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I've had a related discussion with a few VCs in recent months. Some kinds of startups are effectively impossible to build given current structural constraints o

I've had a related discussion with a few VCs in recent months. Some kinds of startups are effectively impossible to build given current structural constraints on financing them, creating an adverse selection for startups that fit the classic model rather than startups with the highest expected ROI. Broadly speaking, engineers will work at a discount to market-clearing wages of maybe 20% if they really like the startup. This is not necessarily an issue if you are well-funded and require ordinary levels of skill from your engineering team, which is most startups. Some types of software startups can't be built without a team of engineers where the market-clearing wages are typically more like $500k-1M. Even at a 20% discount to market, the amount of capital involved just for headcount is far too large for early stage investors, and startups that try to fit within the capital they can raise by getting by with less qualified engineers always fail at technical execution. Consequently, startups that have this property are effectively un-investable because there is not enough capital available in the early stages to achieve technical viability even though they may be great investments in the abstract. This wasn't a serious issue a decade ago, but it is spreading to a larger set of startups as wages rapidly escalate. Given a long-term glut of capital, this could be addressed in principle by designing a model that modifies the distribution of capital/equity over time to accommodate startups that have difficulty financing the initial wage gap. As the startups grow, one would expect the average wages to start reverting toward the mean, but these startups won't get out of the gate without that initial investment in capable and very expensive engineers. I've had interesting and productive discussions around this, it is seen as a way to bring fresh blood into an early stage pipeline that is drying up. It is obvious to almost everyone that the classic model of how you finance and build a startup team is breaking down in the current market environment, with an adverse impact on expected returns.

