It makes sense to invest in a company where the founders want to control the ownership. That really means the strongly believe in what they are doing. And other thing they should look in for founders is Perseverance.
You're new here, so I thought I'd let you know: Hacker News is about actual conversation and debate, and not a contest on who can be most negative or contrary. There's not enough to be learned from that, and we might as well not have that conversation at all.
It's not enough to say something is bullshit. Why is it? What part? How do you know?
"it's becoming cheaper to start a startup, and startups are becoming a more normal thing to do"
You can now start a company with a few hundred dollars. All that's left is food and rent. This is the first time in history when this has been possible.
My co-founder and I have $2500 into our business http://shyp.com. This includes the domain name and all server usage to date. We use zipcars to do pickups and are already profitable on a per transaction basis.
We have a large house in SF and rent our extra rooms on Airbnb. This covers rent + food. We have yet to take any external funding.
> This is the first time in history when this has been possible.
That's overstating it a bit. Plenty of '80s software companies were bootstrapped for the cost of food+rent+computer, with shareware demos distributed via BBS.
Microsoft as well. They required no outside capital, and Gates & Allen put in a modest sum (equal to maybe $10,000 today). Their customers funded the business.
You don't need to have an idea, or even investment to start a company now a days.
Maybe your definition of company is much larger, but there are people who has successfully launched a SaaS company with a) no idea of what they were building and b) no money to build it themselves initially and c) no development skills to build it themselves.
I am not affiliated at all, nor am i member of this group/company but I suggest you go check out http://thefoundation.com -- get the free case study about Sam.
It's loaded with great information.. But the TLDR is simple: Dane Maxwell has a "system" he teaches entrepreneurs. It's a way to source a market for an idea, then actually find paying customers who are willing to wait for the product, then you turn around and use that capital as inital investment for developers. it's a system that has been replicated, and it's quite inspiring.
There are also people like Amy Hoy http://unicornfree.com who actually hits many of the same types of "philosophies" when it comes to building a SaaS company.
"There are too many bad companies out there" -- then don't give them your money.
HackerNews community really looks down upon things like petty insults (and I believe you just called the founder of Y Combinator [creator of this site] dumb).
"I think one of the biggest unexploited opportunities in startup investing right now is angel-sized investments made quickly. Few investors understand the cost that raising money from them imposes on startups."
Oh lord yes.
Having been through the fundraising process a few times, it's hard to describe the sheer relief when you find an investor willing to give a quick yes or no. The best I can describe it is like the feeling of getting a Christmas present you really, really wanted but didn't think to ask for.
SV Angel and a16z are two of the best I've ever interacted with in this regard. It's clear both firms deeply respect entrepreneurs' time.
I propose that investing is a market and the state of that market will depend on how the participants act.
So, let me throw this idea out there: Be the kind of company that can pitch a VC and if they don't have a YES/NO answer to you within a week, pass on the VC.
I think there's a power imbalance because founders want money more than VCs need to invest. I think the economics are such that founders should have a lot more power.
When founders start demanding quick decisions (or more specifically, requiring them) ... the decision making process will become quicker.
It's interesting that you point this out. I have always felt that way about investors: I would much rather have a fast "no" than an indefinite answer indefinitely.
For that reason, whenever my friends give me a pitch deck and are looking for recommendations, I'll usually pass them along to Kevin from SVA, who is not only an awesome person but has always acted quickly. When I think of the slow investors, I never recommend them to friends.
Decisiveness may be the new proxy for judging how good investors are (aside from their portfolio, which currently acts as the main signal).
The unfortunate reality is that it's not about the firms, it's about whether the individual partner at the firm respects founders' time. For example, I know founders who have had unpleasant experiences with an investor at a16z.
Not comfortable naming names but investor was late and founder said it felt like investor already knew it was a pass since he started meeting with something like "just for full disclosure we typically don't invest..." (I made this quote up-- I'm just trying to give you an example)
I don't find the trends to be too surprising. After the major bubbles of the dotcom era and the 2008 financial crisis (I wasn't alive for the LBO bubble), a lot of energy is focused in creative pursuits, rather than those simply engaging in wealth transfer. Bootstrapping will become easier as time goes on, with the advent of b2d/open-source toolkits, as well as the perpetual cost-savings of Platform-As-A-Service providers such as Heroku and AppEngine.
I'm more skeptical. That there will be "more good startups" seems more like a wish than a prediction. Why will there be more good startups? Based off of what evidence?
I'm not necessarily disagreeing, I just wonder why he thinks so. That there will be more startups in general seems obvious, but "good" startups seem to be increasingly more elusive, at least to me.
Maybe, in many markets the total value to capture, while likely heading up over time, is unlikely to double because there are 2 top quality startups in the space rather than one.
So often it could be the case that the competition to dominate a particular market will just be more intense.
Of course in some spaces the quality of product/ service from more startups might alter the capital distribution of customers to create a much larger pie.
Right now, VCs often knowingly invest too much money at the series A
stage. They do it because they feel they need to get a big chunk of
each series A company to compensate for the opportunity cost of the
board seat it consumes. Which means when there is a lot of competition
for a deal, the number that moves is the valuation (and thus amount
invested) rather than the percentage of the company being sold. Which
means, especially in the case of more promising startups, that series
A investors often make companies take more money than they want.
Which means the first VC to break ranks and start to do series A
rounds for as much equity as founders want to sell (and with no
"option pool" that comes only from the founders' shares) stands to
reap huge benefits.
As I always thought the big, required option pool that so heavily diluted founders/early employees was a bit out there. Seems much more sane to practice JIT dilution.
The bigger issue is not that the dilution from the option pool creation happens at that early stage (rather than JIT), it's that VC's require the creation, and therefore dilution, to happen pre-money. Because of this, the founders carry the burden and the new investors don't -- despite the fact that the investors will reap some of the benefit (equity being available to grow the business they now own).
As an outsider, it was surprising to me that seed investors don't have access to a company's revenue numbers. I would think there would be some kind of quarterly report that goes to all investors.
There's no definitive rules for stuff like that. Some seed funding happens pre-revenue and other founders are more than willing to share revenue figures with potential seed investors. We are in the seed funding stage and are starting a bi-monthly email update to our advisors, potential investors ect that will definitely mention revenue numbers.
"[5] This trend is one of the main causes of the increase in economic inequality in the US since the mid twentieth century. The person who would in 1950 have been the general manager of the x division of Megacorp is now the founder of the x company, and owns significant equity in it."
What economic evidence is there to support this claim about the causes of economic inequality?
The whole essay is rife with upper class Panglossian obliviousness. Right before he talks about economic inequality he says "When I graduated from college in 1986, there were essentially two options: get a job or go to grad school". Only 8% of over-25 Americans have a graduate degree today, and that percentage was even lower 27 years ago. From this view of the world, people going to night school to get their Bachelors don't exist, because these people didn't go to the $40k a year college you went to. For most people in the world, someone at 21 with Bachelors in hand deciding on either grad school or a professional career, is already someone who is living the life of Riley.
There's nothing incorrect in his statement, although it does give an idea of the bubble of the world he lives in. Income inequality clearly all is at the level of VCs and founders in his world - even the upper middle class programming minions don't come into consideration. Income inequality connections clearly do not come to mind in the case of, say, the US army marching into Los Angeles in 1992 to restore order among the poor and working poor there. It's a kind of solipsism you can read about in the unofficial minutes of the councils of the Czar's ministers in 1916. The earthquake in class relations coming is not in minor percentage differences between enormously wealthy VC limited partners and upper middle class founders. It's what happens when the world economy comes to a stop like it did in the late 1920s. We got a small preview of it in 2007 and 2008. In the years and decades ahead, financial shenanigans on Wall Street will eventually lead to an economy that will not start up again, no matter how much priming. THEN is when we will start seeing real shifts in the relations of production.
I think this is a great point. That oblivious bubble takes a bite out of otherwise very insightful words.
And I observe this perspective has spread out among the startup community. It always surprises me that people who are so intelligent in many ways can be so narrow in their social and economic context.
That stood out at me as unlikely as well. The hypothesis is essentially that wealth now captured by company founders, which in a previous era would been captured by their employers, explains the majority of the change in inequality. Essentially, that the main reason for increasing income inequality is that people who would've been salaried career engineers in the past are successful founders today. Some evidence in support of that hypothesis would be interesting. For my own part, I would be surprised if shifts in the share of income taken by W2 engineers vs. tech-company founders have even moved the needle on the overall U.S. economy's Gini index.
