5 ms·

I feel like the money quote was buried in the postscript. > Another solution to this problem is to think about startups that can become quite successful with l

I feel like the money quote was buried in the postscript. > Another solution to this problem is to think about startups that can become quite successful with less than ten people. As compensation packages from the giant tech companies continue to increase, I suspect this will become a trend. As cash comp at big public companies grow and the future value of startup options plummet, we need to start thinking about different ways to start businesses, and this feels like the right solution to me. Starting a company with 10 competent people that I enjoy being around and targeting $5-10mm in revenue sounds perfect. Maybe $10mm isn't reasonable, but even if we hit 1/4th of that amount, it's still plenty to support a small company.

jiofih 7y ago
That’s not exactly what he is aiming for; the quote is most likely related to Instagram which reached a $1bn valuation with ~10 people. A lifestyle business is worthless to VC (and unsustainable if it decides to take VC money).
- hef19898 7y ago
  Slowly I having my doubts about that. At least for early stage and angle investment. Investors need a 10x exit. Now imagine an early stage investment of 250k in a small business that grows to 10 million revenue. Healthy, because it is a lifestyle business not geared towards hyper growth. Assuming the company is profitable and cash positive, buying back the investor for 2.5 million through a bank loan is a reasonable thing. But that hints at an interesting problem. 250k is angle and seed, not traditional VCs. And there seems to be so much desperate money out there in the current "no interest for your bank account" times that there simply aren't enough small businesses like that strategy to work. Hence VCs, hyper growth, and, ultimately, things like SoftBank. Whether that is healthy is everyone's guess.
  - baddox 7y ago
    Why would a company bother buying back the investment? Surely there’s not much reason to do that unless the terms of the investment were different than what is common today.
  - URSpider94 7y ago
    I think one problem is opportunity cost for the VC. Arguably, they have to spend as much time on diligence for that .25MM investment as for a 10MM one. Put another way, to deploy a $125MM fund, you’d have to do 500 of these microinvestments.
    - jacquesm 7y ago
      Not just the diligence. Also the time post investment to mentor the founders and deal with various problems that crop up over the year. No startup older than a year or two that hasn't seen at least one major crisis that could have killed the company (and in many cases it does).
  - jiofih 7y ago
    You got it right: VCs are not interested in that 250k investment, and you forgot the time component - they want that 10x over a relatively short period (<5-10 years) that the small business is unlikely to achieve. Plus there is nobody to sell to if it’s not a growth stock, publicly traded, and no incentive to buy back the shares. The company will be pushed harder and to invest in growth strategies that make it not-a-lifestyle-business anymore, i.e. a startup. You cannot have it both ways, and why would you even need a huge lump of cash for a business that is already sustainable? Traditional loans are a much safer source of funding for that.
  - robocat 7y ago
    VC investors look aim for 12% return, approx 3x over 10 years. But returns are hugely variable (power law?), so returns heavily dependent on one winner e.g. one success at 30x out of 10 investments gives 3x. Your numbers don't work unless you can get 10x returns on 3 out of 10 investments (which seems unlikely). https://techcrunch.com/2017/06/01/the-meeting-that-showed-me-the-truth-about-vcs/ https://techcrunch.com/2017/06/01/the-meeting-that-showed-me... Edit: And how far is that $250k going to stretch on salaries, especially over a few years!
bradlys 7y ago
Is 2.5mm really viable for 10 people within SF Bay Area? That would mean compensation would be around $250k per person (not including payroll taxes, office rent, and whatever else cuts into that). That's distant from the compensation packages being given out by Big N.
- munchbunny 7y ago
  I would take a pay cut if it meant working with a high talent concentration team that was small enough to be agile end to end in the full sales -> ops -> product/dev -> support cycle. But that's a unicorn. You don't find a unicorn, you stumble upon it one day and miss the opportunity because you can't rationalize the fact that you actually saw a mythical creature.
  - sp527 7y ago
    It doesn’t have to be a unicorn. Maybe it’s incumbent on the rational participants in this community to figure out a way to do what you’re describing. New business models can be even more valuable inventions than new technologies. Perhaps VC has run its course for business and engineering ICs who don’t have preexisting wealth.
- iratewizard 7y ago
  Why does it need to be in the Bay Area? Or any expensive city for that matter? An EBITDA of $2.5mm in the Rust belt for instance is more than successful and would retain and satisfy top talent in the area. Does the biggest compensation package even attract the best talent? Or does it just attract the obsessively competitive to burn out in style?
  - titanomachy 7y ago
    It might be easier to convince a VC to give you a few million for salaries than to find 10 world-class developers currently looking for a new job in a rust belt city.
- csa 7y ago
starpilot 7y ago
Side note, but I've noticed how less/fewer confusion has ceased being considered a grammatical error. Interesting since pg has previously stated how important good writing is, and the YC app contained the same error.
- everybodyknows 7y ago
  Case in point: Whole Foods in the pre-Amazon, MacKay era had "Ten Items or Fewer" signage at checkstands. A few weeks after the sale, it was "Ten Items or Less".
- mkl 7y ago
  It was never actually a grammatical error. The idea that it was "in fact arose as an incorrect generalization of a personal preference expressed by a grammarian in 1770." [1] Less has been used for countable things at least as far back as Alfred the Great in 888 CE [1], i.e. before English was English. [1] https://en.wikipedia.org/wiki/Fewer_versus_less https://en.wikipedia.org/wiki/Fewer_versus_less
  - starpilot 7y ago
    Interesting. Lies my teacher told me.
ttul 7y ago
These days - and assuming you think the high salary trend will continue unabated for years to come - working at a big tech company will guarantee you a very comfortable lifestyle in perpetuity. No startup can offer the same risk/reward trade-off. But if you do want to start a company and have a high chance of becoming modestly rich, there is no shame in working on a niche problem that doesn't require piles of capital. If you grind away long enough, you can have a slowly growing, profitable business that makes you very comfortable.
jackcosgrove 7y ago
Bootstrapped small businesses are as old as dirt. If you aren't going to scale, why do you need venture funding? Venture funded startups may prove to have been a temporary kind of business made possible by the technological frontier of first the personal computer and then the internet. If a new computing platform comes along the VC model will keep chugging, because you've gotta plant that flag as fast as possible. I see the diminishing value of working for startups as a sign of the maturity of the internet. Rather than try to swim against the current, it's probably better to find a new shoreline. And inventing that new platform is a very hard problem.
an_outsider 7y ago
There are three things in my view which you can theoretically use for recruiting at a small company. Sorry, I don't have personal experience using them, I am just making observations: - I recently heard of a company offering a publicly announced 4 day workweek and being able to recruit very good talent. I am not sure if Big Tech can make it a public policy. - You can point out that there is a much smaller need to be politically correct. For example, it is extremely un-PC to be openly supporting Trump in big tech today, and anyone who says otherwise is just lying to you. I know someone very closely who works in one of the big tech companies and I can tell you that he is wrapped in a very strange bubble. For example, he was 100% convinced that Trump will be impeached and booted out of office before his term completed. Now he has stopped talking about the impeachment altogether. It is actually hilarious. - the "cult" problem. Sooner or later, everyone who defends their big tech job will be referred to as acting like a cult member [1]. I am not sure how a small company can run into the cult problem. [1] Like this person: "Remember, what Facebook is doing has never been done before. There are going to be mistakes." https://news.ycombinator.com/item?id=19321420 https://news.ycombinator.com/item?id=19321420

