Yes, I remember the Paul Graham definition about a "startup" being designed to grow fast. He is welcome to his opinion, but, sorry, I don't accept his definition and believe that relatively few people do.
> Obviously this is only true if the company makes money from ad revenue.
Well, you quoted what I said in rebuttal: "for a Web site with a lot of traffic, revenue from ad networks is so easy to get." So, I was talking about a Web site.
And for more in rebuttal, my sentence before had:
"A big problem for the VCs is that for a lot of the good information technology startups, by the time the startups have the revenue the VCs want, the startups will also have plenty of cash to grow."
So, I qualified with "good" and "information technology".
Uh, a "good" one is not to start from nothing to compete with iPhone!
Now, mostly the juicy "good information technology" startups are ad supported Web sites, e.g., be another Google or Facebook.
> Even with an ad revenue model, there's always an opportunity cost to not having more capital.
Equity capital brings overhead "costs" beyond belief: You and your team own 100% of your company and, with the first equity check, become a Delaware C-corp with a BoD that now controls the company. With common term sheets, you and your team suddenly go from owning 100% to owning 0% with a vesting schedule to get back to, maybe, 35%. But due to the loss of control, the BoD can fire you and your team at any time for any reason or no reason and before much of your stock is vested. And, for the vested stock, it is likely illiquid but has tax due you can't afford. You just had your company taken from you for next to nothing. And, for the BoD meetings, accounting reports, auditing, legal charges, etc., guess who pays for those, including the first class airline seats, limo service, 4 star hotel nights, high end meals, etc. for the BoD members for the meeting?
> Just because you may bring in revenue which you reinvest back into the business, doesn't mean you couldn't grow faster by having more to spend on hiring, marketing, sales, etc.
A company that has the traction VCs really like will likely be generating enough cash that cash is not a major constraint on growth. Below let's see some relevant arithmetic:
An example is Plenty of Fish, long just one guy, owned 100% of the company, had two old Dell servers, ran ads just from Google, and had $10 million a year in revenue, nearly all pre-tax earnings. Eventually he deliberately hired some people and sold out for $500+ million. IIRC, he never took an equity check.
That's the startup case more like I had in mind, but I was being brief.
But we can have some more arithmetic:
IMHO, for the "good information tecnology" startups now, your model of the need for cash is outdated and past. Even if some cash could be helpful, the C-corp and BoD overhead, time, effort, cost in cash, loss of control, etc. are really not worth it, that is, are way too much to pay for the cash.
My central point was that for "good information technology" startups, the VCs are out of date, behind the times, and essentially out of business or at least well on the way.
So, for some arithmetic, to add detail, can get a motherboard for $100, an 8 core processor with 64 bit addressing and a 4.0 GHz clock for $125, max it out with 32 GB of DDR3 ECC main memory for about $320, get 2 TB hard disks for about $70 each, a high end power supply for about $100, a case for about $50, high end case fans for about $100, and lots of high end software for free.
I'll do the arithmetic for you -- $825. With cables, keyboard, screen, Windows 7 Professional 64 bit, more hard disks, etc., call it $1500 total.
But that's 8 cores at 4.0 GHz and processor caches big enough that mostly don't need to worry much about DDR3 main memory cycle time. Besides the DDR4 memory has, yes, faster clocks but more clock ticks per access.
That puppy should be able to send 10 relatively simple (that's the only good kind) Web pages a second, supported by quite a lot of SQL Server back end work. Call it 4 ads per page sent at $1 per 1000 ads sent.
For the arithmetic, I'll multiply that out for you: That's revenue of $103,680 a month, from one $1500 server. The ISP? Say the simple Web pages send for 500,000 bits per page for 5 Mbps upload data rate. Gee, my ISP is giving me 25 Mbps upload data rate by default.
Okay, that's $103,680 a month in revenue. For a solo founder company -- hopefully. Now just why in heck does that founder need equity cash? They own 100% of the business, say, as a Subchapter S or LLC; why the heck do they want a Delaware C-corp and BoD? They don't!
If the Web site can't get users enough to permit sending 10 pages a second, then likely the traction is not enough for VCs to want to invest. But if the site is sending 10 pages a second with $100+K a month in revenue, then no way will the founder want, need, or take the equity cash. No way.
Sure, in the old days, with a team of five cofounders, with credit cards maxed out, all five spouses pregnant, paying Silicon Valley housing costs, and using Sun servers, equity cash would be very welcome.
Now it can be a solo founder, no credit card debt, no pregnant spouse, cheap housing costs far from Silicon Valley, and the main server parts for the $865, and that's a very different world.
I was being brief, but that's the world I was describing.
