I think this is a great post. A few months ago, I wrote a post that I think is complimentary. I focused more on figuring out how much to raise, and working backwards from that number. http://codingvc.com/an-algorithm-for-seed-round-valuations
Don't most seed rounds use convertible notes? We use Y Combinator's SAFE Docs (https://www.ycombinator.com/documents/) so the issue of valuation can be delayed until the company has better metrics and can be value properly, while still giving upside to the note holder.
20% MoM growth is the gold standard - the longer and more consistent you hit high MoM growth, the better. Even a product an investor doesn’t fully understand - for example, an app that self-destructs the photos it shares - starts to look really good with high MoM growth.
This is part of why I find the (light tech) startup world to be scammy and light on substance. 20% monthly growth is 792% annual growth. Would you really be inclined to put money in a stock fund that said that it was targeting over 700 percent annual growth? Or would you think there was something funny and unsustainable going on?
Quality has gone out the window and it's all about blowing up bullshit metrics because that's all these short-attention-span man-child types can deal with. Rather than thinking about what the fuck we're growing it's just growth, growth, growth. Fuck that one-dimensional mindless noise. What are you building? Not all "growth" is desirable.
Technology can easily produce 20 to 40 percent annual growth on a large number of economic problems, and even 10-20% once they achieve scale (unlike "viral" phenomena that, unpredictably, phase-change into negative growth). This can be done with a low level of risk. So why isn't there any attention given to companies that, given a couple years of salaries for a few technically competent founders, could reliably and sustainably deliver 20-40% growth over the next couple of decades? Meaningful technological growth rarely comes out of get-big-or-die gambits. The moon landing wasn't powered by a "move fast and break things" attitude. It comes from the humbler 30% annual growth, one year after another after another. Things take time.
There's a very different dynamic going on in most tech markets. A customer's purchasing decision is binary (either buy this product or that product), there are few if any geographic or physical barriers to adoption, and most markets have only a handful of incumbents.
That means that when your product becomes appreciably better than the substitutes that are already out there, there are no throttles to growth other than what you put in place yourself. Customers switch en-masse from one product to another, as soon as they hear about it, and don't stop switching until the old product is dead and the new one is a giant company.
That's why it takes a lot of work to get to product/market fit (which is nothing more or less than your product being noticeably better than all existing substitutes in the market), but once you have it the company will take off like a rocketship, and investors are willing to pay valuations in the billions. Because all you need to do then is maintain your lead, which is a lot easier when you have billions in capital coming in. The growth doesn't stop until you've saturated the market, which is why the other number investors care about is Total Addressable Market.
This is also why companies like Google and Facebook spend thousands of engineer hours on incremental gains that seem trivial. They want to put as much distance between themselves and any potential competitors as possible, so that nobody bothers trying or they run out of money long before they get close.
Far from quality going out the window, these stratospheric growth rates are proxies for quality - at least as measured by the consumer. What an investor is looking for is whether your company is, in the eyes of many other people, producing enough value that they choose to use it.
What you're missing is that early stage growth is completely different from late stage growth.
It might help to think of it in absolute numbers. A company going from 1bn revenue to 8bn in a year is rare, a company going from 100k to 800k in a year is fairly common.
> Quality has gone out the window and it's all about blowing up bullshit metrics because that's all these short-attention-span man-child types can deal with.
Not for everyone. Some people spend a lot of time building really high quality things and gradually work their way up to the point where they are ready for a seed round. Investors who are substance-oriented and long term focused do sometimes notice that kind of thing, especially if you have both substance and growth.
Basically it's:
Substance + Metrics >> Metrics > Substance Only
An example of the first would be something like Docker or Digital Ocean. The second would be SnapChat in its early days. The third would be any geeky hacker project on GitHub like CJDNS that has some loyal and excited users but is very niche and doesn't have growth that any investor would look at (or a viable revenue model, etc.). Such things are cool but generally aren't fundable. But sometimes such projects can learn business and pivot a little or build a secondary product around themselves and turn into the first category of thing.
I would add one more criteria that separates a geek project from a fundable venture: some prospect of a revenue model some day. It's best to book revenue ASAP, but even if you don't there needs to be some prospect that you could do it at some point. This is why "cloud" based ventures that hold the promise of future... ahem... monetizable surveillance... are getting funded over distributed and decentralized things where there isn't such a possibility -- even if they are initially "free." (My hope is that public reaction against snooping plus a saturation of the secondary market for snarfed user data might eventually put an end to this pathological trend.)
This can be done with a low level of risk. So why isn't there any attention given to companies that, given a couple years of salaries for a few technically competent founders, could reliably and sustainably deliver 20-40% growth over the next couple of decades?
I don't see this. I do see a lot of companies founded by a couple technically competent cofounders, who spend two years on the project, and end up nowhere. Building software is high risk because there is much competition and the landscape is changing so fast. If you have product ideas that are low risk, feel free to share ... :-) Some of those products end up as successful, cash-cow small businesses. Some show traction, end up taking venture money, grow at 200% for a couple years before de-accelerating to a more sustainable 20% growth rate.
Also, it is exceptionally rare for a software product to grow sustainably over multiple decades. You usually are the best product for a given platform, and you take off, and you remain hot for five to ten years while that platform is hot. Or you are an also-ran and don't see enough traction to be sustainable at all.
It should also be noted that while Snapchat and these hyper-growth consumer apps get the headlines, most startups do not have that trajectory (and are not designed to have that trajectory). The trajectory for most companies is spend one to three years building a product and getting to product market fit, spend a couple years at 100-300% annual growth as your product breaks through, and then decelerate gradually down to 20% growth, where you last until a new platform comes along and disrupts you. (A good company will be able to disrupt itself, and build new successful products, bad companies will decline and self-liquidate).
One big hole in the investment scene is that it is very hard for first-time founders to get seed investment pre-product and pre-traction. You basically either have to bootstrap, get into YC, have connections, or get very lucky and meet an angel who is in love with the vision. That said, angel investors are probably making the economically correct choice in not funding these founders, so I'm not sure what could be done about it.
I am curious if you have examples of the types of 20-40% sustained growth businesses that could exist, but don't get funded. I don't see those kind of opportunities, but maybe I am missing out.
Generally is, if you're an investor confident in not being the last fool holding the bag. If you're in this game you presumably have that confidence.
> So why isn't there any attention given to companies that ... could reliably and sustainably deliver 20-40% growth over the next couple of decades?
Because those companies don't have huge PR budgets or ridiculous numbers that facilitate hyperbolic news articles.
> Meaningful technological growth rarely comes out of get-big-or-die gambits.
You're probably right, and meaningful technological growth isn't the investment thesis applied here. Get big or die is the order of the day and (at least the investors believe) it works. If you have a better thesis, you're welcome to try your hand and show them they're wrong.
> The moon landing wasn't powered by a "move fast and break things" attitude.
No, it was powered by patriotic sentiment and an unlimited budget sucked from the pockets of the public. It's nothing at all like a startup.
> It comes from the humbler 30% annual growth, one year after another after another.
What, specifically, is this "technological growth" that is created when your company grows slowly? I would expect technological growth to generally scale along with users/revenue.
