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Business has traditionally not needed outside funding. Funding has mostly come from revenue or from family. This angel/small scale investment is only neccessary

Business has traditionally not needed outside funding. Funding has mostly come from revenue or from family. This angel/small scale investment is only neccessary because technology is changing so quickly and there are many opportunities at the moment. But this will end soon enough and the market will stabilize. The few new things that startup then will not be worth having a lot of angels for.

pg 16y ago
That's false. Medieval trading voyages, which comprised a large part of economic activity at the time, were frequently paid for with investor money. Since the industrial revolution most new industries have been. More things surely would have before, but there was no way for investors to ensure they weren't cheated by the managers skimming the profits. The reason venture funding worked for trading voyages was that when the ship returned, it was very hard to conceal what was in it. The way railroads ensured that investors got paid was to fund themselves with bonds that paid a fixed rate. Managers were free to do what they wanted with the cash flow, but if they failed to make their bond payments they'd be in default.
- maxklein 16y ago
  Big and risky business has always been paid for by big money. Trading voyages were big business and were limited in the number available. There were not millions of ships setting sail everyday. The risk and cost factor in websites is rapidly reducing. As the risk reduces, so will the need to go to people dedicated towards giving money. It will be easier to raise money locally and in your environment, as has been done for a long time. In human society, it's my observation that there are two types of capital being raised: -- Risky and big money: These is the type of money that gets raised from venture capitalists nowadays and from rich dudes back in the shipping days -- Less risky and smaller money: This type of money is raised from savings, bank loans and borrowed from family. Websites and many of these simple technology things are rapidly moving out of the first category and into the second category. Cost is dropping and risk is dropping. Things like robots or electric cars are now in the first category.
  - garply 16y ago
    Actually, what you're saying seems true according to PG's own "meta-trend" of founders of web startups becoming more powerful. Founders would be most powerful when they only need to raise money from friends and family - as it continues to become cheaper to start such a startup, why shouldn't the angel industry contract just as the VC industry is doing now?
    - pg 16y ago
      There's a lower bound on the cheapness: the living expenses of the founders and the people they hire. Few families could risk that amount of money on something as risky as a startup.
  - byrneseyeview 16y ago
    It doesn't cost much to run a website, but it can still cost a lot to grow a business. Look at all the companies in the local space. Their limiting factor is how many sales reps they can hire; the company that raises $10 million beats the company that raises $1 million. The same holds true for long-tail content generation. If you want to build a better Demand Media, you need to spend like they spend. As transaction costs in general decline, it will make less and less sense to rely on friends and family, the way I don't rely on friends and family to make my shoes, even though shoes are (adjusted for inflation), much cheaper than they have been in the past. Your "Two types of capital" division is arbitrary, both because you're turning a continuum into a binary decision, and because that's just one way to divide things. I could divide capital-raising businesses into those with limited scale and those with unlimited scale. There are more and more businesses with unlimited scale, and the optimal way to run such a business is to maximize risk, and to use someone else's capital to place bigger bets.
  - pg 16y ago
    The volume of shipping varied at different times, but it was always a huge component of European economies. There were points in the preindustrial period when several percent of English workers were on ships at any given time. The percentage would have been higher in the Netherlands. And investing in shipping was definitely not limited to the high and mighty; ships were rarely owned outright, but were divided into shares, and I've read of shares as small as 1/64 of a ship.
- DaniFong 16y ago
  Is there an unfulfilled opportunity in creating bond-type instruments for investment in startups/businesses that may never get acquired or to the public market? Many founders don't want to exit, or don't intend to (37Signals would be a marquee example), but it is getting easier and easier to make some significant amount of revenue from smaller and smaller niches. It is just less likely, in those small niches, to create a big company, and there are a limited number of acquirers who can acquire successfully.
  - rmah 16y ago
    Perhaps. But the level of risk is so high that the bond would have to pay a very high coupon. But by perhaps bundling startups together the way they do for mortgages it could lower the risk level. We could have SBS's or Startup Backed Securities. Har.
    - DaniFong 16y ago
      This is not a bad idea. It might be a great one. Do you know anything about the logistics of getting something like this legally worked out? Presumably, there are some businesses who'd be okay with that very high coupon -- as the business model improves itself it could come down. It's a lot less risky that credit card and other personal debt, but it handles a niche that equity investments mostly can't touch. That's possibly trillions of dollars in an underserved market.
apu 16y ago
Coming from a family of entrepreneurs (in India), this seems empirically false to me, regardless of whether you count tech startups or regular 'small businesses'. Almost without exception, we've needed significant capital to start a business. Whether this came from a bank, a private investor, or existing family wealth has changed over time, but the need for it has not. I'd actually argue the opposite. Business has traditionally needed outside funding, but the incredible cheapness of software startups is decreasing that need. Finally, you say that investment "is only neccessary because technology is changing so quickly...but this will end soon enough." That definitely seems wrong. Technological change is accelerating.
- maxklein 16y ago
  Business always needs investment. These private investors you got investment from, did they know your family already?