lpolovets 7y ago
> Some kinds of startups are effectively impossible to build given current structural constraints on financing them I generally agree with this, except I would change "impossible" to "exceptionally hard." You're right that a lot of startups innovating on deep tech need to hire people who would earn $500k+ elsewhere, and that a typical startup can't afford that. However, very exceptional founders can often raise unusually large rounds early on. I.e. some founders can raise a $10m or $20m "seed" round at inception, which allows them to afford to pay $500k salaries. It's the top 1% or 0.1% founders within their fields, but it is possible. (Source: I'm a VC)
Alex3917 7y ago
> Some kinds of startups are effectively impossible to build given current structural constraints on financing them There are a lot of things that are impossible to raise money for, that are possible to bootstrap. If you're willing to work on something for 5 or 6 years without getting paid, there are lots of opportunities that open up that have high barrier to entry because they essentially can't be copied by venture backed companies.
- czbond 7y ago
  If you'd like to share, I'm interested in the types.....
  - jv22222 7y ago
    Imma say, a lot of these ones: https://www.indiehackers.com/products https://www.indiehackers.com/products
  - Alex3917 7y ago
    I would just look at successful bootstrapped startups that didn't have traction for 4+ years after the last pivot. E.g. Global Relay, Mailchimp, Bubble.is, ProfitWell, etc. And I wouldn't count something like Kickstartr, which took seven years to launch but only because the founder was non-technical.
    - aledalgrande 7y ago
      DuckDuckGo
- jandrewrogers 7y ago
  Very few people can afford to bootstrap 5-6 years, that is a privileged position, most viable startups will never be executed if that is the filter. Some startups require many man-years of engineering effort before they can produce an MVP, so after 5-6 years they may have no material traction. Furthermore, startups have a shelf-life beyond which they become borderline un-investable solely by virtue of age. There are always exceptions but I would not want to count on being an exception among exceptions. Some startups may be amenable to slow bootstrap, but the ones that have this very high wage cost tend not to be those types startups. I love these kinds of hardcore tech startups and believe they are extraordinarily valuable, it is the kind of company I would start, but I am also very realistic about the economics of building a team that can execute within those constraints.
ummonk 7y ago
Why not bring on the early engineers as cofounders with sizeable equity in lieu of market-clearing wages?
- CalChris 7y ago
  That’s a title. I’ve never seen an accepted definition of cofounder but mine is anyone pre-money. Someone pre-money is taking a 100% pay cut and often invests their own money.
  - ummonk 7y ago
    Cofounders typically get double digit or at least mid-high single digit grants in equity. Whereas employees typically have 1% or less in equity. If they're this vital to the success of the startup, they should receive equity accordingly.
    - CalChris 7y ago
      Cofounders do get equity but don't get paid until funding. Employees get equity and pay. If it's a startup, the employee will get value = equity + (K * market wage) + benefits where K is less than 1. That value should be competitive with the market and key contributors should get more equity but NOT in the range of cofounder because otherwise something doesn't add up. There is an implicit startup social contract and the OP points out that maybe startups can't outbid the FAANGs for talent now. That may be but I think startups (and the VCs+lawyers who are guiding them) are absolutely pathetic at managing this social contract. You want equity? Fine. Here's some equity in the form of an RSU (fuck you, Bill Gates) which won't qualify for either 83b or QSBS tax protection. Sure, it may crush the employee with AMT taxes. Yeah, the startup gets a minor tax benefit from this but then expects its employees to bleed for them. This is beyond stupid. This is beyond stupid by the founders, the employee (who knows nothing) and the VC+lawyers (aka the institutional memory of the Valley) who do know something. It should be part of the startup social contract and best practices to inform and help manage the employees tax situation. Don't use RSUs. Put a gun their head and make them sign and file the 83b. Etc.
divbzero 7y ago
> Some types of software startups can't be built without a team of engineers where the market-clearing wages are typically more like $500k-1M. What types of software startups have these constraints? And, as suggested in sibling comments, could building a highly technical founding team (e.g. bootstrapping) be a viable alternative to hiring with high wages? There ought to be a sizable subset of highly skilled engineers who have achieved financial independence and would enjoy tackling a challenging problem in a startup.
- swiftcoder 7y ago
  > There ought to be a sizable subset of highly skilled engineers who have achieved financial independence and would enjoy tackling a challenging problem in a startup. The flip side of this equation is that those same engineers can tackle pretty much any challenging problem they choose, while continuing to take home those massive paycheques from a big tech firm. Big tech operates in almost every part of industry simultaneously - want to work on Blockchain? AI? VR? Shipping and logistics? Silicon design? Drones? A valued engineer at a FAANG can switch between all of those at will without ever even interviewing.
  - mooreds 7y ago
    > at will Is it that easy to switch departments/focus? I thought internal transfers, while easier than interviews, were not trivial.
    - swiftcoder 7y ago
      Internal transfers are close to mandatory in many cases. Veterans are strongly encouraged to move every 2-3 years to cross-polinate engineering knowledge and culture. For someone at a senior level (Amazon SDE III/Facebook IC5), an internal transfer is at most a perfunctory whiteboard session, and often just a conversation - you already have passed an interview loop to get into the company, after all, and have an easily-verifiable track record thereafter.