Their findings are that labor's share of overall income hasn't declined, but that wages/salaries have gotten much more unequal within the sector of employment-based income. Some of the factors they point to are: a greater polarization along skill lines; a decline in high-wage, skilled blue-collar labor; and a rise in the pay and number of high-end salaried jobs such as investment banking and C-level officers.
"This trend is one of the main causes of the increase in economic inequality in the US since the mid twentieth century. The person who would in 1950 have been the general manager of the x division of Megacorp is now the founder of the x company, and owns significant equity in it."
Boy, is this a load of bollocks. I guess the 20th century war against socialism ("the means of production in the hands of those who work it") and worker's organizations and parties doesn't come much into play into these analyses. Up to the bickering a few months ago in Wisconsin with Walker - although we're so far down the road, that example isn't very useful as a specific case.
Yes, the entrepreneurial middle manager starting his own business, this is the source of income inequality! Meanwhile, half the Forbes 400 inherited their way onto the list. Where's the plucky entrepreneur in that equation? Even "self-made" people like Warren Buffett had a congressman father and a grandfather with a chain of stores. Not exactly a guy pulling himself up by his bootstraps.
I mean, the fact that this speech was made to investors is a signal. Not the tone, but the fact that it's investors who are the ones who sit and hear these things. The programmer in the trenches, working 50-60 hours a week creating wealth is not a part of these decisions on production.
There's a good documentary called "Born Rich" that is on Youtube right now. I would recommend people watch it. This is who the money goes to, not the plucky, hard-working entrepreneur. Blogs are filled with stories of angels and VCs backstabbing founders. As is HN. And the founders usually get the best deal in the company, far better than schlub programmers. Even hackers of the caliber of Jamie Zawinski have attested to this.
This idea of income inequality happening because some hard-working founder gets all of the money is a complete farce. Propaganda even.
If we want to really get into a discussion of this - just who are the "limited partners" the VCs are raising money from, and where did they get their money? We always see a fresh-faced Mark Zuckerberg or Drew Houston, or a Paul Graham or even a Ron Conway, or John Doerr or Michael Moritz. But who are the limited partners they're raising money from? Who is calling the shots on how money gets spent?
It will be interesting to see if VCs take Pauls advice. Recently a lot of VCs have been offering value add services like design expertise and recruiting. I hope they also include quick decisions and less dilution.
Why does it take some VCs so long to make a decision? Ron Conway makes a decision to fund a founder within 10min of meeting them.
paulgraham.com's design is actually quite similar to the design of default templates for Viaweb online stores, the company pg founded. Every Viaweb site had a left-hand row of buttons with navigation elements and simple sans-serif text in the center.
I actually have a theory that the software running paulgraham.com is a sort of stripped down version of the original Viaweb content management system. You can see in the view-source that there is still "Y! Store" JavaScript running on his pages, and that, for example, the titles of each essay on his site are actually images hosted at yimg.com (e.g. for this essay, http://ep.yimg.com/ca/I/paulgraham_2270_385).
pg has spoken about how one of Viaweb's major features early-on was that it worked around the limitations of browser fonts by auto-generating images (GIFs) with rendered anti-aliased fonts and served those in the browser. Looks like his site continues to do the same thing to this day.
If my theory is true, I really hope pg never redesigns it. It serves as a pretty cool historical reference to the company he founded, that made him wealthy in the sale to Yahoo, and that ultimately allowed him to start YC / HN.
The left-side navbar is also an image map! (remember those?) My guess: Viaweb generated a single image out of the navbar description and markup for an image map. In those days, browsers didn't handle parallel downloading well. A single navigation element with an image map probably loaded faster in browsers than several navigation image buttons.
Yes, image maps are out of vogue and text-as-images is unnecessary with modern browsers. But, if the software running paulgraham.com truly has lineage to Viaweb, then that is so much cooler than any modern redesign could possibly be.
1. Don't grow pessimistic over the growing number of startups because there will be a growing number of great founders. If you focus on finding them, you can make more money than before.
2. To find them, you need a competitive advantage which could be doing what founders want/need: smaller Series A rounds and quick decisions.
He's practically daring the VC community to see who will step up.
One thing I suspect will change for VCs is the 2/20 model.
Because the cost of building a startup is going down, and assuming the opportunity lies in early stage investments, VCs are going to have to make more early stage investments than they are now.
VC operating expenses are covered by a 2% management fee levied on assets under management. This incentivizes VCs to create megafunds so that they can have proportionally mega salaries.
Seed stage investments come at a totally different operating cost.
Seed-stage investing is pretty hard with a megafund because they are so expensive operationally. VCs would much rather write a 50M check in a growth round for 33% of a company than a 100 $500K checks for 5% of each company. They might have to talk to 20 companies for the growth rounds to make 1 investment, but they'd probably have to talk to thousands to make the 100 investments in seed rounds. That means they need a bigger staff and that 2% model won't work.
In fact, I've heard VCs say that the only reason they write small checks in seed rounds is so that they have a strong relationship with the founders and pro-rata rights if the company happens to blow up.
I suspect that VC salaries will go down like crazy, and they'll be forced to rely on carry for the funds earnings. Which is probably a good direction for VCs to go.
The article was a good read. Through out the article though, I couldn't help but feel that Paul Graham wants to change how startups are invested in, specifically the 24 hour turnaround on investment decisions and the A round change, and framed it as "I see x as a trend that is developing". It makes me wonder if a sufficiently influential person in a given industry claims to see a trend that is closely tied to human behavior, could that trend become a reality?
Yes. I think there is no question that people like PG have a vested interest in taking patterns that favour them and socialising them into the wider industry as a descriptive account of an ongoing trend, rather than a prescriptive self-fulfilling prophecy. Any good marketer-pundit will do that. :-)
"When I graduated from college in 1986, there were essentially two options: get a job or go to grad school. Now there's a third: start your own company."
This is an important observation. 20 years ago, the smartest people went to large companies. Now it's a question of "Join someone else's startup or start my own?" The alternative of career paths at large companies no longer exist. It isn't just social acceptance and lower cost of entry, it's that the alternative is long gone.
You're only talking about a very, very small slice of the population - geographically centered around maybe 3 or 4 cities. This is absolutely not the case in reality though.
The slice is the top students, who used to exclusively go to large companies. Now it's not so many. My impression is the top CS and Engineering students can successfully conduct a national job search.
The top students still mostly go to large companies. Compared to the number of top students going to companies like Google (who hired something like 6,000 people last year), grad school, quantitative finance companies, and several other options, the number of top students going to YC or otherwise starting companies is not a large number.
Among my own acquaintances it seems to have more to do with people's strengths and lifestyle interests. People who are strong techies but entirely uninterested in business would rather go to Google, or even to somewhere like NASA or Boeing or IBM or Intel. People who are a bit more into entrepreneurship, and/or don't like having a boss, would rather go into starting a business. Depends on the specific technology as well: a lot more web-tech people go the startup route than hardware engineers, and certainly compared to aerospace engineers.
Where are you getting this?? Plenty of recent college grads are more than happy working for large companies and have plenty of opportunities to do so. From my experience, only a a minority even consider going into the startup world, as employee or founder. Source: A majority of my friends, my sister, and my girlfriend all graduated in the past two years.
I am not as in love with that quote as you are. I'm not a fan of the term, but also, it screws with the tone. You know it's janky writing when the reader stops and rereads to make sure they just read what they think they read.
That's why I enjoyed it so much. PG puts thought into every word of these essays. If I know him well enough to have an opinion, that sentence was crafted as much for its contents as for its tone, and that's what made it so awesome. Any disgruntled founder saying it would have been status quo. PG saying that in an essay is just pure entertainment to me.
I really wish Paul had not used that word. "Bitch" is a deeply sexist word, even when it is applied to males. I realize its use has gained a certain currency and there is a corresponding desensitization to it, and I think this is highly regrettable. To me it's as offensive as "nigger".
After many years dealing with VCs as an employee of startups (often very early employee) when it came time to start my own company, I knew I wanted one that would not require venture capital.
Making money is not that hard (for me, anyway, I think this might be a talent, but I think it's not as rare a talent as it might seem.) I think there are a lot of startups out there who build an Instagram when they could be building a Basecamp.
