7 ms·

Venture capital is a hell of a drug

112 points by tedmiston 10y ago

tedmiston 10y ago
The author talks about why founders should be more critical about taking venture capital, and how it polarizes the possible outcomes of the company. I think Eric put together a strong piece that missed commentary from being published on Friday.
- replicatorblog 10y ago
  Totally agree—this is a well considered post that provides a counterbalance to the conventional wisdom.
  - tomc1985 10y ago
    Even more surprising... it's posted at TechCrunch
    - replicatorblog 10y ago
      People crap on the "Crunch Network" quite a bit, but there are some real gems in there. Take "The Stack Fallacy," a solid post that might have gotten 20 hearts on Medium, but TC helped elevate the idea to the point that the WSJ picked up on it. Granted, there's some dross in there, but like it or not, it's tech's paper of record. https://techcrunch.com/2016/01/18/why-big-companies-keep-failing-the-stack-fallacy/ https://techcrunch.com/2016/01/18/why-big-companies-keep-fai...
      - tedmiston 10y ago
        > In a surprising way, it is far easier to innovate down the stack than up the stack. That was quite unintuitive to me on the surface, but the examples provided really drove it home.
      - tomc1985 10y ago
        I had gotten so used to reading puff pieces on TC that I had written them off in the same light as Wired and Ars Technica
deleted 10y ago
[deleted]
AndrewKemendo 10y ago
This all makes sense, if your only goal as a founder is to get rich. I can only speak for myself, but to me, getting individually rich is not the goal. Having a quick exit isn't the goal. The goal is to make a huge company that shifts the way people behave in a way that I think will make them better off and "build a world I want to live in." The reality is, for big moonshot things (AI, Nano, Genetics, AR), you can't bootstrap them with revenues - you need a shitload of high risk money to build, grow & scale. That's what Venture money is for. If you get venture money, make some waves and flame out or acquihire before the unicorn exit and see it as a loss, then I don't really know what you were working for. Think about it like a PhD on steroids - if you do it right, no matter the long term outcome you are making a dent in the market.
- tedmiston 10y ago
  Yeah, but once you start quantifying making a huge company — what is "huge": 10M, 50M, 100M, 1B? I think this number varies a lot by founder. I think you're totally on point about that what venture money was created for decades ago... but, is that how it is being deployed today? Particularly, I'm thinking of Vinod Khosla's thoughts when he criticized VCs for acting like investors in a company like Dollar Shave Club [0]. [0]: http://www.latimes.com/business/la-fi-tn-vc-funding-20160409-story.html http://www.latimes.com/business/la-fi-tn-vc-funding-20160409...
  - AndrewKemendo 10y ago
    I don't think there is any one box that fits "huge." The way I answer it is if you can say yes to the question "Has this new product/service overwhelmingly changed how people do X?" Still pretty variable.
- replicatorblog 10y ago
  The point of the post isn't to bootstrap, it's to use capital efficiently. You can build products that put a dent in the universe for relatively small sums—Oculus ($93.55), Nest ($80M), WhatsApp ($60.25M), Instagram ($50.5M), Twitch ($35M), Cruise ($18.8M) are all lightly funded relative to the value they bring to market—both financially and aspirationally.
DavidSJ 10y ago
Viewed probabilistically, the most likely positive exit for a startup is an acquisition for less than $50 million. This outcome has little benefit to VCs, and they will happily trade it for an improbable shot at a higher outcome. Am I misunderstanding something, or is the author asserting that VCs regularly make the sunk cost fallacy?
- replicatorblog 10y ago
  Not so much sunk cost as raised stakes. VCs don't regularly pour money into companies that are struggling, but they will richly fund startups that have shown early spark of success for the slim chance that they can make it massive.
  - CalChris 10y ago
    Agreed. The article says from a founder's POV that every dollar you spend is a dollar of dilution. From a VC's POV, every dollar they invest is percentage. If a company is doing well, they want to increase that percentage whether the company needs the money or not.
- tedmiston 10y ago
  I think he's referring to the distribution of VC-backed companies: since most will fail, the ones that win have to win really big. If all of the winners in a fund get acquired too early (small wins instead of big wins) it could mean the fund is not actually successful because it's not enough to outweigh the losses.
  - msencenb 10y ago
    This is accurate. Returns of VC portfolios follow a power law distribution. One or two companies generally return the entire value of the fund, and these tiny acquisitions are considered 'gravy'.
- majani 10y ago
  I don't know whether it falls into sunken cost fallacy, but yes, VCs will go to great lengths to tank deals that don't fall within their expectation of return. What's worse they usually succeed in either spoiling the deal, or getting a larger percentage that what was initially agreed since they have all the leverage in acquisition talks vs the founder.
lsc 10y ago
My own experience is that the big risk that I did not account for, as a founder without venture backing, is that you become ramen profitable and just sit there for a decade. This is hugely destructive for the founder in question. If you don't have vc baking and you don't sell to a big name? Looking for a job after running a business with a gross of a few hundred thousand a year is just not the same as looking for a job after working for one of the big valley companies. I mean I exaggerate and say that employers treat me like I was unemployed, and it is not that bad, but compared to working for large companies with reputations for hiring good people, running an unfunded, ramen profitable company looks pretty bad on your resume. I would argue that vc mitigates a lot of these risks. First, you have a name, a reputation to put on your reputation. Second, the bit about get big or get dead? In many cases, that is as good for the founder as for the vc. You are way less likely to end up starting your career over when the thing fails, both because of the reputation factor and because either you got big (which is good for the career even if the company gets dead before you can cash out) or you got dead fairly quickly, and have less time to explain away.
- jbooth 10y ago
  That's just tech companies being stupid, insular and cargo-culty with who they hire. Someone with business experience, who can prioritize effectively with an eye to the big picture, is way more valuable than someone who figured out the n log n solution to the stupid whiteboard question in 20 minutes. We're not working 20 minute days, here.
  - lsc 10y ago
    The first business lesson? Things are are worth what people will pay for them. And really, the business skills you need to run a small business that doesn't really do sales do not have a lot of overlap with the business skills that large companies want or need in their technical workforce.
    - jbooth 10y ago
      Well, I haven't run a small business, but I've been astounded by the number of very sharp engineers I've run into over the years who are completely myopic about the business impact of their activity. From not having internalized basic microecon fundamentals to being willfully ignorant as long as they get to work on their pet technology. Small business owners, presumably, have both of those lessons pretty well internalized, in addition to a certain "just get it frickin done" attitude towards things that need to be done. The super-advanced algo-writing skills that we in the industry screen for, conversely, come up as a real-world requirement far less commonly, and you can poll the whole office for opinions when they do, because everyone's excited to see an actual nifty problem.