  - rhlsthrm 7y ago
AndrewKemendo 7y ago
This is a good summation of the current challenges with startups that are attempting to compete on technical merit. I know this first hand as I started a computer vision company right around 2012 when the "AI" boom was really picking up steam. I would never dream today of starting a very technical company because every major will poach your talent (happened to me), invest in your competitors or attempt to acquire you (some people don't want to be acquired). Contrary to your points, I don't see any way this will change until some big technology revolution happens that puts power back into the hands of creators - though that might be a pipedream. Note, that doesn't mean you can't start and be successful with a company. What I'm trying to point out is that the days of a scrappy upstart coming along to "unseat the leaders" doesn't seem anywhere near realistic. The only counter to this might be worldwide competition - so for example I could see Tencent getting bigger than Facebook in total user numbers. I'm not sure if these are comparable because they are in segmented markets.
- streetcat1 7y ago
  So there are actually three tech revolutions going on in parallel: 1) Kuberentes 2) Microservices. 3) AI All of them are based on open source, and all of them are permissionless (I.e. the startup does not need permission from a big company, e.g. an app store owner). They also erode the build-in advantages of big tech: 1) Kubernetes erode cloud lock-in on compute/storage. 2) AI is best serve on the edge. I would say that everything today is up for grab.
  - buzzkillington 7y ago
    Kubernetes is a solution worse than the problem. Microservices are unix pipes but slower. AI is linear algebra that costs x1000 because of the brand name. There is no revolution in software. We are just building crud as high and as fast as we can because the quality of developers tends to zero as the number of developers increases.
    - crtlaltdel 7y ago
      ^the account name that posted this comment is the single most honest thing i have seen on the internet today. well done!
eanzenberg 7y ago
I think a solution is less hiring at early stages (until you can afford it) and having co-founders hyper-focused on what’s important to the business (the ip) and they build and do the work to get it or the gate.
- caro_douglos 7y ago
  This. I would even go so far as to say that if you can’t get the founder salaries up to market rate based on MRR you should either bootstrap some more if you’re really into the IP or product...or close the place down before you hire someone under what they should be paid.
techsin101 7y ago
Open source technology that requires 500k skills so all can share in cost
- jandrewrogers 7y ago
  Open sourcing does not share the cost of $500k engineers. People using open source typically aren't paying the wages of the people that wrote the code. There is minimal financial upside to contributing to open source for most people. The challenges that open source faces are closely related to this subject. Many vibrant parts of the software world -- open source, startups, et al -- are essentially dependent on engineers willing to write code for the compensation (direct or indirect) offered. When it no longer makes sense for good engineers to write that code, everyone will suffer from their lack of contributions.
- aledalgrande 7y ago
  I don't like this "make money on the back of others" philosophy.
buboard 7y ago
> Some kinds of startups are effectively impossible to build given current structural constraints on financing them what are those startups? asking for a friend
bumblebee4 7y ago
Imagine Steve Jobs having to pay Steve Wozniak. The trick of the startup is that the key engineers are the founders. Startups are not a place for an MBA to get engineers for free but a place for engineers to make bank if their egghead managers in their corporations don't get going with an interesting business idea of which they know that it is a missed opportunity.
- TuringNYC 7y ago
  Thank you for so succinctly responding. I'm going to expand a bit and ask the GP (rhetorically) - if you want 500k-1M engineers (R&D I'm presuming) to work for you, what are you bringing to a table? If you are failing to attract these high-end engineers to a low paying job, perhaps it is because they dont see what unique skills the "business person" is bringing to the table to balance the risk. As an extreme example, I'd guarantee if the "business person" was Elon Musk, people would flock this startup. What high-end Engineers do not want is to give away a lions share of equity in exchange for a pay cut with no real upside, that would make no sense. The typical procedural founder with "business skills" may have solid business skills, but those can be hired anyway, the business founder needs to demonstrate equal 500k-1M level of skills/background/trackrecord/etc.
tluyben2 7y ago
I know a lot of very good people who would take a very substantial (well over 20%) pay cut if being allowed to work (mostly) remotely (+ equity if it's a startup). Especially the senior engineers (like myself) I know really consider taking or did take very early retirement over having to commute any longer.
goatinaboat 7y ago
Consequently, startups that have this property are effectively un-investable because there is not enough capital available in the early stages to achieve technical viability Well, this is the class system in action. Investors would rather sit on capital and moan about how they’re unable to spend it, than spend it in a way that would benefit engineers. They will endlessly try to keep that money circulating amongst their own class. Note: I am not a Corbynista by any means, but there’s no other way to explain all this money with nowhere to go yet wages stagnating.
Vadoff 7y ago
Most startups I see pay at 50% discount to wages compared to top public companies not 20%
tomaskafka 7y ago
Or, you could go remote - $120-150k is an awesome package for a senior engineer or designer eg. in Czech Republic (where I live).