jiofih 7y ago

That’s not exactly what he is aiming for; the quote is most likely related to Instagram which reached a $1bn valuation with ~10 people. A lifestyle business is worthless to VC (and unsustainable if it decides to take VC money).

hef19898 7y ago
Slowly I having my doubts about that. At least for early stage and angle investment. Investors need a 10x exit. Now imagine an early stage investment of 250k in a small business that grows to 10 million revenue. Healthy, because it is a lifestyle business not geared towards hyper growth. Assuming the company is profitable and cash positive, buying back the investor for 2.5 million through a bank loan is a reasonable thing. But that hints at an interesting problem. 250k is angle and seed, not traditional VCs. And there seems to be so much desperate money out there in the current "no interest for your bank account" times that there simply aren't enough small businesses like that strategy to work. Hence VCs, hyper growth, and, ultimately, things like SoftBank. Whether that is healthy is everyone's guess.
- baddox 7y ago
  Why would a company bother buying back the investment? Surely there’s not much reason to do that unless the terms of the investment were different than what is common today.
- URSpider94 7y ago
  I think one problem is opportunity cost for the VC. Arguably, they have to spend as much time on diligence for that .25MM investment as for a 10MM one. Put another way, to deploy a $125MM fund, you’d have to do 500 of these microinvestments.
  - jacquesm 7y ago
    Not just the diligence. Also the time post investment to mentor the founders and deal with various problems that crop up over the year. No startup older than a year or two that hasn't seen at least one major crisis that could have killed the company (and in many cases it does).
- jiofih 7y ago
  You got it right: VCs are not interested in that 250k investment, and you forgot the time component - they want that 10x over a relatively short period (<5-10 years) that the small business is unlikely to achieve. Plus there is nobody to sell to if it’s not a growth stock, publicly traded, and no incentive to buy back the shares. The company will be pushed harder and to invest in growth strategies that make it not-a-lifestyle-business anymore, i.e. a startup. You cannot have it both ways, and why would you even need a huge lump of cash for a business that is already sustainable? Traditional loans are a much safer source of funding for that.
- robocat 7y ago
  VC investors look aim for 12% return, approx 3x over 10 years. But returns are hugely variable (power law?), so returns heavily dependent on one winner e.g. one success at 30x out of 10 investments gives 3x. Your numbers don't work unless you can get 10x returns on 3 out of 10 investments (which seems unlikely). https://techcrunch.com/2017/06/01/the-meeting-that-showed-me-the-truth-about-vcs/ https://techcrunch.com/2017/06/01/the-meeting-that-showed-me... Edit: And how far is that $250k going to stretch on salaries, especially over a few years!