Further, if you're profitable, the cost of scaling is lower.
The reason for this is that there are three major costs to VCs (and Paul touches on some of them). There's the huge distraction of dealing with them when raising money, but this also becomes and ongoing distraction of keeping them happy, and fielding their calls where they tell you some sector is hot and maybe you should pivot into it. (Much better than the bad old days when they would force bad decisions on you, or at least, I hope that is less common now.) The second major cost is not just the equity (which Paul touches on) but the terrible, terrible, lopsided deal terms. "Standard" terms are basically a ripoff that in no other sector of investing would be acceptable. (I'm talking about liquidation preferences and the manifold other ways of double dipping, stripping founders of their stock, etc.) Yes, they get away with this because they're investing in "to the moon" type businesses run by mostly young guys and this has been the culture. But the consequence of this is that the terms are bad for employees as well. (At least founders have a big chunk of stock, for employees the shrinking of the pool is more dramatic.)
But the biggest cost of a VC is starting the clock. They will put you on a track to "go big" which really means "spend more than you're taking in and keep raising more funds", which further dilutes you. You do this until you die or get aquihired or are able to raise enough rounds to have a really big business.
Everyone seems to go into it thinking they're shooting for the moon and that they'll be the next Instagram. But they won't. (almost certainly. 1/1000? 1/10,000? 1/1,000,000,000?)
I think github is the model we should be striving for. Profitable almost from day one. Reinvest the profits, grow the business. Later if you want to take money, you can get a deal like they got.
And if times are tough and you need to pivot, well, at least you have cash flow to fund it.
I'll never forget the experience of one company I worked for. I was in right after the founders. They had a profitable business doing consulting right in their line of technology, which meant that the consultants were producing code that made the product more valuable. The consultants were paying for the product team all the overhead and the company was slightly profitable.
As part of the deal to get venture capital, they had to shut down the consulting team and "focus". There was no focus being taken away by that team-- they were run by a manager and the rest of the company could ignore them... they just increased the value of the product on other people's dimes.
So the team was shut down, then the VC firm dragged it all out for 6-8 months until the company was almost out of money, and gave us a bridge loan (really choice terms too, choice for the VC that is.)
They put us over a barrel.
It turned out the company was about 3 years too early. They would have been well ahead of the competition when the market hit and things really took off... but by the time the VC had run them into the ground. (Forcing many other terrible decisions on them in the interim.) They could have made it without taking VC money and would have been a $400M business.... (what one of the competitors sold for, even though they were much worse off than we were.)
I think this story is very common.
But you don't see a lot of stories like this on HN and other "startup" hangouts. You see a lot of self aggrand...
Are you assuming these startups are all in the bay area? I don't think PG is. I think he's saying that doing startups is becoming a broad cultural phenomenon.
I think the "talent pool" really should be the whole world.
There are several startups I know of who hire people completely remotely. One guy lives in thailand, the other in spain, etc.
Actually, it sounds like a golden startup opportunity: disrupting the recruiting industry. Besides, strong job creation dynamics sounds like a generally-good problem.
I'm genuinely surprised by the wherewithal entrepreneurs have at hiring domestic talent. Anyone know why outsourcing isn't more popular- particularly among B2B startups?
I'm a developer myself, but if I was an entrepreneur with no coding skills, I'd hire some guys in India to crank out my lo-fi MVP and use that to find a product/market fit and then raise money. I suppose it's not that easy though, is it?
The quality of the outsourced programmers is extremely low. They might cost 20% of a domestic programmer, but if you got even 20% of the productivity you'd be pretty lucky.
These outsourcing companies will also only do exactly what you have specified. This means the specs have to be very precise, in a way that I think would be difficult to do if you weren't a programmer already
Indeed. Plus general communication problems, language problems, time zone problems, and lack-of-shared-intellectual-culture problems. It's a lot to overcome to save a few pennies.
I have yet to see it work successfully in a startup context - I am sure it can be done and there is certainly empirical evidence out there - but I have yet to see it work.
The feedback loop is frequently difficult to get right. Communication barriers don't help (fwiw I grew up in India so have some sort of limited advantage but not by much). The time zone difference does actually slow things down a tad bit more.
You talk about 2 rather different milestones in your comment - building a lo-fi MVP is certainly possible with an offshore team. But lo-fi MVP != product/market fit on any reasonable definition of p/m fit (Sean Ellis' formulation of 40% of users/customers) being disappointed with your disappearance, say). Getting to p/m fit may require lots of rapid experimentation, iteration, brainstorming and so forth...and that's when you can run into trouble with offshore contractors.
Well, most startups appear to pay crap rates with dubious company ownership schemes. What more value could they get out of outsourcing when they're likely already paying far below minimum wage?
this is one of my hobbyhorses, but recruiting really isn't that hard. If you're finding it hard, let me ask:
(1) are you paying market salaries?
(1a) are you really paying market salaries, or are employees supposed to join your company because you're a special snowflake
(1b) even if you are paying market, why should an employee go to your firm? What is the upside to them for leaving a boss and company that they know? Because it would be really convenient for you, the hirer, is not a good answer.
(2) do you make the interviewing process decent, or do you scatter caltrops in front of potential employees
(2a) good employees do not need to crash study then regurgitate graph algorithms that your company never uses on the whiteboard. They also have jobs and value their vacation time and don't care to spend a week consulting for you
(2b) how long does it take you to respond to resumes that come in? You should be able to say yes/no/maybe within 2 business days. Do your recruiters / interviewers actually read the cover letters / resumes? Last time I changed job a big sf / yc startup let my first interviewer roll into the interview room just shy of 20 minutes late without having read my resume. That's a complete fucking dick move, and it's part of why I turned them down.
(2c) when potential employees send you github links, do you have an engineer actually bloody look at them (almost never in my experience)
(2d) do you actually expend effort to meet potential employees / grow a bunch of warm leads, or do you wait until 3 weeks before you want someone to start then gripe because you can't convert cold leads in 1 week plus a 2 week resignation period for their current employee?
(2e) do you use shit software like that jobvite bullshit that badly ocrs then expects me to hand proof their shitty ocr job? Or do you directly accept pdf resumes.
(2f) for the love of god, I do not have a copy of ms word and wouldn't take one if it were free. I will not put my resume into word format.
(3) do you take some pains to grow employees? Hire people out of university? Take a chance on people?
(3b) Like one of my former employers, do you do a good job hiring new grads from schools besides stanford / berkeley / mit / cmu, but then 18 months in after employees have demonstrated their value refuse to bring them up to market rates and lose them?
(4) when you send out offers, do you actually put out a good offer or do you throw numbers out that are 10% or more under your ceiling then expect employees to negotiate hard with you? I just turned down an sf startup because they did this; the ceo who hired me said, "x0x0: when I was an employee I hated negotiating, so I'm going to make you a great offer. This also means I'm not going to negotiate." And you know what? It was a great offer, and I said yes the next morning. It also avoids starting your new job after a confrontational exercise.
(5) if you have recruiters contacting people, do you have them make clear they're internal not external?
(5b) do your recruiters actually read peoples' linkedin profiles before contacting them? I used rails a bit 3 employers ago and had to remove that word from my profile because I got spammed with rails stuff.
(6) do your job postings on LI/craigslist/message boards tell potential employees why he or she should work for you, or is it simply a long list of desiderata like the vast majority?
(7) like Rand says, do you know off the top of your head the career goals of your employees? What are you doing to help them get there?
(7b) just like the easiest sale is an upsell to a customer you have, the easiest recruit is the good employee you already have that you keep happy and prevent from leaving
(7c) do you give your employees raises to keep them at or above market, or can they get a $20k raise by swapping companies? If that raise is on offer, exactly why should they continu...
I'm a big believer in finding the candidate you're not supposed to find. Meaning, if you find the person you're supposed to find, then everyone else will as well. Plus, they probably already have the job you're offering. So, you compete on salary.
If you can find and take a chance on the right student from the "wrong" school, you can get some great employees.
Large companies in particular love butt-in-seat time as a predictor of value. Sure 6 months experience is probably better than 3. But 6 years doesn't buy you much more than 3 years.
The other thing big companies love is prior experience in the industry. I have never understood that tendency. You already have 10 people with 10 years experience... Why is adding more of the same important? Years in industry isn't anywhere on my framework for hiring.