lpolovets 7y ago

> Some kinds of startups are effectively impossible to build given current structural constraints on financing them I generally agree with this, except I would change "impossible" to "exceptionally hard." You're right that a lot of startups innovating on deep tech need to hire people who would earn $500k+ elsewhere, and that a typical startup can't afford that. However, very exceptional founders can often raise unusually large rounds early on. I.e. some founders can raise a $10m or $20m "seed" round at inception, which allows them to afford to pay $500k salaries. It's the top 1% or 0.1% founders within their fields, but it is possible. (Source: I'm a VC)

Alex3917 7y ago

> Some kinds of startups are effectively impossible to build given current structural constraints on financing them There are a lot of things that are impossible to raise money for, that are possible to bootstrap. If you're willing to work on something for 5 or 6 years without getting paid, there are lots of opportunities that open up that have high barrier to entry because they essentially can't be copied by venture backed companies.

czbond 7y ago
If you'd like to share, I'm interested in the types.....
- jv22222 7y ago
  Imma say, a lot of these ones: https://www.indiehackers.com/products https://www.indiehackers.com/products
- Alex3917 7y ago
  I would just look at successful bootstrapped startups that didn't have traction for 4+ years after the last pivot. E.g. Global Relay, Mailchimp, Bubble.is, ProfitWell, etc. And I wouldn't count something like Kickstartr, which took seven years to launch but only because the founder was non-technical.
  - aledalgrande 7y ago
    DuckDuckGo
jandrewrogers 7y ago
Very few people can afford to bootstrap 5-6 years, that is a privileged position, most viable startups will never be executed if that is the filter. Some startups require many man-years of engineering effort before they can produce an MVP, so after 5-6 years they may have no material traction. Furthermore, startups have a shelf-life beyond which they become borderline un-investable solely by virtue of age. There are always exceptions but I would not want to count on being an exception among exceptions. Some startups may be amenable to slow bootstrap, but the ones that have this very high wage cost tend not to be those types startups. I love these kinds of hardcore tech startups and believe they are extraordinarily valuable, it is the kind of company I would start, but I am also very realistic about the economics of building a team that can execute within those constraints.

ummonk 7y ago

Why not bring on the early engineers as cofounders with sizeable equity in lieu of market-clearing wages?

CalChris 7y ago
That’s a title. I’ve never seen an accepted definition of cofounder but mine is anyone pre-money. Someone pre-money is taking a 100% pay cut and often invests their own money.
- ummonk 7y ago
  Cofounders typically get double digit or at least mid-high single digit grants in equity. Whereas employees typically have 1% or less in equity. If they're this vital to the success of the startup, they should receive equity accordingly.
  - CalChris 7y ago
    Cofounders do get equity but don't get paid until funding. Employees get equity and pay. If it's a startup, the employee will get value = equity + (K * market wage) + benefits where K is less than 1. That value should be competitive with the market and key contributors should get more equity but NOT in the range of cofounder because otherwise something doesn't add up. There is an implicit startup social contract and the OP points out that maybe startups can't outbid the FAANGs for talent now. That may be but I think startups (and the VCs+lawyers who are guiding them) are absolutely pathetic at managing this social contract. You want equity? Fine. Here's some equity in the form of an RSU (fuck you, Bill Gates) which won't qualify for either 83b or QSBS tax protection. Sure, it may crush the employee with AMT taxes. Yeah, the startup gets a minor tax benefit from this but then expects its employees to bleed for them. This is beyond stupid. This is beyond stupid by the founders, the employee (who knows nothing) and the VC+lawyers (aka the institutional memory of the Valley) who do know something. It should be part of the startup social contract and best practices to inform and help manage the employees tax situation. Don't use RSUs. Put a gun their head and make them sign and file the 83b. Etc.

divbzero 7y ago

> Some types of software startups can't be built without a team of engineers where the market-clearing wages are typically more like $500k-1M. What types of software startups have these constraints? And, as suggested in sibling comments, could building a highly technical founding team (e.g. bootstrapping) be a viable alternative to hiring with high wages? There ought to be a sizable subset of highly skilled engineers who have achieved financial independence and would enjoy tackling a challenging problem in a startup.

swiftcoder 7y ago
> There ought to be a sizable subset of highly skilled engineers who have achieved financial independence and would enjoy tackling a challenging problem in a startup. The flip side of this equation is that those same engineers can tackle pretty much any challenging problem they choose, while continuing to take home those massive paycheques from a big tech firm. Big tech operates in almost every part of industry simultaneously - want to work on Blockchain? AI? VR? Shipping and logistics? Silicon design? Drones? A valued engineer at a FAANG can switch between all of those at will without ever even interviewing.
- mooreds 7y ago
  > at will Is it that easy to switch departments/focus? I thought internal transfers, while easier than interviews, were not trivial.
  - swiftcoder 7y ago
    Internal transfers are close to mandatory in many cases. Veterans are strongly encouraged to move every 2-3 years to cross-polinate engineering knowledge and culture. For someone at a senior level (Amazon SDE III/Facebook IC5), an internal transfer is at most a perfunctory whiteboard session, and often just a conversation - you already have passed an interview loop to get into the company, after all, and have an easily-verifiable track record thereafter.
- rhlsthrm 7y ago

AndrewKemendo 7y ago

This is a good summation of the current challenges with startups that are attempting to compete on technical merit. I know this first hand as I started a computer vision company right around 2012 when the "AI" boom was really picking up steam. I would never dream today of starting a very technical company because every major will poach your talent (happened to me), invest in your competitors or attempt to acquire you (some people don't want to be acquired). Contrary to your points, I don't see any way this will change until some big technology revolution happens that puts power back into the hands of creators - though that might be a pipedream. Note, that doesn't mean you can't start and be successful with a company. What I'm trying to point out is that the days of a scrappy upstart coming along to "unseat the leaders" doesn't seem anywhere near realistic. The only counter to this might be worldwide competition - so for example I could see Tencent getting bigger than Facebook in total user numbers. I'm not sure if these are comparable because they are in segmented markets.

