The article is a little misleading. I too operate without VC funding and behave in a ways similar to the small business owner -- because I am one. But to apply the philosophy of a small business to a startup would be a big mistake. Startup founders and their VCs behave the way they do, because they are optimising for different things than a small business owner like me. I am optimising for survival, a startup founder is optimising for the expected size of the outcome. The possibility of ruin in that expected outcome is taken into account in the VCs calculation. As long as one is clear about what one is optimising for, both strategies are fine. Problems only begin when you take VC money and behave like a small business owner. Or behave like you have VC money when you are, in fact, a small business owner.
The article is pretty clear about the dynamic you bring up. The first subhed is, “A Different Business Philosophy.”
At the same time, there is a valid critique from this small business veteran. She points out that startup founders tend to hire people from their startup world, even for specialized positions where much more experienced talent is readily available from within the food world. She also indicates they do not listen to input from others in the industry.
> As long as one is clear about what one is optimising for, both strategies are fine.
I know this is HN orthodoxy, considering the audience and our beneficent hosts.
But I think this assumption bears questioning. Is the startup model really morally equivalent? Clearly we wouldn't say that all cost functions a business could optimize are all equivalent. So why should the traditional small business and startup model be assumed to be equivalent?
And moreover, even if it is morally equivalent... is it really that good of a strategy? By which I mean two things: 1) is it a fit strategy in of itself, and 2) is it good for the entire business ecosystem?
As food for thought... why hasn't Silicon Valley adequately considered a "slow-up" model that combines the traditional survival and sustainable growth focuses with the advantages of massive cash influxes and rapid iteration towards a viable product (even if that means pivoting)?
I think the answer is clear: venture capitalists want a return, and a large one, before they die. Is a business model optimized for generating returns before investors die really a healthy strategy to have so much capital allocated towards? Especially when these businesses in particular (tech startups) can often have such a large impact on culture and society.
I have a startup to sell you on. It's called Brydge. We have a radically non-linear revenue model which resembles a perpendicular hockey stick. We currently have no revenue, but revenues will quintuple each year until you die, at which point we expect to make ten billion dollars per year. We are looking for a 10 million dollar investment for a 30% stake. You are also entitled to 100% of our revenues until you die. In expected value terms, that's a great deal.
> As food for thought... why hasn't Silicon Valley adequately considered a "slow-up" model that combines the traditional survival and sustainable growth focuses with the advantages of massive cash influxes and rapid iteration towards a viable product (even if that means pivoting)?
> I think the answer is clear: venture capitalists want a return, and a large one, before they die. Is a business model optimized for generating returns before investors die really a healthy strategy to have so much capital allocated towards? Especially when these businesses in particular (tech startups) can often have such a large impact on culture and society.
I think the answer is simpler than that: the VC investment model is predicated on jackpot payouts. Anything less than that is a failed bet from their perspective. That mentality permeates the businesses they invest in and pressures them to take risks they otherwise wouldn't, thereby increasing the odds of becoming such a jackpot. Even if the "slow-up" model was a net win for everyone involved, it's not the jackpot the VC was after. And the sheer existence of it being an acceptable outcome would act as a relief valve for that pressure and lower the odds of a jackpot payout for the VC.
I wouldn't call it misleading; VC-funded startups (and the decisions they make) can be incredibly unintuitive for someone who has no understanding of the VC funding model itself. There's even an entire section titled Difference in Business Philosophy, where the person being interviewed recognizes the VC-funded startups are operating under a different philosophy and towards distinctly different goals:
> Albrecht says she she quickly realized her tenants weren’t trying to build a sustainable business like her. They were swinging for the moon.
and
> Albrecht says most of the people she has met at these companies are very different from her and owners of other local food businesses. She struggled to characterize the difference, but it was more than just their corporate philosophy.
The article seems fairly balanced in that it includes examples of behaviors and seemingly illogical decisions characteristic of VC-funded startups, while also including an entire section expressing that there does seem to be something deeper at play driving this behavior, she can't rationalize what it is from her experience.
The article does feel incomplete though, as it never actually attempts to address what that fundamental difference is that Albrecht struggles to characterize. Which is the fact that VCs and VC-funded startups are gamblers with distinctly different risk profiles from traditional businesses and financiers:
- A typical small business owner is gambling with a finite bankroll, based on whatever capital they have or are able to acquire in the form of guaranteed debt. Going bust is a catastrophic outcome that they will personally bear the consequences of. So their betting strategy optimizes against going bust, resulting in a conservative play style of short odd bets of moderate value.
- The financiers those business owners have access to operate under similar dynamics, just with far larger bankrolls. This reinforces a typical business owner's behavior, as they understand their access to capital is dependent on not being seen as a long odd bet by their potential financier.
- A founder with VC-funding is similarly gambling with a limited bankroll, but well funded by someone else with no guarantees attached and an express mandate of spending it with a "go big or go home" mindset. Going bust is pretty inconsequential for this gambler - the worst outcome is that they can't get their bankroll topped up and walk away having wasted a bunch of their time gambling. So their play style is super aggressive, solely consisting of large bets on long-odd plays. Small business owners can recognize these players when they show up at the table, based on their reckless yet distinctive play style and propensity to go bust in the end. But these players defy logic to small business owners - they someone convinced someone to bankroll them despite being such obviously risky bets, their play style has absolutely no sense of self-preservation to it (ignoring safe bets even as their bankroll dwindles), and show far too little distress when they go bust. There's absolutely nothing about these players in and of themselves that allow their existence to be rationalized.
- Then you have VCs, the deep pocketed financiers that create and fuel these incomprehensible players that are flooding the gaming floor. Their gambling strategy is both elegantly simple and fundamentally different than all three of the above. They walk right past all the table games, pick a slot machine, and pull the handle. Then keep pulling it again and again until one of their spins eventually lands a jackpot. They fully know the odds of a jackpot going in, and come prepared with a bankroll to play those odds. So the only criteria they evaluate with any given bet is whether a particular machine's jackpot payout and cost to spin is a match for them.
Once you understand the gambling strategy of VCs, everything else falls into place and makes a ton of sense. But if you're missing that piece of the puzzle, it all just seems bonkers.