Good list. For 2f, though, is this would-be employers or head hunters? Agencies tend to want word format... because they change your resume to suit the job they're pimping you out for. Can't imagine why an actual company would need word if they can get a PDF.
I'd like to offer an observation: based on both anecdotal (and actual classroom data), college student interest/enrollment/majors in CS have gone up something like 2-3x in the past 2-3 years alone, and is only going to increase even further year-over-year. As with many other things, labor definitely has a significant lag period, and for all we know there could be a glut of software developers in 4 years.
Good. Software development is horribly underpaid in most places (even the places most on here would say are well paid, IMO) so it's only right that companies should be competing against a person's opportunity to make their own company.
I don't disagree with all of PG's points, but I always find it intriguing that in discussions of the current startup landscape and the future of startup investing, there's almost never any mention of the impact of the easy money policies of the major central banks over the past several years.
Cheap money on an unprecedented scale has affected just about every asset class, including VC, so to discuss the future of startup investing without even considering the extraordinary monetary policies we've seen implemented since 2008 is interesting to say the least.
The effect of deep pools of capital varies from country to country.
In Australia, for example, superannuation funds hold about AU$1.5 trillion under management (not a large number by global standards, but Australia is a country of only 23 million). That amount will continue to rise steadily, and the rate at which it will rise is being pushed up by laws increasing the level of compulsory retirement savings.
In the USA, retirement funds, hedge funds, college endowments and so on and so forth all invest in VCs. A few percent.
How much do Australia's superannuation funds invest in venture?
So far as I am able to determine -- nothing. We have venture funds here, but they're not really venture funds at all. They were seeded with government money; no such fund has an incentive to take true risks.
The other problem with a pure monetary explanation is that it predicts that all other asset classes should have moved in the same direction. One of the reason VCs got so much money is because shares were flat for a long time; the unadorned Austrian interpretation says that shares should've risen too.
I am not suggesting that monetary policy is everything. Secular trends, like the tendency for software and hardware to get cheaper, can't be ignored. But to ignore the direct and indirect impacts of monetary policy altogether doesn't make sense either.
Silicon Valley-specific example: Facebook goes public during what many believe is a Fed-supported bull market. Insiders sell stock at close to a $100 billion valuation; it's estimated that more than 1,000 employees get to sell stock worth at least $1 million a few months later. Some of the gains realized by insiders and employees will be funneled back into startup investments as those insiders and employees become limited partners in venture funds or angel investors themselves.
Now consider this dynamic across the entire tech industry. Numerous companies have taken advantage of the IPO window of the past several years, and have been able to go public at rich valuations. Many employees with equity compensation at established publicly traded tech companies have done very well too, and ironically some of the most exorbitant valuations are at large companies lacking earnings.
It would be foolish to believe that none of this has impacted the amount of money being thrown at VC firms, super angel funds and startups through direct angel investment, which in turn impacts valuations, deal terms, etc.
The big question: when the great experiment of the central banks ends, how will this affect the landscape for investments in startups? I have some ideas which may or may not be right, but it's simply not credible to believe that there will be no change. The fact that few investors in Silicon Valley seem to be talking about this, however, suggests that they believe they live in a vacuum completely disconnected from the rest of the economy and global financial system. The last time this happened, it didn't end well.
IPO pyramids can be funded without central bank profligacy. Consider the first tech bubble: inflationary policy followed from the wreck, it did not lead it at all. The current bubble is actually remarkable for the relative rarity of IPOs; probably connected to lower founding costs and substitution of acquisition exits.
The word "profligacy" has taken on new meaning in the past several years, but keep in mind that many people believe the first .com bubble was in part a result of Alan Greenspan not raising rates quickly enough in response to a stock market that was overheating. In other words, even though rates can't get much lower than they have been the past several years doesn't mean that they weren't too low in the late 1990s too.
As for IPOs, I'm not sure that what we saw in the first boom should be used as a baseline for anything. The IPO window has most certainly been open and Facebook's IPO was an historic one.
In any case, I'm not sure I understand the point you're making. Even if you believe that bubbles can be created without extraordinary central bank action, which is true, the injection of trillions of dollars into the financial system in a few short years and what happens when it has to come out should be top of mind for any investor in any asset class, particularly now that it appears we are closer to the end of this phase of the experiment.
Listen to people in just about every corner of the financial markets, from equities to credit, and this is the topic. But it's striking that instead, Silicon Valley startup investors seem more interested in how they can get in on the hottest deals, convince founders they're friendly, etc. That should be of concern to everybody in Silicon Valley, including the entrepreneurs who will likely find themselves in a much different world sooner than they expect.
My point is that overreliance on monetary inflation as the single systemic driver is simplistic. Is it a cause? I think so. Is it the only cause? Not even close. There are so many other confounding factors at work that it is insensible to sheet it home purely to monetary factors.
Stuff like "large capital institutions in the USA are comfortable with venture investing", "shares have underperformed for most of the past 6 years", "it has never been cheaper or easier to launch a web startup" and "there are now billions of people connected to the internet" deserve billing alongside "the money supply is expanding", especially since monetary expansion has such lumpy and unpredictable effects on different asset classes at different times.
>My point is that overreliance on monetary inflation as the single systemic driver is simplistic.
Oh, but of course. I mean, it's crazy non linear system and we don't even know all the variables. Any cause in particular will be insufficient to account for the whole.
So, yeah, startups are doing so well because software is eating the world, but amidst all of the narratives most people go with rarely to people seem to consider the role that the economy is having on the industry. Of course it's non the single systemic driver, but it's certainly a catalyst if not a multiplier - and it's rarely discussed.
Rarely discussed? I disagree. There is a strong contingent of mises.org followers hereabouts; every time anything vaguely related to economics or the SV bubble is discussed someone bursts in to breathlessly update us on Bernanke's dastardly doings.
I didn't suggest that easy money was the single driver, or even the primary driver.
But the financial system rarely rewards those who choose to be ignorant. Individuals and institutions investing large sums of money in any asset class today who are not thinking about the unprecedented experiment that is taking place and considering how their investments could be affected by changes in policy are more than likely to end up losing money, perhaps far more of it than they ever could have anticipated. And in some cases, far more of it than they actually have.
Quite. You'll find relatively few accidental millionaires and billionaires in the financial markets. And the markets are very efficient at taking back gains from the small number of wilfully ignorant fools who get lucky.
Yes, hello, I am interested in this topic and I've been saying something like this for a little while now. Negative real interest rates have had to have an impact in how we've been allocating money.
Do we have a way for measuring how much money has been funneled into the funds? What about the whole, firms now stockpiling cash?
I think the cheap money certainly has the biggest impact on two things: first, larger class VC money (and where they get their funds); and second, the free capital that angels and others have available due to the Fed inflating the stock market.
However, given the increasingly lower cost of starting a company, I can't see a substantial impact to the sub $100k funding arena with the inevitable end to cheap money. $100k just ain't what it used to be, but the infrastructure ooomph it buys is just going to keep getting more astounding.
You might be right that big VC will take the biggest hit, but from what I can tell, a large part of the market for $100K investments exists precisely because you have so many individuals who have done well in the Fed-inflated stock market.
When the number of people with $100,000 to throw at twenty-something founders fresh out of college drops and/or interest rates rise to the point where you can eventually get a 5-year FDIC-insured CD yielding as much as investment grade corporate debt in 2012, the impact on the angel market might not be insignificant.
Exactly right. In our current zero-interest rate environment everyone with spare cash is scrambling to figure out what to do to generate a return. Stock market? Risky. Bonds? You've got to be insane. Real-estate? Very risky. Angel investing in tech companies? Used to seem crazy but now it's not any less risky than the other options. They'll all implode if the money printing ends. It is unfortunate since out of all of the options, investing in tomorrow's inventors is actually one of the better uses (for society) of idle money.
you sound like someone with no investment experience.
investing in the stock market is a lot less risky than angel investing. especially if you keep it safe with index funds and don't look at individual stocks.
you have close to zero liquidity investing in private companies. you're buying something you can't sell, for years, if ever. with stocks and bonds, I can always get out.
To be honest, I don't know anything at all about monetary policy. I've said before that valuations are high right now, but I don't know what if any effect monetary policy has had on them.
