy for one particular way of business. This article by common cog has another sound strategy for doing business.

Different target audiences, different games.

This is not correct.

You can have positive cash flow over a period but still be losing money.

You can also have minimal cash flow but be wildly positive.

Cash flow is one component of value, but not the only one.

Cash flow and the discounted cash flow model for valuation are different things.

Cash flow over a period is simply cash in-cash out, and having cash on hand for business operations. It ignores profitability. You can be cash flow positive and be running a business that loses money as long as money comes in faster than it leaves. Or if you get an external source of cash like investments.

The discounted cash flow valuation defines cash flow as “investor returns”. So in the case of a business you’d be looking at EBIDTA or net revenue, not cash flow itself.

Or even if you did use cash flow, you’d need to look at cash flow over the life of the investment, not 1 or 2 years. Accounting tricks like deferring expenses or accelerating revenue increases cash flow over the short term, but eventually it gets accounted for.

Selling $1M of product, at a $1.1M cost that you don’t pay until next year is $1M of positive cash flow this year, but nobody is giving that a positive valuation.

Much of the received wisdom of Silicon Valley startup culture is centered on developing new markets that do not currently exist. This activity has a very specific set of risks and rewards and for that profile, the advice is generally sound.

If your business is attacking an existing market with entrenched players, more than half the advice is wrong.

Cedric does a great job navigating these differences IMO.

I get the examples, especially the restaurant one.

But I don’t blame anyone for not being able to play cash flow games.

For a corporation where revenues are consistent, 90 days of payables that you haven't paid anybody yet could be equivalent to tens or hundreds of millions of interest-free loans.

Home depot notoriously has payment terms that can extend beyond one year.

Edit: To add on to that, understanding the accounting of E,I,T,D, & A (earnings, interest, taxes, depreciation, amortization) as in EBITDA is an important factor to grokking beyond the surface of the article. Basically cash accounting versus amortization accounting.

... for the first 90 days, it seems to me. Then you're back to paying them, they're only time shifted. So it strikes me as a way to take a 90 day loan, once. What am I missing?

A startup is a means to an end.

Borrowed money gets you there faster with less risk to self.

It’s not wrong per se but worded to hide the benefit. Having less skin makes it easier to take higher risk. Which means more “bad” decisions but also with higher potential.

———-

While the prepayment strategy described here is interesting, I'm skeptical about some of the claims and implications. Here's why:

> So how much should they discount it? So let's say we're going to buy steaks. We're going to pay $34 a pound wholesale for dry aged rib-eye, we get net-120 (normally). So I call the guy and say "I'm going to use 400 pounds of your beef a week for the next 4 months, for our menu, which is about about $300,000 of beef, what (would) we get, if we prepay you?" And he was like "what do you mean?" I'm like "I want to write you a cheque tomorrow for all of it, for four months." And he was like, "Well, no one has ever said that." So he called me the next day, he said "$18 a pound" … so … half. Half price.

1. The 50% discount seems implausibly high. Even considering the benefits of prepayment and volume commitment, typical early payment discounts in most industries range from 1-5%, rarely exceeding 10%.

2. The story implies this strategy reduces waste, but the restaurant's beef consumption remains unchanged. The butcher isn't selling more beef overall, just securing a guaranteed sale for a portion of their product.

3. While prepayment does reduce risk for the supplier and improve their cash flow (which justifies some discount), it doesn't fundamentally alter the supply-demand dynamics or the perishable nature of the product.

4. If such extreme discounts were readily available, it suggests either highly inflated initial prices or an incredibly inefficient market. In reality, these price disparities would likely be arbitraged away quickly.

5. The net-120 terms do carry risks (default risk, cash flow pressure, inventory carrying costs), but it's unlikely these factors account for such a large portion of the price.

The principle of prepayment providing mutual benefits is sound, but the magnitude described here is likely overstated or oversimplified. A more realistic scenario might involve a combined discount of 20-25% at most, factoring in prepayment, volume commitment, and possible seasonal factors.

This story, while engaging, highlights the importance of critically evaluating business anecdotes, even from seemingly authoritative sources. The restaurant industry certainly has room for innovation in supply chain and financial practices, but the impacts and benefits may be more nuanced than presented here.