pg 16y ago

That's false. Medieval trading voyages, which comprised a large part of economic activity at the time, were frequently paid for with investor money. Since the industrial revolution most new industries have been. More things surely would have before, but there was no way for investors to ensure they weren't cheated by the managers skimming the profits. The reason venture funding worked for trading voyages was that when the ship returned, it was very hard to conceal what was in it. The way railroads ensured that investors got paid was to fund themselves with bonds that paid a fixed rate. Managers were free to do what they wanted with the cash flow, but if they failed to make their bond payments they'd be in default.

maxklein 16y ago
Big and risky business has always been paid for by big money. Trading voyages were big business and were limited in the number available. There were not millions of ships setting sail everyday. The risk and cost factor in websites is rapidly reducing. As the risk reduces, so will the need to go to people dedicated towards giving money. It will be easier to raise money locally and in your environment, as has been done for a long time. In human society, it's my observation that there are two types of capital being raised: -- Risky and big money: These is the type of money that gets raised from venture capitalists nowadays and from rich dudes back in the shipping days -- Less risky and smaller money: This type of money is raised from savings, bank loans and borrowed from family. Websites and many of these simple technology things are rapidly moving out of the first category and into the second category. Cost is dropping and risk is dropping. Things like robots or electric cars are now in the first category.
- garply 16y ago
  Actually, what you're saying seems true according to PG's own "meta-trend" of founders of web startups becoming more powerful. Founders would be most powerful when they only need to raise money from friends and family - as it continues to become cheaper to start such a startup, why shouldn't the angel industry contract just as the VC industry is doing now?
  - pg 16y ago
    There's a lower bound on the cheapness: the living expenses of the founders and the people they hire. Few families could risk that amount of money on something as risky as a startup.
- byrneseyeview 16y ago
  It doesn't cost much to run a website, but it can still cost a lot to grow a business. Look at all the companies in the local space. Their limiting factor is how many sales reps they can hire; the company that raises $10 million beats the company that raises $1 million. The same holds true for long-tail content generation. If you want to build a better Demand Media, you need to spend like they spend. As transaction costs in general decline, it will make less and less sense to rely on friends and family, the way I don't rely on friends and family to make my shoes, even though shoes are (adjusted for inflation), much cheaper than they have been in the past. Your "Two types of capital" division is arbitrary, both because you're turning a continuum into a binary decision, and because that's just one way to divide things. I could divide capital-raising businesses into those with limited scale and those with unlimited scale. There are more and more businesses with unlimited scale, and the optimal way to run such a business is to maximize risk, and to use someone else's capital to place bigger bets.
- pg 16y ago
  The volume of shipping varied at different times, but it was always a huge component of European economies. There were points in the preindustrial period when several percent of English workers were on ships at any given time. The percentage would have been higher in the Netherlands. And investing in shipping was definitely not limited to the high and mighty; ships were rarely owned outright, but were divided into shares, and I've read of shares as small as 1/64 of a ship.
DaniFong 16y ago
Is there an unfulfilled opportunity in creating bond-type instruments for investment in startups/businesses that may never get acquired or to the public market? Many founders don't want to exit, or don't intend to (37Signals would be a marquee example), but it is getting easier and easier to make some significant amount of revenue from smaller and smaller niches. It is just less likely, in those small niches, to create a big company, and there are a limited number of acquirers who can acquire successfully.
- rmah 16y ago
  Perhaps. But the level of risk is so high that the bond would have to pay a very high coupon. But by perhaps bundling startups together the way they do for mortgages it could lower the risk level. We could have SBS's or Startup Backed Securities. Har.
  - DaniFong 16y ago
    This is not a bad idea. It might be a great one. Do you know anything about the logistics of getting something like this legally worked out? Presumably, there are some businesses who'd be okay with that very high coupon -- as the business model improves itself it could come down. It's a lot less risky that credit card and other personal debt, but it handles a niche that equity investments mostly can't touch. That's possibly trillions of dollars in an underserved market.

apu 16y ago

Coming from a family of entrepreneurs (in India), this seems empirically false to me, regardless of whether you count tech startups or regular 'small businesses'. Almost without exception, we've needed significant capital to start a business. Whether this came from a bank, a private investor, or existing family wealth has changed over time, but the need for it has not. I'd actually argue the opposite. Business has traditionally needed outside funding, but the incredible cheapness of software startups is decreasing that need. Finally, you say that investment "is only neccessary because technology is changing so quickly...but this will end soon enough." That definitely seems wrong. Technological change is accelerating.

maxklein 16y ago
Business always needs investment. These private investors you got investment from, did they know your family already?