I suppose you could argue that monetary policy isn't as big a consideration for YC as it is for other funds. YC effectively capitalizes new companies with tiny amounts of money, and it does so across a relatively large number of companies. If you're not involved in follow-on rounds, valuation is less important to you, although you probably wouldn't be happy if the paper value of equity you haven't realized gains on collapsed. Outside of this, it seems to me that YC's next biggest risk is that the landscape changes, you cannot put enough of your capital to use effectively/efficiently and more attractive risk-adjusted returns become available elsewhere.
But most angels and VC firms investing larger sums in fewer deals, and competing harder to get into those deals, have much greater risk. The intriguing/disturbing thing is that as far as I can see, those investors seem to be completely ignoring how the injection of trillions of dollars into the financial system has impacted the asset class they're investing in. I can't name any other asset class in which professionals haven't been publicly discussing this topic for some time.
I would also add that VC funds have a s..t load of money to invest. The valuations that they give in comparison with a bricks and mortar business are night and day different in most cases. For example a successful local business might sell for 3-4 times net profits or 1 times revenues. A tech company in a series A might get 15 times revenues (with zero profits). A hot tech startup can justify a lot more based on a lot less or zero revenue. The hope is that the tech company is going to justify that MUCH higher valuation by spectacular growth. Obviously it is justified with a handful of companies, but it's a very high risk investment for VCs to put it bluntly. However they have the funds, and they have their criteria with which to invest, and they mostly have a mandate and must invest the money.
I think Paul Graham's point's are interesting, but they are based on a world that he lives in, the world of tech startups and VCs, which is not the same as the wider business world.
I think a more interesting discussion would be one concerning what impact the opinions on the markets is having on startup investing. I wonder if people's current distrust of the general stock market & fear of volatality may encourage investors to do more deals with companies that aren't publicly traded because the value of the company is isolated from the whims of the market etc. This would push people from the traditional markets into less liquid markets such as equity deals with pre-ipo companies.
Distrust of the stock market is mostly a retail investor phenomenon. If you look across the board at the increase in prices of just about everything in the past five years, especially yield-generating instruments (dividend stocks, REITs, MLPs, preferred shares, high-yield debt, etc.), I think it's hard to argue that investors have shunned public markets. Assets simply can't increase that much in value if there are no net buyers.
Granted, the low interest rate environment has essentially forced some of these investments and the money fueling them is cheaper than ever, but I don't see any evidence that there's a large contingent of professional investors fearful of public markets who are plowing their cash into illiquid startup stock instead.
If anything, the growth of markets like Second Market suggests that investors are increasingly eager to buy shares of private companies likely to go public in the not too distant future. Recall that there were investors snapping up Facebook shares before the IPO (the latest to the party hoping for a double-digit IPO pop lost a lot of money) and somewhat amazingly, there were even funds dedicated entirely to accumulating pre-IPO shares.
Even if you're not banking on an IPO as a startup investor, the other liquidity event you're looking for (acquisition) typically comes at the hands of a publicly-traded company, particularly if it's big, so you have stock market exposure there too. It's usually a lot easier for a public company to make a big acquisition when its stock is flying high.
> One thing we can say for sure is that there will be a lot more startups. The monolithic, hierarchical companies of the mid 20th century are being replaced by networks of smaller companies. This process is not just something happening now in Silicon Valley. It started decades ago, and it's happening as far afield as the car industry. It has a long way to run.
I think this is predicted in part by Coase's theory of the firm.
As the transactional cost of coordinating between firms falls, the size of a firm necessary to sustain complex projects and processes shrinks.
For example, it used to be that getting computing done meant leasing mainframe time. IBM wouldn't deal with small-fry, just too much work for too little return. So to get started, you needed mondo capital.
Later, provisioning a server meant some faxes, phonecalls and maybe some emails; followed by sending some staff to a data centre to meet a shipment from the manufacturer and install it. This meant that you needed several actual people in the company to do this. Usually the founders and a few other people, on a weekend.
These days? I type a command. My computer talks to a remote computer and they set up any amount of computing that I need.
Now I need to jump in here and point out that it's not simply sticker cost. It's the full transactional cost -- cost of search, cost of integration, cost of coordination etc etc -- that is falling on many fundamental inputs to software development.
The other thing that predicts the fall in firm size is the increasing productivity of developers. One of the principal ways to improve the productivity of labour is to use capital, and the past decade has seen an accumulation of capital that is stunning in its breadth and scope.
For example, a decade ago, Rails didn't exist outside of 37signals. Neither did the vast ecosystem of tools that has grown up around it. Collectively these represent amazing amounts of capital that any individual can access and apply.
Im sure PG is right on this for the most part, but some days I am un-optimistic about this. It seems like the big tech companies will cannibalize (buy out/take the talent off the market) or move into the same space as a startup that has validated the market for them.
Google is the best example here. They are across so many markets (payments, local, social, mobile, video, cloud storage, big data, cloud computing, ad's, etc, etc).
Sure Google are cutting services left and right atm (rss, google+ games) but then they just spread the empire further by moving into more new territory they really don't have any business in (eg Google Keep, competing with Evernote).
People talk about Google, Amazon, Apple and Facebook all having more or less all the same competing products and services. Ie, all in social, mobile, etc.
I bet there is not one start-up starting today who is not the least bit worried about being crushed by one of the above tech giants should they want to move into the same space.
I mean, I do truly hope we are not moving towards the William Gibson Dystopian "Megacorp" - http://en.wikipedia.org/wiki/Megacorporation but some days it seems that's what we could be heading towards if we didn't have any anti-trust laws in place.
Sure, the big corps, are going to become more agile, module and Startup-like. But they are still ultra powerful and not everyone wants to build a accusation target.
(yes I am aware there is still probably thousands of niches/areas where you can be competitive)
"If there were a reputable investor who invested $100k on good terms and promised to decide yes or no within 24 hours, they'd get access to almost all the best deals, because every good startup would approach them first. It would be up to them to pick, because every bad startup would approach them first too, but at least they'd see everything."
Sounds like a classic intermediation problem.
The classic intermediation solution is a market maker who defaults to funding any start-up that meets pre-posted requirements. The intention would be to off-load the illiquid stake as soon as possible. The thesis is that liquidity conditions are restraining venture capital flows more than any shortage of risk capital. The plan may still achieve escape velocity if net transaction efficiencies outweigh the information asymmetry costs, i.e. the "6 weeks" liberated from fund-raising enhances valuations fast enough to make up for the duds accepted in the name of speediness. ROFRs and other anti-transfer mechanisms diminish the appeal of this idea.
If investors don't do the option pool shuffle, don't have mandatory minimum amounts to invest, don't waste everyone's time, and don't dick around for control provisions (board seats, etc.), I wonder if that ceases to be a "Series A" and is just followup very large seed rounds. i.e. does calling it a "Series A" when in fact it has terms closer to seed make it more or less likely to happen?
Doing two seed rounds (maybe one for $1-2mm, and a later one for $5-10mm) seems like an easier way for this to "just happen without conscious thought" than redefining A rounds themselves.
I've certainly heard of people raising <$500k early on genuine seed terms, and then $5mm+ on "seed rounds" which are essentially Series A minus control. Then you end up with crazy $100mm Series A rounds happening later.
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[ 0.18 ms ] story [ 225 ms ] threadAlso, http://www.paulgraham.com/disagree.html
It's not enough to say something is bullshit. Why is it? What part? How do you know?
You can now start a company with a few hundred dollars. All that's left is food and rent. This is the first time in history when this has been possible.
We have a large house in SF and rent our extra rooms on Airbnb. This covers rent + food. We have yet to take any external funding.
That's overstating it a bit. Plenty of '80s software companies were bootstrapped for the cost of food+rent+computer, with shareware demos distributed via BBS.
You don't need to have an idea, or even investment to start a company now a days.
Maybe your definition of company is much larger, but there are people who has successfully launched a SaaS company with a) no idea of what they were building and b) no money to build it themselves initially and c) no development skills to build it themselves.
I am not affiliated at all, nor am i member of this group/company but I suggest you go check out http://thefoundation.com -- get the free case study about Sam.
It's loaded with great information.. But the TLDR is simple: Dane Maxwell has a "system" he teaches entrepreneurs. It's a way to source a market for an idea, then actually find paying customers who are willing to wait for the product, then you turn around and use that capital as inital investment for developers. it's a system that has been replicated, and it's quite inspiring.
