When interest rates are low the cost of borrowing is low. Now investors can get returns by parking their money so the value proposition has to be stronger for them to invest in the first place, hence companies are now needing to show profitability earlier.
Not to say it wasn’t possible to be profitable during zero interest rates, Linear being an example, but the competitive landscape is certainly healthier today for companies trying to be profitable.
There are a number of other reasons that (might have) contributed to greater or lesser extent:
* rush to capture users and get acquired (the buyer can worry about profitability)
* race to the bottom by multiple competitors (you might want to be profitable but can't command a high price because others' are artificially low)
* ignoring costs that were rising faster than anticipated (wages, cloud costs, etc)
... and probably many more.
Not saying you're completely wrong, but ZIRP is just part of the picture.
* Uber IPOed in 2019, had a loss of $8.5b that year; interest rates were around 2%
* YouTube was acquired by Google for $1.65B in 2006, it lost ~$350m in the year before and the entire music industry was suing it; interest rates were around 4%
* Facebook bought Instagram for $1b in 2012, which at that point had no revenue and no plan how to achieve it; this was smack in the middle of the previous ZIRP cycle, however I don't think anyone would say that Instagram wasn't a huge success either for the founders or for Facebook
I would agree ZIRP fuels those things (to unhealthy levels), but not that it's always the root cause.
It you were to set a house on fire with just a lighter in your hands, you would not succeed. If you have a lighter and a tank of gasoline, you might probably succeed. ZIRP was the fuel, the lightener and your will are the "root causes". But with no fuel, no fire.
But the "Z" in "ZIRP" is literally zero% interest so your reply doesn't seem to address the gp's counter-examples of >0%. Other examples of non-zero% interest rate time periods include 1990s high-interest rates of +5% with Amazon in 1994 losing money for 7 years, PayPal 1998 losing money for 3+ years, Google 1998 losing money for 3+ years.
Those counter-examples means the simplistic narrative of "ZIRP is The Reason" does not explain everything. Those non-profitable companies were immediately scaling out to win the market and didn't wait for year 2008 ZIRP to do it.
Today, OpenAI (and other AI startups) are losing billions and expect to lose more billions in the upcoming years even though the current interest rate is ~4%.
AI stuff is little different. If OpenAI and others hit AGI or anything remotely near it, the money is in theory massively endless. So investing when you could get 4% in a company that would return 10000% makes sense.
However, 4% in a company growing 15% in their field with profit margin of 10% means if only 1 in 5 survive, you have lost money so investors pull back.
I used "fuel" in the meaning "to make people's ideas or feelings stronger, or to make a situation worse", not "a substance that is burned to provide heat or power", see https://dictionary.cambridge.org/dictionary/learner-english/...
I did provide two quick examples of these effects happening in the absence of ZIRP, so it is clearly not always required.
As, sadly, is not a tank of gasoline or ill intent to set a house on fire - these things can happen by accident, often a single spark is enough.
There's plenty of literal fuel beside gasoline, and there's plenty of "startup growth at all costs" fuel beside ZIRP.
For most of the 2010’s ZIRP created a startup gold rush with everyone trying to leverage the same “burn money, get users” strategy you’ve outlined.
Excepting the current AI bubble, you cannot play that strategy today. Investors started demanding real results in the post COVID inflation years and continue to do so today, or else don’t invest at all in high-risk ventures with no tangible results.
Just if anybody was wondering. Would have liked to see it spelled put at first mention, so I do that for y'all.
"And when we launched after a year in private beta, almost all of our 100 beta users converted to paid customers." — That's a neat stat and one I'd be extremely proud of.
It seems that the internet allows for a third option: a small company that grows slowly and organically which eventually captures a significant market segment, still staying small. GitHub was like that for many years since founding. Linear apparently is another example.
As soon as it is profitable, it is a normal company. Small or big.
An established company has established products and keep building/improving them. A startup does not have that: they just have ideas and try them until one works, or they run out of money. VCs consider it's worth fueling that "trial-and-error" with investments because they believe it is a competent team in a promising field. Nothing more, nothing less, it's just a lottery after that point. Just one where VCs and founders like to believe they are enlightened.
Because the first idea you try is successful does not mean you know more than the (numerous) others, but rather that you were lucky at the first try.
But like palata said above, it is a startup if hasn’t found product-market fit.
Maybe it's my own personal bias but I feel that these stories of low,
slow growth; small teams, small wins but consistency are becoming
more norm. While I realize there is still plenty of froth, it's
inspiring and makes me hopeful for an industry shift in that direction.
They had 50 users after two years.
I think a lot of the value is taking the ordinary engineers (by hacker news) and letting them actually do something. Staying small helps this, because you are not thinking of the business ops burden of not building microservices. You’re building your single dockerized app.
To Meta, it might mean cream of the crop, $1m+ engineer. To early Google, it might mean Stanford grad with deep CS knowledge. To a no-name startup, it might mean someone who accepts the job who takes initiative and knows how to crank out ugly code quickly on AWS and makes good prioritization decisions.
It sounds counter-intuitive, but mediocracy usually works better in the long run.
You want one or two stars, chemistry among the whole team, and good fundamentals.
Good sports examples: the LA Dodgers, 90s Chicago Bulls (a few stars, a few normal players, good fundamentals, and great chemistry)
Bad sports examples: the 2023 Mets with Verlander and Scherzer (both overpaid divas with bad attitudes that hated each other), the current Yankees (a few stars, no fundamentals or discipline)
For startups it's best to start with at least one or two good technical co-founders, as the risk of losing them is lower when compared to an employee.
