32 ms·

I think the reason so many VCs think the VC business needs to shrink is not that there' some limit on the number of startups, but because of a historical accide

by pg 17y ago

I think the reason so many VCs think the VC business needs to shrink is not that there' some limit on the number of startups, but because of a historical accident that caused the VC business to bloat suddenly. The bubble of the late 90s caused a great increase in the number of VC firms, and many of the new arrivals were incompetent. When VCs say the VC business is going to shrink, it's largely a tactful way of saying that those firms are going to get GCed.

apsec112 17y ago
Actually, I pretty strongly think that there is a limit on the number of startups, if by "startup" you mean "small company in which people create wealth largely through computer programming". According to the BLS, there are 1.3 million "software engineers" and programmers in the United States (cite: http://www.bls.gov/oco/ocos303.htm http://www.bls.gov/oco/ocos303.htm). This number will go up over the next fifty years, but not by that much; projected growth is 2% annually. One could see this number increasing more rapidly if programmers are in so much demand that their salaries (either in the form of cash or startup equity) go up very fast, but we don't see that happening; programmers nowadays don't get paid that much more, in either dollars or equity, than programmers five or ten years ago. Now, how many of these programmers have the skills needed to start a successful company? Let's be optimistic and say 10%, which is probably above your estimate ("The top 5% of programmers probably write 99% of the good software", cite: http://www.paulgraham.com/wealth.html http://www.paulgraham.com/wealth.html). Now, out of those, how many have the personality and determination needed to start a successful company? In the overall population this number is probably less than 5%, but the traits needed to become a good programmer (high energy, determination, ability to think well) probably correlate significantly with the traits needed to start a successful company, so I'll be optimistic again and say 25%. Now, what's the viable window for programmers to start companies? At a guess, I'd say probably around age 22-37, so 15 years. I'm going to be optimistic again and assume that all working programmers are within this age range. Now, how many founder-class programmers do you need to start a successful company? This number could probably range from one to five, but I'm going to be optimistic again and say one. So, dividing it out, the number of successful startups every year is bounded above by 1,300,000 * 0.1 * 0.25 / 15 = ~2,200, and this is almost certainly an overestimate.
- FreeRadical 17y ago
  You've excluded successful startups founded by non programmers.
  - apsec112 17y ago
    I explicitly defined "startup" to mean companies that need programming skill (as this seems to be the way the word is used nowadays), and there are very few of those that have zero programmers as founders.
- huherto 17y ago
  I followed your calculations, but I am not sure what point are you trying to make. Are you saying that the upper limit of start ups is 2200 and it is limited by the number of highly capable programmers. What about the Market? Is there enough space in the market for 2200 new start ups?
  - apsec112 17y ago
    My point is, even though there are an infinite number of applications to write, there aren't an infinite number of people to write them.
  - pg 17y ago
    That's equivalent to asking, are people's desires limited? The answer appears to be no, in the short term.
    - usaar333 17y ago
      It is more asking: A) Do people have the time/money to use X products? and B) Are there X people who want to use a given product (at a given price/time point)? I have no doubt that there is a limit on the number of successful startups due to A and B.
- pg 17y ago
  The number of programmers is pretty elastic. People can and will learn to program if it starts to seem like that's a valuable skill. E.g. there is a founder in this current YC cycle who came to the US to go to business school, but then realized that if he wanted to start a startup he'd be better off spending the time learning to hack instead. I'd say the upper bound on the number of startups is the number of people who are determined and smart enough. That's probably between 1 in 100 and 1 in 1000.
btilly 17y ago
You are right. However the airline industry is a demonstration that persistent oversupply can sometimes exist indefinitely. Though admittedly that example is being propped up by the Chapter 11 bankruptcy laws that repeatedly lets companies on the verge of dying get rescued instead. (I'd love to see chapter 11 bankruptcy go away.)
- coliveira 17y ago
  If chapter 11 bankruptcy goes away it will be bad only for employees. Because investors are already wiped out by bankruptcy and upper management can always negotiate sweet deals for when/if it happens.
  - btilly 17y ago
    I'm guessing that you're not very familiar with the history of the airline industry. The problem is that there are too many competitors, someone fails, go into chapter 11, with the competitive advantages they get from chapter 11 they become healthy, there remain too many competitors and another one fails. At this point most of the major airlines have been in and out of chapter 11 multiple times, and the airline industry still has structural problems of too many airlines. But with every round life has gotten worse for the employees. To such an extent that pilot has gone from a good job to a piece of crap job that people only stay in because they have already sunk the cost of their training and love to fly. If chapter 11 wasn't there then this cycle would never have caught on. But the artificial boost for companies that are ready to go away is artificially distorting the market to everyone's disadvantage. And it has stayed distorted for a period of decades.
marshallp 17y ago
I disagree, I think it's simply that the VC's are incompetent. They don't use data to make their judgements, relying instead on gut feelings. They don't have a systematic procedure/checklist to make decisions, or even a systematic way for entrepreneurs to to see them. They don't even like to hire analysts as is common in the rest of banking. It's simply not a 'prefessional' industry yet. It's not the fault of individuals in the vc (they have to run fast just to keep up), just the industry hasn't had enough academics/software telling them to how to more reliably run their business.