There are also people like Amy Hoy http://unicornfree.com who actually hits many of the same types of "philosophies" when it comes to building a SaaS company.
"There are too many bad companies out there" -- then don't give them your money.
HackerNews community really looks down upon things like petty insults (and I believe you just called the founder of Y Combinator [creator of this site] dumb).
Oh lord yes.
Having been through the fundraising process a few times, it's hard to describe the sheer relief when you find an investor willing to give a quick yes or no. The best I can describe it is like the feeling of getting a Christmas present you really, really wanted but didn't think to ask for.
SV Angel and a16z are two of the best I've ever interacted with in this regard. It's clear both firms deeply respect entrepreneurs' time.
So, let me throw this idea out there: Be the kind of company that can pitch a VC and if they don't have a YES/NO answer to you within a week, pass on the VC.
I think there's a power imbalance because founders want money more than VCs need to invest. I think the economics are such that founders should have a lot more power.
When founders start demanding quick decisions (or more specifically, requiring them) ... the decision making process will become quicker.
For that reason, whenever my friends give me a pitch deck and are looking for recommendations, I'll usually pass them along to Kevin from SVA, who is not only an awesome person but has always acted quickly. When I think of the slow investors, I never recommend them to friends.
Decisiveness may be the new proxy for judging how good investors are (aside from their portfolio, which currently acts as the main signal).
Thanks!
I'm not necessarily disagreeing, I just wonder why he thinks so. That there will be more startups in general seems obvious, but "good" startups seem to be increasingly more elusive, at least to me.
The number of good startups will grow with the number of overall startups.
So often it could be the case that the competition to dominate a particular market will just be more intense.
Of course in some spaces the quality of product/ service from more startups might alter the capital distribution of customers to create a much larger pie.
Also, I rather enjoyed reading:
As I always thought the big, required option pool that so heavily diluted founders/early employees was a bit out there. Seems much more sane to practice JIT dilution.As an outsider, it was surprising to me that seed investors don't have access to a company's revenue numbers. I would think there would be some kind of quarterly report that goes to all investors.
What economic evidence is there to support this claim about the causes of economic inequality?
There's nothing incorrect in his statement, although it does give an idea of the bubble of the world he lives in. Income inequality clearly all is at the level of VCs and founders in his world - even the upper middle class programming minions don't come into consideration. Income inequality connections clearly do not come to mind in the case of, say, the US army marching into Los Angeles in 1992 to restore order among the poor and working poor there. It's a kind of solipsism you can read about in the unofficial minutes of the councils of the Czar's ministers in 1916. The earthquake in class relations coming is not in minor percentage differences between enormously wealthy VC limited partners and upper middle class founders. It's what happens when the world economy comes to a stop like it did in the late 1920s. We got a small preview of it in 2007 and 2008. In the years and decades ahead, financial shenanigans on Wall Street will eventually lead to an economy that will not start up again, no matter how much priming. THEN is when we will start seeing real shifts in the relations of production.
And I observe this perspective has spread out among the startup community. It always surprises me that people who are so intelligent in many ways can be so narrow in their social and economic context.
Found this survey article: http://www.nber.org/papers/w13982
Their findings are that labor's share of overall income hasn't declined, but that wages/salaries have gotten much more unequal within the sector of employment-based income. Some of the factors they point to are: a greater polarization along skill lines; a decline in high-wage, skilled blue-collar labor; and a rise in the pay and number of high-end salaried jobs such as investment banking and C-level officers.
It's a bit long, but worth at least a skim.
Boy, is this a load of bollocks. I guess the 20th century war against socialism ("the means of production in the hands of those who work it") and worker's organizations and parties doesn't come much into play into these analyses. Up to the bickering a few months ago in Wisconsin with Walker - although we're so far down the road, that example isn't very useful as a specific case.
Yes, the entrepreneurial middle manager starting his own business, this is the source of income inequality! Meanwhile, half the Forbes 400 inherited their way onto the list. Where's the plucky entrepreneur in that equation? Even "self-made" people like Warren Buffett had a congressman father and a grandfather with a chain of stores. Not exactly a guy pulling himself up by his bootstraps.
I mean, the fact that this speech was made to investors is a signal. Not the tone, but the fact that it's investors who are the ones who sit and hear these things. The programmer in the trenches, working 50-60 hours a week creating wealth is not a part of these decisions on production.
There's a good documentary called "Born Rich" that is on Youtube right now. I would recommend people watch it. This is who the money goes to, not the plucky, hard-working entrepreneur. Blogs are filled with stories of angels and VCs backstabbing founders. As is HN. And the founders usually get the best deal in the company, far better than schlub programmers. Even hackers of the caliber of Jamie Zawinski have attested to this.
This idea of income inequality happening because some hard-working founder gets all of the money is a complete farce. Propaganda even.
If we want to really get into a discussion of this - just who are the "limited partners" the VCs are raising money from, and where did they get their money? We always see a fresh-faced Mark Zuckerberg or Drew Houston, or a Paul Graham or even a Ron Conway, or John Doerr or Michael Moritz. But who are the limited partners they're raising money from? Who is calling the shots on how money gets spent?
Why does it take some VCs so long to make a decision? Ron Conway makes a decision to fund a founder within 10min of meeting them.
I actually have a theory that the software running paulgraham.com is a sort of stripped down version of the original Viaweb content management system. You can see in the view-source that there is still "Y! Store" JavaScript running on his pages, and that, for example, the titles of each essay on his site are actually images hosted at yimg.com (e.g. for this essay, http://ep.yimg.com/ca/I/paulgraham_2270_385).
pg has spoken about how one of Viaweb's major features early-on was that it worked around the limitations of browser fonts by auto-generating images (GIFs) with rendered anti-aliased fonts and served those in the browser. Looks like his site continues to do the same thing to this day.
If my theory is true, I really hope pg never redesigns it. It serves as a pretty cool historical reference to the company he founded, that made him wealthy in the sale to Yahoo, and that ultimately allowed him to start YC / HN.
The left-side navbar is also an image map! (remember those?) My guess: Viaweb generated a single image out of the navbar description and markup for an image map. In those days, browsers didn't handle parallel downloading well. A single navigation element with an image map probably loaded faster in browsers than several navigation image buttons.
Yes, image maps are out of vogue and text-as-images is unnecessary with modern browsers. But, if the software running paulgraham.com truly has lineage to Viaweb, then that is so much cooler than any modern redesign could possibly be.
1. Don't grow pessimistic over the growing number of startups because there will be a growing number of great founders. If you focus on finding them, you can make more money than before.
2. To find them, you need a competitive advantage which could be doing what founders want/need: smaller Series A rounds and quick decisions.
He's practically daring the VC community to see who will step up.
Because the cost of building a startup is going down, and assuming the opportunity lies in early stage investments, VCs are going to have to make more early stage investments than they are now.
VC operating expenses are covered by a 2% management fee levied on assets under management. This incentivizes VCs to create megafunds so that they can have proportionally mega salaries.
Seed stage investments come at a totally different operating cost.
Seed-stage investing is pretty hard with a megafund because they are so expensive operationally. VCs would much rather write a 50M check in a growth round for 33% of a company than a 100 $500K checks for 5% of each company. They might have to talk to 20 companies for the growth rounds to make 1 investment, but they'd probably have to talk to thousands to make the 100 investments in seed rounds. That means they need a bigger staff and that 2% model won't work.
In fact, I've heard VCs say that the only reason they write small checks in seed rounds is so that they have a strong relationship with the founders and pro-rata rights if the company happens to blow up.
I suspect that VC salaries will go down like crazy, and they'll be forced to rely on carry for the funds earnings. Which is probably a good direction for VCs to go.
Chris Dixon outlined the problem here too: http://cdixon.org/2009/08/26/the-other-problem-with-venture-...
This is an important observation. 20 years ago, the smartest people went to large companies. Now it's a question of "Join someone else's startup or start my own?" The alternative of career paths at large companies no longer exist. It isn't just social acceptance and lower cost of entry, it's that the alternative is long gone.
Among my own acquaintances it seems to have more to do with people's strengths and lifestyle interests. People who are strong techies but entirely uninterested in business would rather go to Google, or even to somewhere like NASA or Boeing or IBM or Intel. People who are a bit more into entrepreneurship, and/or don't like having a boss, would rather go into starting a business. Depends on the specific technology as well: a lot more web-tech people go the startup route than hardware engineers, and certainly compared to aerospace engineers.