If anything, the Blue Jays are the example, not the Dodgers.
The previous Dodgers were stacked, but I meant that they had good chemistry and fundamentals. They beat the Yankees because the Yankees just made too many mistakes.
The Mets hired highly paid stars but couldn’t find chemistry, as nobody could get along. They did have some good eras with DeGrom, Syndegaard, etc, but if I remember, many of those stars started out small and grew into their stardom with the team.
Maybe that's not the kind of company you'd like to build, but if it's the only option given your financial circumstances, ramen it will be.
So that's one way to come up with the capital you need. Start something, grow it, sell it for $$, and invest that $$ in a new company that you hope will be worth $$$$. Rinse and repeat. You don't have to make it big on your first try!
That said, knowing how you get to profitability or what you need to change in your model to get to it are fundamental things to know. But just because Linear did it the way they’ve outlined here, doesn’t mean that is what will work for your model.
I think it's important to note that if you're building your business and you are profitable, then you're lucky: you're doing something that you find cool, and it's bringing money.
> What holds you back is rarely team size – it's the clarity of your focus, skill and ability to execute.
This, to me, confirms what I said: nowhere they mention anything like "luck". "Being in the right place at the right time", etc.
The reason startups grow without being profitable is because they "fake it until they make it". They pretend that it's all normal and it will work in order to convince VCs who have no way to know if it's true or not, and don't care (it's just another bet).
Of course a founder won't say "we're not profitable because our company is failing". They will truly believe that they're not profitable because they are on the way to get profitable, through growth. But the numbers are here: most startups fail.
It's always tempting to believe that you succeeded because you are strictly better than the others. And that's the whole point of founding a startup: if it succeeds, the founders want to be rich. The first employees will be "compensated" for their lower salary and extra hours, they won't get rich. The founders have to believe that it's all their doing and that they deserve to get rich and not the other employees, that's an obvious cognitive bias. Otherwise how would they feel about themselves? I don't think it could work.
Um..? Not sure what your definition of "rich" is. My neighbor joined a U.S. tech company as employee 1000-ish when that company was at a few hundred $100M revenue, 8 years later they are at a few $1B revenue and his comp has brought him into 8-figures (USD). If he wanted to then he'd never again need to work in his life. I call that "rich".
If your neighbour got into 8-figures, it means that it's one of the very big tech companies, and the founders are super, super rich. But that's a very, very small minority of the cases.
The lotery makes a few people rich, but I don't think it would be fair to say that "the lotery makes people rich" in general. In general, the lotery makes people a little poorer.
You can't discuss luck but you can discuss everything else, like frequency. More attempts, more opportunities to get lucky. This is kinda obvious, no?
The whole point of startups is that you take on massive investment to scale extremely quickly and outrun all potential imitators. It's not the only viable growth model, but that's the whole conceit of startups and what differentiates them for small businesses
It's a bit silly to try to redefine the term b/c you want to self identify as a startup. Just come to terms with that fact you're running a small business
unless they have some creative definition of profitable
Being profitable is one of the best times to raise. You don't need the money, but it'll accelerate the next phase of growth.
Retaining profitability after raising is probably harder as you're expected to spend that money to grow.
I'm sure it can be done if you've raised with the right people and you keep focus on ARR per FTE.
But the post we are discussing is literally about hiring slowly and only if really needed and only hiring the "next great engineer".
I understand that the post words are written deliberately in a way open to more interpretations, and the "only if needed" can apply to "we need to take on more Atlassian customers so we need this and that".
A startup can be profitable.
Then it has a notion of "growing large beyond the solo founder". But I argue that most of the time, this is just the story they tell to justify their losing money. As in: "we are not profitable YET, because we need to grow larger to reach the scale we need, hence you should give us more money".
> A startup can be profitable.
Is Logitech a startup? They (or at least not so long ago) call themselves a startup. I disagree: it's an established company.
If a company of 20 employees has been profitable for 10 years and doesn't grow, would you call it a startup? If it is profitable and keeps growing while staying profitable, wouldn't you say it's "expanding"?
Now if that company of 20 employees suddently gets a big funding to try to become a company of 2000 and goes into a state where it may well bankrupt in the next 2 years if it fails, then I would again consider it a startup: it's "trying a completely new business model" (one that works for 2000 employees instead of 20, probably with the goal of making the leadership rich).
Another thing is that startups usually tend to be those Ponzi schemes where employees are badly treated but get not-so-worthy stock options (that may compensate someday for the bad conditions, but often don't) while the founders get a shot at getting rich. If your company is profitable and stable, it's much harder to do: how would you justify the bad conditions if you could actually afford better ones?
But of course, saying that you are a startup is "cool", which is exactly why Logitech was saying it though they were one of the big tech companies in the world.
Even better, profitability is all about a harmonious developer-customer relationship. This was alluded to later in the essay, but I believe it is worth emphasizing. The entire point of business is to serve customers. That relationship is everything, and profitability indicates the presence of net-positive impact.
My startup, my cofounder was obsessed with profitability - I was far more focussed on growth. In theory, not a bad balance - but in practice, his drive towards profitability meant that we ended up underinvesting in the business - millions of pounds sat in our coffers that could have gone to hiring, could have gone to maintaining and building upon our core mission rather than focussing on a profitable sideshow - and in the end, while the business still exists, it is now Just Another Agency, rather than the tech startup it once was.
Anyway. These days I run my own affairs, and place emphasis on long term growth and keep short term profits to the absolute minimum needed to live well enough.
It’s good to make a profit - but business should be viewed as any investment should be - let it compound.