112 points by tedmiston 10y ago

The author talks about why founders should be more critical about taking venture capital, and how it polarizes the possible outcomes of the company. I think Eric put together a strong piece that missed commentary from being published on Friday.

replicatorblog 10y ago
Totally agree—this is a well considered post that provides a counterbalance to the conventional wisdom.
- tomc1985 10y ago
  Even more surprising... it's posted at TechCrunch
  - replicatorblog 10y ago
    People crap on the "Crunch Network" quite a bit, but there are some real gems in there. Take "The Stack Fallacy," a solid post that might have gotten 20 hearts on Medium, but TC helped elevate the idea to the point that the WSJ picked up on it. Granted, there's some dross in there, but like it or not, it's tech's paper of record. https://techcrunch.com/2016/01/18/why-big-companies-keep-failing-the-stack-fallacy/ https://techcrunch.com/2016/01/18/why-big-companies-keep-fai...
    - tedmiston 10y ago
      > In a surprising way, it is far easier to innovate down the stack than up the stack. That was quite unintuitive to me on the surface, but the examples provided really drove it home.
    - tomc1985 10y ago
      I had gotten so used to reading puff pieces on TC that I had written them off in the same light as Wired and Ars Technica

deleted 10y ago

[deleted]

AndrewKemendo 10y ago

This all makes sense, if your only goal as a founder is to get rich. I can only speak for myself, but to me, getting individually rich is not the goal. Having a quick exit isn't the goal. The goal is to make a huge company that shifts the way people behave in a way that I think will make them better off and "build a world I want to live in." The reality is, for big moonshot things (AI, Nano, Genetics, AR), you can't bootstrap them with revenues - you need a shitload of high risk money to build, grow & scale. That's what Venture money is for. If you get venture money, make some waves and flame out or acquihire before the unicorn exit and see it as a loss, then I don't really know what you were working for. Think about it like a PhD on steroids - if you do it right, no matter the long term outcome you are making a dent in the market.