Making money is not that hard (for me, anyway, I think this might be a talent, but I think it's not as rare a talent as it might seem.) I think there are a lot of startups out there who build an Instagram when they could be building a Basecamp.
Further, if you're profitable, the cost of scaling is lower.
The reason for this is that there are three major costs to VCs (and Paul touches on some of them). There's the huge distraction of dealing with them when raising money, but this also becomes and ongoing distraction of keeping them happy, and fielding their calls where they tell you some sector is hot and maybe you should pivot into it. (Much better than the bad old days when they would force bad decisions on you, or at least, I hope that is less common now.) The second major cost is not just the equity (which Paul touches on) but the terrible, terrible, lopsided deal terms. "Standard" terms are basically a ripoff that in no other sector of investing would be acceptable. (I'm talking about liquidation preferences and the manifold other ways of double dipping, stripping founders of their stock, etc.) Yes, they get away with this because they're investing in "to the moon" type businesses run by mostly young guys and this has been the culture. But the consequence of this is that the terms are bad for employees as well. (At least founders have a big chunk of stock, for employees the shrinking of the pool is more dramatic.)
But the biggest cost of a VC is starting the clock. They will put you on a track to "go big" which really means "spend more than you're taking in and keep raising more funds", which further dilutes you. You do this until you die or get aquihired or are able to raise enough rounds to have a really big business.
Everyone seems to go into it thinking they're shooting for the moon and that they'll be the next Instagram. But they won't. (almost certainly. 1/1000? 1/10,000? 1/1,000,000,000?)
I think github is the model we should be striving for. Profitable almost from day one. Reinvest the profits, grow the business. Later if you want to take money, you can get a deal like they got.
And if times are tough and you need to pivot, well, at least you have cash flow to fund it.
I'll never forget the experience of one company I worked for. I was in right after the founders. They had a profitable business doing consulting right in their line of technology, which meant that the consultants were producing code that made the product more valuable. The consultants were paying for the product team all the overhead and the company was slightly profitable.
As part of the deal to get venture capital, they had to shut down the consulting team and "focus". There was no focus being taken away by that team-- they were run by a manager and the rest of the company could ignore them... they just increased the value of the product on other people's dimes.
So the team was shut down, then the VC firm dragged it all out for 6-8 months until the company was almost out of money, and gave us a bridge loan (really choice terms too, choice for the VC that is.)
They put us over a barrel.
It turned out the company was about 3 years too early. They would have been well ahead of the competition when the market hit and things really took off... but by the time the VC had run them into the ground. (Forcing many other terrible decisions on them in the interim.) They could have made it without taking VC money and would have been a $400M business.... (what one of the competitors sold for, even though they were much worse off than we were.)
I think this story is very common.
But you don't see a lot of stories like this on HN and other "startup" hangouts. You see a lot of self aggrand...
I think the "talent pool" really should be the whole world.
There are several startups I know of who hire people completely remotely. One guy lives in thailand, the other in spain, etc.
I'm a developer myself, but if I was an entrepreneur with no coding skills, I'd hire some guys in India to crank out my lo-fi MVP and use that to find a product/market fit and then raise money. I suppose it's not that easy though, is it?
These outsourcing companies will also only do exactly what you have specified. This means the specs have to be very precise, in a way that I think would be difficult to do if you weren't a programmer already
The feedback loop is frequently difficult to get right. Communication barriers don't help (fwiw I grew up in India so have some sort of limited advantage but not by much). The time zone difference does actually slow things down a tad bit more.
You talk about 2 rather different milestones in your comment - building a lo-fi MVP is certainly possible with an offshore team. But lo-fi MVP != product/market fit on any reasonable definition of p/m fit (Sean Ellis' formulation of 40% of users/customers) being disappointed with your disappearance, say). Getting to p/m fit may require lots of rapid experimentation, iteration, brainstorming and so forth...and that's when you can run into trouble with offshore contractors.
(1) are you paying market salaries?
(1a) are you really paying market salaries, or are employees supposed to join your company because you're a special snowflake
(1b) even if you are paying market, why should an employee go to your firm? What is the upside to them for leaving a boss and company that they know? Because it would be really convenient for you, the hirer, is not a good answer.
(2) do you make the interviewing process decent, or do you scatter caltrops in front of potential employees
(2a) good employees do not need to crash study then regurgitate graph algorithms that your company never uses on the whiteboard. They also have jobs and value their vacation time and don't care to spend a week consulting for you
(2b) how long does it take you to respond to resumes that come in? You should be able to say yes/no/maybe within 2 business days. Do your recruiters / interviewers actually read the cover letters / resumes? Last time I changed job a big sf / yc startup let my first interviewer roll into the interview room just shy of 20 minutes late without having read my resume. That's a complete fucking dick move, and it's part of why I turned them down.
(2c) when potential employees send you github links, do you have an engineer actually bloody look at them (almost never in my experience)
(2d) do you actually expend effort to meet potential employees / grow a bunch of warm leads, or do you wait until 3 weeks before you want someone to start then gripe because you can't convert cold leads in 1 week plus a 2 week resignation period for their current employee?
(2e) do you use shit software like that jobvite bullshit that badly ocrs then expects me to hand proof their shitty ocr job? Or do you directly accept pdf resumes.
(2f) for the love of god, I do not have a copy of ms word and wouldn't take one if it were free. I will not put my resume into word format.
(3) do you take some pains to grow employees? Hire people out of university? Take a chance on people?
(3b) Like one of my former employers, do you do a good job hiring new grads from schools besides stanford / berkeley / mit / cmu, but then 18 months in after employees have demonstrated their value refuse to bring them up to market rates and lose them?
(4) when you send out offers, do you actually put out a good offer or do you throw numbers out that are 10% or more under your ceiling then expect employees to negotiate hard with you? I just turned down an sf startup because they did this; the ceo who hired me said, "x0x0: when I was an employee I hated negotiating, so I'm going to make you a great offer. This also means I'm not going to negotiate." And you know what? It was a great offer, and I said yes the next morning. It also avoids starting your new job after a confrontational exercise.
(5) if you have recruiters contacting people, do you have them make clear they're internal not external?
(5b) do your recruiters actually read peoples' linkedin profiles before contacting them? I used rails a bit 3 employers ago and had to remove that word from my profile because I got spammed with rails stuff.
(6) do your job postings on LI/craigslist/message boards tell potential employees why he or she should work for you, or is it simply a long list of desiderata like the vast majority?
(7) like Rand says, do you know off the top of your head the career goals of your employees? What are you doing to help them get there?
(7b) just like the easiest sale is an upsell to a customer you have, the easiest recruit is the good employee you already have that you keep happy and prevent from leaving
(7c) do you give your employees raises to keep them at or above market, or can they get a $20k raise by swapping companies? If that raise is on offer, exactly why should they continu...
If you can find and take a chance on the right student from the "wrong" school, you can get some great employees.
Large companies in particular love butt-in-seat time as a predictor of value. Sure 6 months experience is probably better than 3. But 6 years doesn't buy you much more than 3 years.
The other thing big companies love is prior experience in the industry. I have never understood that tendency. You already have 10 people with 10 years experience... Why is adding more of the same important? Years in industry isn't anywhere on my framework for hiring.
Cheap money on an unprecedented scale has affected just about every asset class, including VC, so to discuss the future of startup investing without even considering the extraordinary monetary policies we've seen implemented since 2008 is interesting to say the least.
In Australia, for example, superannuation funds hold about AU$1.5 trillion under management (not a large number by global standards, but Australia is a country of only 23 million). That amount will continue to rise steadily, and the rate at which it will rise is being pushed up by laws increasing the level of compulsory retirement savings.
In the USA, retirement funds, hedge funds, college endowments and so on and so forth all invest in VCs. A few percent.
How much do Australia's superannuation funds invest in venture?
So far as I am able to determine -- nothing. We have venture funds here, but they're not really venture funds at all. They were seeded with government money; no such fund has an incentive to take true risks.
The other problem with a pure monetary explanation is that it predicts that all other asset classes should have moved in the same direction. One of the reason VCs got so much money is because shares were flat for a long time; the unadorned Austrian interpretation says that shares should've risen too.
