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0 pointsvessenes7y ago0 comments

I hear you. In my twenties I was resistant to this idea also, that growth was the thing. I was mentored for a while by the founder of JD Edwards, and he drilled this idea into me -- if you're not growing, you're dead. I can only speak to my own experience -- I've started roughly 20 companies, and generated hundreds of millions of dollars of earnings and value, and I've lost quite a lot of money and made some terrible decisions along the way as well. I now mostly sit in the investor seat, but I have worn the founder hat many, many times, and I think to a first approximation he was precisely right.

I'll note our own pg says he doesn't really need to understand almost anything about a company, he just needs to eyeball their growth rate to know everything he needs to about a company. And, if you read through the public YC training materials, they hammer this point home, very, very hard for their founders. Weekly compounding growth.

To respond to some of your other questions, I don't really believe in retaining earnings for a company this size -- returns should be deployed somehow, and this deployment should be planned for -- they have certainly not found the end of the list of things they could do with money inside the company that beats some notional outside-the-company returns yet.

I don't know how you would propose to mitigate risk more effectively than growing aggressively, but I would be interested in your perspective -- rapid growth brings its own risks, yes. But it does a few things - it provides an incontrovertible early feedback loop on your continued ability to have product market fit - and it increases your power as you grow your network of stakeholders - and it increases your economic power in that network as you have greater revenue.

In general I'd rather be sitting in the seat of being the largest most influential company in a niche, and being able to acquire or squash competitors (or expand) than finding out I'm up against a deep pocketed competitor with a vastly larger customer portfolio, and if you're starting out organically from scratch the only way to get to that large/influential spot is to put the gas on very fast while you target a small niche, unless you have some extraordinarily special sauce that isn't replicable.

My experience is that generally people are better at thinking about risks from doing things -- risks from growing for instance, risks from taking on capital -- they aren't so good at thinking about risks from inaction -- from doing the same thing they do now.

Finally, I'd say most businesses are vulnerable to well funded competitors; usually though the business they're in isn't juicy enough to really get say the Goldman special situations group interested. You'd better believe if you have juicy at-scale real world returns available to your business then very intelligent very wealthy people are already thinking about how to carve up / acquire those returns.

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alexpetralia7y ago

First, thanks for the thorough response.

Let me preface this response by saying that I don't have direct experience in any of this. That being said, I'm not sure that renders my points immediately invalid from a logical perspective (though, definitely from an experience perspective, it may).

For the most part, I completely agree about growth. You can do everything wrong but kill it on growth (either revenue, or a proxy for future growth such as user count/engagement), and none of the mistakes matter. You can do everything right but have weak growth, and you're still dead.

I think there are many ways to mitigate risk without growing - in fact, growth often exacerbates risk. Here are some examples of risk:

* Operational risk (payments errors, fat finger mistakes)

* Cultural risk (diluted or confrontational culture)

* Legal risk (sticking with old contracts that nobody thought to update)

* Technical risk (ie. too much technical debt)

* Key man risk

* Security risks (cyber or otherwise)

* Concentration risk (eg. one main vendor/supplier, one main platform like selling on Amazon)

Yes - cash can mitigate these risks, but growth is definitely not the same thing as cashflow. If you have cashflow, you should absolutely spend it toward mitigating risks as well as pursuing growth (ie. new features, new target markets). When you raise funding, it is often deployed to either _risk mitigation_ or _growth opportunities_. Of course, you can also do both of these without VC - cash is cash.

I do think it's important to note that large companies can move somewhat fast, but also somewhat slow.

It is _very hard_ for a large company to (a) be exposed to an idea, (b) agree it's a good idea (is it really worth risking our core competency/brand?), (c) allocate the resources to a team (as if people are just sitting around unstaffed! you almost always have to hire), (d) motivate the team to actually work faster than the startup (though yes they will have more resources), and (e) execute well. None of these are guaranteed. However, it is very cheap to _threaten_ that you can do all this stuff and never have to worry about a competitor!

People who are incentivized to - namely, investors (an acquirer is also an investor) - will wave a few case studies about how this happened in the past, so you better watch out. However, I don't think this is statistically very probable.

Nevertheless, founders are often uninformed and often believe what people with expertise (and not perfectly aligned interests) say. It is very hard to find a VC, almost by their very nature, who is aligned with a founder without persuading that founder to part from her own long-term interests. (For example, VC always has an incentive to pump a startup with risk, since it's effectively a call option.)

All in all, I personally think it's important to realize that VC's main value-add is running a book, almost like an investment banker. They raise capital so _you don't have to_. That's a lot of work! That's valuable!

But somewhere in the process, they became the gatekeepers for starting a business (we provide network! recruiting! expertise! everything!), and that's quite literally not their primary job. It's just a very convenient tale to tell founders because it increases deal flow.

Anyway, I do admit, those are my very uninformed opinions and I could be wrong about quite a lot.

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