bradlys 7y ago

Is 2.5mm really viable for 10 people within SF Bay Area? That would mean compensation would be around $250k per person (not including payroll taxes, office rent, and whatever else cuts into that). That's distant from the compensation packages being given out by Big N.

munchbunny 7y ago
I would take a pay cut if it meant working with a high talent concentration team that was small enough to be agile end to end in the full sales -> ops -> product/dev -> support cycle. But that's a unicorn. You don't find a unicorn, you stumble upon it one day and miss the opportunity because you can't rationalize the fact that you actually saw a mythical creature.
- sp527 7y ago
  It doesn’t have to be a unicorn. Maybe it’s incumbent on the rational participants in this community to figure out a way to do what you’re describing. New business models can be even more valuable inventions than new technologies. Perhaps VC has run its course for business and engineering ICs who don’t have preexisting wealth.
iratewizard 7y ago
Why does it need to be in the Bay Area? Or any expensive city for that matter? An EBITDA of $2.5mm in the Rust belt for instance is more than successful and would retain and satisfy top talent in the area. Does the biggest compensation package even attract the best talent? Or does it just attract the obsessively competitive to burn out in style?
- titanomachy 7y ago
  It might be easier to convince a VC to give you a few million for salaries than to find 10 world-class developers currently looking for a new job in a rust belt city.
csa 7y ago

starpilot 7y ago

Side note, but I've noticed how less/fewer confusion has ceased being considered a grammatical error. Interesting since pg has previously stated how important good writing is, and the YC app contained the same error.

everybodyknows 7y ago
Case in point: Whole Foods in the pre-Amazon, MacKay era had "Ten Items or Fewer" signage at checkstands. A few weeks after the sale, it was "Ten Items or Less".
mkl 7y ago
It was never actually a grammatical error. The idea that it was "in fact arose as an incorrect generalization of a personal preference expressed by a grammarian in 1770." [1] Less has been used for countable things at least as far back as Alfred the Great in 888 CE [1], i.e. before English was English. [1] https://en.wikipedia.org/wiki/Fewer_versus_less https://en.wikipedia.org/wiki/Fewer_versus_less
- starpilot 7y ago
  Interesting. Lies my teacher told me.

ttul 7y ago

These days - and assuming you think the high salary trend will continue unabated for years to come - working at a big tech company will guarantee you a very comfortable lifestyle in perpetuity. No startup can offer the same risk/reward trade-off. But if you do want to start a company and have a high chance of becoming modestly rich, there is no shame in working on a niche problem that doesn't require piles of capital. If you grind away long enough, you can have a slowly growing, profitable business that makes you very comfortable.

jackcosgrove 7y ago

Bootstrapped small businesses are as old as dirt. If you aren't going to scale, why do you need venture funding? Venture funded startups may prove to have been a temporary kind of business made possible by the technological frontier of first the personal computer and then the internet. If a new computing platform comes along the VC model will keep chugging, because you've gotta plant that flag as fast as possible. I see the diminishing value of working for startups as a sign of the maturity of the internet. Rather than try to swim against the current, it's probably better to find a new shoreline. And inventing that new platform is a very hard problem.

an_outsider 7y ago

There are three things in my view which you can theoretically use for recruiting at a small company. Sorry, I don't have personal experience using them, I am just making observations: - I recently heard of a company offering a publicly announced 4 day workweek and being able to recruit very good talent. I am not sure if Big Tech can make it a public policy. - You can point out that there is a much smaller need to be politically correct. For example, it is extremely un-PC to be openly supporting Trump in big tech today, and anyone who says otherwise is just lying to you. I know someone very closely who works in one of the big tech companies and I can tell you that he is wrapped in a very strange bubble. For example, he was 100% convinced that Trump will be impeached and booted out of office before his term completed. Now he has stopped talking about the impeachment altogether. It is actually hilarious. - the "cult" problem. Sooner or later, everyone who defends their big tech job will be referred to as acting like a cult member [1]. I am not sure how a small company can run into the cult problem. [1] Like this person: "Remember, what Facebook is doing has never been done before. There are going to be mistakes." https://news.ycombinator.com/item?id=19321420 https://news.ycombinator.com/item?id=19321420