tedmiston 10y ago
Yeah, but once you start quantifying making a huge company — what is "huge": 10M, 50M, 100M, 1B? I think this number varies a lot by founder. I think you're totally on point about that what venture money was created for decades ago... but, is that how it is being deployed today? Particularly, I'm thinking of Vinod Khosla's thoughts when he criticized VCs for acting like investors in a company like Dollar Shave Club [0]. [0]: http://www.latimes.com/business/la-fi-tn-vc-funding-20160409-story.html http://www.latimes.com/business/la-fi-tn-vc-funding-20160409...
- AndrewKemendo 10y ago
  I don't think there is any one box that fits "huge." The way I answer it is if you can say yes to the question "Has this new product/service overwhelmingly changed how people do X?" Still pretty variable.
replicatorblog 10y ago
The point of the post isn't to bootstrap, it's to use capital efficiently. You can build products that put a dent in the universe for relatively small sums—Oculus ($93.55), Nest ($80M), WhatsApp ($60.25M), Instagram ($50.5M), Twitch ($35M), Cruise ($18.8M) are all lightly funded relative to the value they bring to market—both financially and aspirationally.

DavidSJ 10y ago

Viewed probabilistically, the most likely positive exit for a startup is an acquisition for less than $50 million. This outcome has little benefit to VCs, and they will happily trade it for an improbable shot at a higher outcome. Am I misunderstanding something, or is the author asserting that VCs regularly make the sunk cost fallacy?

replicatorblog 10y ago
Not so much sunk cost as raised stakes. VCs don't regularly pour money into companies that are struggling, but they will richly fund startups that have shown early spark of success for the slim chance that they can make it massive.
- CalChris 10y ago
  Agreed. The article says from a founder's POV that every dollar you spend is a dollar of dilution. From a VC's POV, every dollar they invest is percentage. If a company is doing well, they want to increase that percentage whether the company needs the money or not.
tedmiston 10y ago
I think he's referring to the distribution of VC-backed companies: since most will fail, the ones that win have to win really big. If all of the winners in a fund get acquired too early (small wins instead of big wins) it could mean the fund is not actually successful because it's not enough to outweigh the losses.
- msencenb 10y ago
  This is accurate. Returns of VC portfolios follow a power law distribution. One or two companies generally return the entire value of the fund, and these tiny acquisitions are considered 'gravy'.
majani 10y ago
I don't know whether it falls into sunken cost fallacy, but yes, VCs will go to great lengths to tank deals that don't fall within their expectation of return. What's worse they usually succeed in either spoiling the deal, or getting a larger percentage that what was initially agreed since they have all the leverage in acquisition talks vs the founder.

lsc 10y ago

My own experience is that the big risk that I did not account for, as a founder without venture backing, is that you become ramen profitable and just sit there for a decade. This is hugely destructive for the founder in question. If you don't have vc baking and you don't sell to a big name? Looking for a job after running a business with a gross of a few hundred thousand a year is just not the same as looking for a job after working for one of the big valley companies. I mean I exaggerate and say that employers treat me like I was unemployed, and it is not that bad, but compared to working for large companies with reputations for hiring good people, running an unfunded, ramen profitable company looks pretty bad on your resume. I would argue that vc mitigates a lot of these risks. First, you have a name, a reputation to put on your reputation. Second, the bit about get big or get dead? In many cases, that is as good for the founder as for the vc. You are way less likely to end up starting your career over when the thing fails, both because of the reputation factor and because either you got big (which is good for the career even if the company gets dead before you can cash out) or you got dead fairly quickly, and have less time to explain away.

jbooth 10y ago
That's just tech companies being stupid, insular and cargo-culty with who they hire. Someone with business experience, who can prioritize effectively with an eye to the big picture, is way more valuable than someone who figured out the n log n solution to the stupid whiteboard question in 20 minutes. We're not working 20 minute days, here.
- lsc 10y ago
  The first business lesson? Things are are worth what people will pay for them. And really, the business skills you need to run a small business that doesn't really do sales do not have a lot of overlap with the business skills that large companies want or need in their technical workforce.
  - jbooth 10y ago
    Well, I haven't run a small business, but I've been astounded by the number of very sharp engineers I've run into over the years who are completely myopic about the business impact of their activity. From not having internalized basic microecon fundamentals to being willfully ignorant as long as they get to work on their pet technology. Small business owners, presumably, have both of those lessons pretty well internalized, in addition to a certain "just get it frickin done" attitude towards things that need to be done. The super-advanced algo-writing skills that we in the industry screen for, conversely, come up as a real-world requirement far less commonly, and you can poll the whole office for opinions when they do, because everyone's excited to see an actual nifty problem.