streetcat1 7y ago
So there are actually three tech revolutions going on in parallel: 1) Kuberentes 2) Microservices. 3) AI All of them are based on open source, and all of them are permissionless (I.e. the startup does not need permission from a big company, e.g. an app store owner). They also erode the build-in advantages of big tech: 1) Kubernetes erode cloud lock-in on compute/storage. 2) AI is best serve on the edge. I would say that everything today is up for grab.
- buzzkillington 7y ago
  Kubernetes is a solution worse than the problem. Microservices are unix pipes but slower. AI is linear algebra that costs x1000 because of the brand name. There is no revolution in software. We are just building crud as high and as fast as we can because the quality of developers tends to zero as the number of developers increases.
  - crtlaltdel 7y ago
    ^the account name that posted this comment is the single most honest thing i have seen on the internet today. well done!

eanzenberg 7y ago

I think a solution is less hiring at early stages (until you can afford it) and having co-founders hyper-focused on what’s important to the business (the ip) and they build and do the work to get it or the gate.

caro_douglos 7y ago
This. I would even go so far as to say that if you can’t get the founder salaries up to market rate based on MRR you should either bootstrap some more if you’re really into the IP or product...or close the place down before you hire someone under what they should be paid.

techsin101 7y ago

Open source technology that requires 500k skills so all can share in cost

jandrewrogers 7y ago
Open sourcing does not share the cost of $500k engineers. People using open source typically aren't paying the wages of the people that wrote the code. There is minimal financial upside to contributing to open source for most people. The challenges that open source faces are closely related to this subject. Many vibrant parts of the software world -- open source, startups, et al -- are essentially dependent on engineers willing to write code for the compensation (direct or indirect) offered. When it no longer makes sense for good engineers to write that code, everyone will suffer from their lack of contributions.
aledalgrande 7y ago
I don't like this "make money on the back of others" philosophy.

buboard 7y ago

> Some kinds of startups are effectively impossible to build given current structural constraints on financing them what are those startups? asking for a friend

bumblebee4 7y ago

Imagine Steve Jobs having to pay Steve Wozniak. The trick of the startup is that the key engineers are the founders. Startups are not a place for an MBA to get engineers for free but a place for engineers to make bank if their egghead managers in their corporations don't get going with an interesting business idea of which they know that it is a missed opportunity.

TuringNYC 7y ago
Thank you for so succinctly responding. I'm going to expand a bit and ask the GP (rhetorically) - if you want 500k-1M engineers (R&D I'm presuming) to work for you, what are you bringing to a table? If you are failing to attract these high-end engineers to a low paying job, perhaps it is because they dont see what unique skills the "business person" is bringing to the table to balance the risk. As an extreme example, I'd guarantee if the "business person" was Elon Musk, people would flock this startup. What high-end Engineers do not want is to give away a lions share of equity in exchange for a pay cut with no real upside, that would make no sense. The typical procedural founder with "business skills" may have solid business skills, but those can be hired anyway, the business founder needs to demonstrate equal 500k-1M level of skills/background/trackrecord/etc.

tluyben2 7y ago

I know a lot of very good people who would take a very substantial (well over 20%) pay cut if being allowed to work (mostly) remotely (+ equity if it's a startup). Especially the senior engineers (like myself) I know really consider taking or did take very early retirement over having to commute any longer.

goatinaboat 7y ago

Consequently, startups that have this property are effectively un-investable because there is not enough capital available in the early stages to achieve technical viability Well, this is the class system in action. Investors would rather sit on capital and moan about how they’re unable to spend it, than spend it in a way that would benefit engineers. They will endlessly try to keep that money circulating amongst their own class. Note: I am not a Corbynista by any means, but there’s no other way to explain all this money with nowhere to go yet wages stagnating.

Vadoff 7y ago

Most startups I see pay at 50% discount to wages compared to top public companies not 20%

tomaskafka 7y ago

Or, you could go remote - $120-150k is an awesome package for a senior engineer or designer eg. in Czech Republic (where I live).