Silicon Valley-specific example: Facebook goes public during what many believe is a Fed-supported bull market. Insiders sell stock at close to a $100 billion valuation; it's estimated that more than 1,000 employees get to sell stock worth at least $1 million a few months later. Some of the gains realized by insiders and employees will be funneled back into startup investments as those insiders and employees become limited partners in venture funds or angel investors themselves.
Now consider this dynamic across the entire tech industry. Numerous companies have taken advantage of the IPO window of the past several years, and have been able to go public at rich valuations. Many employees with equity compensation at established publicly traded tech companies have done very well too, and ironically some of the most exorbitant valuations are at large companies lacking earnings.
It would be foolish to believe that none of this has impacted the amount of money being thrown at VC firms, super angel funds and startups through direct angel investment, which in turn impacts valuations, deal terms, etc.
The big question: when the great experiment of the central banks ends, how will this affect the landscape for investments in startups? I have some ideas which may or may not be right, but it's simply not credible to believe that there will be no change. The fact that few investors in Silicon Valley seem to be talking about this, however, suggests that they believe they live in a vacuum completely disconnected from the rest of the economy and global financial system. The last time this happened, it didn't end well.
As for IPOs, I'm not sure that what we saw in the first boom should be used as a baseline for anything. The IPO window has most certainly been open and Facebook's IPO was an historic one.
In any case, I'm not sure I understand the point you're making. Even if you believe that bubbles can be created without extraordinary central bank action, which is true, the injection of trillions of dollars into the financial system in a few short years and what happens when it has to come out should be top of mind for any investor in any asset class, particularly now that it appears we are closer to the end of this phase of the experiment.
Listen to people in just about every corner of the financial markets, from equities to credit, and this is the topic. But it's striking that instead, Silicon Valley startup investors seem more interested in how they can get in on the hottest deals, convince founders they're friendly, etc. That should be of concern to everybody in Silicon Valley, including the entrepreneurs who will likely find themselves in a much different world sooner than they expect.
Stuff like "large capital institutions in the USA are comfortable with venture investing", "shares have underperformed for most of the past 6 years", "it has never been cheaper or easier to launch a web startup" and "there are now billions of people connected to the internet" deserve billing alongside "the money supply is expanding", especially since monetary expansion has such lumpy and unpredictable effects on different asset classes at different times.
Oh, but of course. I mean, it's crazy non linear system and we don't even know all the variables. Any cause in particular will be insufficient to account for the whole.
So, yeah, startups are doing so well because software is eating the world, but amidst all of the narratives most people go with rarely to people seem to consider the role that the economy is having on the industry. Of course it's non the single systemic driver, but it's certainly a catalyst if not a multiplier - and it's rarely discussed.
But the financial system rarely rewards those who choose to be ignorant. Individuals and institutions investing large sums of money in any asset class today who are not thinking about the unprecedented experiment that is taking place and considering how their investments could be affected by changes in policy are more than likely to end up losing money, perhaps far more of it than they ever could have anticipated. And in some cases, far more of it than they actually have.
How sure are you about this?.. ;)
Do we have a way for measuring how much money has been funneled into the funds? What about the whole, firms now stockpiling cash?
However, given the increasingly lower cost of starting a company, I can't see a substantial impact to the sub $100k funding arena with the inevitable end to cheap money. $100k just ain't what it used to be, but the infrastructure ooomph it buys is just going to keep getting more astounding.
When the number of people with $100,000 to throw at twenty-something founders fresh out of college drops and/or interest rates rise to the point where you can eventually get a 5-year FDIC-insured CD yielding as much as investment grade corporate debt in 2012, the impact on the angel market might not be insignificant.
investing in the stock market is a lot less risky than angel investing. especially if you keep it safe with index funds and don't look at individual stocks.
you have close to zero liquidity investing in private companies. you're buying something you can't sell, for years, if ever. with stocks and bonds, I can always get out.
What's the competitive pressure for VCs/funders to invest at higher valuations?
But most angels and VC firms investing larger sums in fewer deals, and competing harder to get into those deals, have much greater risk. The intriguing/disturbing thing is that as far as I can see, those investors seem to be completely ignoring how the injection of trillions of dollars into the financial system has impacted the asset class they're investing in. I can't name any other asset class in which professionals haven't been publicly discussing this topic for some time.
I think Paul Graham's point's are interesting, but they are based on a world that he lives in, the world of tech startups and VCs, which is not the same as the wider business world.
Granted, the low interest rate environment has essentially forced some of these investments and the money fueling them is cheaper than ever, but I don't see any evidence that there's a large contingent of professional investors fearful of public markets who are plowing their cash into illiquid startup stock instead.
If anything, the growth of markets like Second Market suggests that investors are increasingly eager to buy shares of private companies likely to go public in the not too distant future. Recall that there were investors snapping up Facebook shares before the IPO (the latest to the party hoping for a double-digit IPO pop lost a lot of money) and somewhat amazingly, there were even funds dedicated entirely to accumulating pre-IPO shares.
Even if you're not banking on an IPO as a startup investor, the other liquidity event you're looking for (acquisition) typically comes at the hands of a publicly-traded company, particularly if it's big, so you have stock market exposure there too. It's usually a lot easier for a public company to make a big acquisition when its stock is flying high.
I think this is predicted in part by Coase's theory of the firm.
As the transactional cost of coordinating between firms falls, the size of a firm necessary to sustain complex projects and processes shrinks.
For example, it used to be that getting computing done meant leasing mainframe time. IBM wouldn't deal with small-fry, just too much work for too little return. So to get started, you needed mondo capital.
Later, provisioning a server meant some faxes, phonecalls and maybe some emails; followed by sending some staff to a data centre to meet a shipment from the manufacturer and install it. This meant that you needed several actual people in the company to do this. Usually the founders and a few other people, on a weekend.
These days? I type a command. My computer talks to a remote computer and they set up any amount of computing that I need.
Now I need to jump in here and point out that it's not simply sticker cost. It's the full transactional cost -- cost of search, cost of integration, cost of coordination etc etc -- that is falling on many fundamental inputs to software development.
The other thing that predicts the fall in firm size is the increasing productivity of developers. One of the principal ways to improve the productivity of labour is to use capital, and the past decade has seen an accumulation of capital that is stunning in its breadth and scope.
For example, a decade ago, Rails didn't exist outside of 37signals. Neither did the vast ecosystem of tools that has grown up around it. Collectively these represent amazing amounts of capital that any individual can access and apply.
To be pedantic, it has to fall faster than the transactional cost of coordinating within a firm. Your point stands though.
Google is the best example here. They are across so many markets (payments, local, social, mobile, video, cloud storage, big data, cloud computing, ad's, etc, etc).
Sure Google are cutting services left and right atm (rss, google+ games) but then they just spread the empire further by moving into more new territory they really don't have any business in (eg Google Keep, competing with Evernote).
People talk about Google, Amazon, Apple and Facebook all having more or less all the same competing products and services. Ie, all in social, mobile, etc.
I bet there is not one start-up starting today who is not the least bit worried about being crushed by one of the above tech giants should they want to move into the same space.
I mean, I do truly hope we are not moving towards the William Gibson Dystopian "Megacorp" - http://en.wikipedia.org/wiki/Megacorporation but some days it seems that's what we could be heading towards if we didn't have any anti-trust laws in place.
Sure, the big corps, are going to become more agile, module and Startup-like. But they are still ultra powerful and not everyone wants to build a accusation target.
(yes I am aware there is still probably thousands of niches/areas where you can be competitive)
Sounds like a classic intermediation problem.
The classic intermediation solution is a market maker who defaults to funding any start-up that meets pre-posted requirements. The intention would be to off-load the illiquid stake as soon as possible. The thesis is that liquidity conditions are restraining venture capital flows more than any shortage of risk capital. The plan may still achieve escape velocity if net transaction efficiencies outweigh the information asymmetry costs, i.e. the "6 weeks" liberated from fund-raising enhances valuations fast enough to make up for the duds accepted in the name of speediness. ROFRs and other anti-transfer mechanisms diminish the appeal of this idea.
Doing two seed rounds (maybe one for $1-2mm, and a later one for $5-10mm) seems like an easier way for this to "just happen without conscious thought" than redefining A rounds themselves.
I've certainly heard of people raising <$500k early on genuine seed terms, and then $5mm+ on "seed rounds" which are essentially Series A minus control. Then you end up with crazy $100mm Series A rounds happening later.