by pg 17y ago

apsec112 17y ago

Actually, I pretty strongly think that there is a limit on the number of startups, if by "startup" you mean "small company in which people create wealth largely through computer programming". According to the BLS, there are 1.3 million "software engineers" and programmers in the United States (cite: http://www.bls.gov/oco/ocos303.htm http://www.bls.gov/oco/ocos303.htm). This number will go up over the next fifty years, but not by that much; projected growth is 2% annually. One could see this number increasing more rapidly if programmers are in so much demand that their salaries (either in the form of cash or startup equity) go up very fast, but we don't see that happening; programmers nowadays don't get paid that much more, in either dollars or equity, than programmers five or ten years ago. Now, how many of these programmers have the skills needed to start a successful company? Let's be optimistic and say 10%, which is probably above your estimate ("The top 5% of programmers probably write 99% of the good software", cite: http://www.paulgraham.com/wealth.html http://www.paulgraham.com/wealth.html). Now, out of those, how many have the personality and determination needed to start a successful company? In the overall population this number is probably less than 5%, but the traits needed to become a good programmer (high energy, determination, ability to think well) probably correlate significantly with the traits needed to start a successful company, so I'll be optimistic again and say 25%. Now, what's the viable window for programmers to start companies? At a guess, I'd say probably around age 22-37, so 15 years. I'm going to be optimistic again and assume that all working programmers are within this age range. Now, how many founder-class programmers do you need to start a successful company? This number could probably range from one to five, but I'm going to be optimistic again and say one. So, dividing it out, the number of successful startups every year is bounded above by 1,300,000 * 0.1 * 0.25 / 15 = ~2,200, and this is almost certainly an overestimate.

FreeRadical 17y ago
You've excluded successful startups founded by non programmers.
- apsec112 17y ago
  I explicitly defined "startup" to mean companies that need programming skill (as this seems to be the way the word is used nowadays), and there are very few of those that have zero programmers as founders.
huherto 17y ago
I followed your calculations, but I am not sure what point are you trying to make. Are you saying that the upper limit of start ups is 2200 and it is limited by the number of highly capable programmers. What about the Market? Is there enough space in the market for 2200 new start ups?
- apsec112 17y ago
  My point is, even though there are an infinite number of applications to write, there aren't an infinite number of people to write them.
- pg 17y ago
  That's equivalent to asking, are people's desires limited? The answer appears to be no, in the short term.
  - usaar333 17y ago
    It is more asking: A) Do people have the time/money to use X products? and B) Are there X people who want to use a given product (at a given price/time point)? I have no doubt that there is a limit on the number of successful startups due to A and B.
pg 17y ago
The number of programmers is pretty elastic. People can and will learn to program if it starts to seem like that's a valuable skill. E.g. there is a founder in this current YC cycle who came to the US to go to business school, but then realized that if he wanted to start a startup he'd be better off spending the time learning to hack instead. I'd say the upper bound on the number of startups is the number of people who are determined and smart enough. That's probably between 1 in 100 and 1 in 1000.

btilly 17y ago

You are right. However the airline industry is a demonstration that persistent oversupply can sometimes exist indefinitely. Though admittedly that example is being propped up by the Chapter 11 bankruptcy laws that repeatedly lets companies on the verge of dying get rescued instead. (I'd love to see chapter 11 bankruptcy go away.)

coliveira 17y ago
If chapter 11 bankruptcy goes away it will be bad only for employees. Because investors are already wiped out by bankruptcy and upper management can always negotiate sweet deals for when/if it happens.
- btilly 17y ago
  I'm guessing that you're not very familiar with the history of the airline industry. The problem is that there are too many competitors, someone fails, go into chapter 11, with the competitive advantages they get from chapter 11 they become healthy, there remain too many competitors and another one fails. At this point most of the major airlines have been in and out of chapter 11 multiple times, and the airline industry still has structural problems of too many airlines. But with every round life has gotten worse for the employees. To such an extent that pilot has gone from a good job to a piece of crap job that people only stay in because they have already sunk the cost of their training and love to fly. If chapter 11 wasn't there then this cycle would never have caught on. But the artificial boost for companies that are ready to go away is artificially distorting the market to everyone's disadvantage. And it has stayed distorted for a period of decades.

marshallp 17y ago

I disagree, I think it's simply that the VC's are incompetent. They don't use data to make their judgements, relying instead on gut feelings. They don't have a systematic procedure/checklist to make decisions, or even a systematic way for entrepreneurs to to see them. They don't even like to hire analysts as is common in the rest of banking. It's simply not a 'prefessional' industry yet. It's not the fault of individuals in the vc (they have to run fast just to keep up), just the industry hasn't had enough academics/software telling them to how to more reliably run their business.