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Except for dozens of counter examples that make up for literally multiple trillions of dollars in market capitalization.

by kahnjw 6y ago

Apocryphon 6y ago
And how much money has been squandered funding the startups that do fail? Survivor bias.
- kahnjw 6y ago
  I'm not sure what you're getting at. Here are the facts: Companies following these accelerated growth trajectories now make up a total of 4 trillion in market capitalization depending on how you count it. That's really just the FAANGs, not the smaller companies that are profitable or on the road to profitability [1]. If you count everything you can safely say the number is closer to 8 trillion. Every year, VC in the US _as a whole_ invests roughly 100B [2]. If you cut out non-growth and non-tech sectors I'd guess that number total goes to around 40B, and roughly 100B (very rough number) globally. So yeah, some money gets "wasted" but it creates huge market capitalizations that are around two full orders of magnitude larger than a single years investment, and growing strong year over year. [1] https://www.investopedia.com/terms/f/faang-stocks.asp https://www.investopedia.com/terms/f/faang-stocks.asp [2] https://www.prnewswire.com/news-releases/us-venture-capital-investment-surpasses-130-billion-in-2019-for-second-consecutive-year-300986237.html https://www.prnewswire.com/news-releases/us-venture-capital-...
  - scarface74 6y ago
    Facebook - didn’t raise billions and was profitable when it IPOd Amazon - operates on thin to non existent profits for years but use much of its own money to grow through operating cash. Apple - definitely didn’t raise billions in the 70s and was profitable at IPO. Netflix - I don’t know much about Netflix. Google - grew fast but it also had a profitable business. Microsoft - famously, MS didn’t even need the VC money it got early on. It took the money because it wanted the expertise of the investors.
    - Apocryphon 6y ago
      Netflix started in the original dot-com bubble as a DVD rental service, and only began streaming in 2007, a decade after they were founded. Reed Hastings put up $2.5 million himself. Not exactly a case of rapid illusory hypergrowth like the poster children unicorns of the current gig/sharing economy dot-com bubble.
    - malandrew 6y ago
      None of these companies had to deal with the current investment environment. It's an arms race. While it's a chicken and the egg issue since both Facebook and Google provide virality and discovery, respectively, and it is those two features, virality and discovery that lead to a positive return on investment from blitzscaling. Besides discovery and virality, there is also the issue of falling transaction costs. When Google, Facebook and Amazon were founded, you had to maintain your own datacenters and infrastructure. That alone produced a massive barrier to entry that made competition less fierce. Since the advent of AWS and other cloud computing platforms, transactions costs for tech companies have dropped dramatically so you can't rely on infrastructure prowess as a competitive advantage for many tech verticals. You simply can't compare companies that were born and matured in different markets with different dynamics to those founded in the past 10-15 years. It's apples and oranges.
      - scarface74 6y ago
        How’s that working out for them? Name one tech company founded since Facebook that has been massively successful - ie massively profitable.
        kahnjw 6y ago
        Becoming a massively profitable megacorp isn't the only winning formula. Were Linkedin, Instagram, Beats by Dre, WhatsApp, Tableau, Skype, GitHub, MuleSoft all failures because they were acquired for billions, making lucrative paydays for their founders and investors?
        6y ago
  - neuromancer2701 6y ago
    Netflix - created in 1997 with profit from selling Reed Hasting previous company. They IPOed 5 years later in 2002 don't see anything about VC money. Could be some but definitely not the Softbank model back then.
scarface74 6y ago
What are those dozens of counter examples? The big profitable tech companies today didn’t raise billions in VC money.
- pembrook 6y ago
  Literally every single company in the top 6 of the S&P 500 was financed via private VC-style funding at the beginning. Whether the numbers crept into the billions when the company was private or public is irrelevant. The point is that for a company to reach scale, they need billions in funding from somewhere. Somebody has to take the risk, and all investors want returns for that risk. Public market growth investors want rapidly growing companies just as VC investors do.
  - Apocryphon 6y ago
    One would assume that there are different styles of VC-style funding, with different time horizons. My original point isn't disputing the need for the existence of VCs in some funding cases- I'm not DHH arguing that every startup needs to bootstrap- my point is that this cycle has shown that VCs pumping in dumb money while chasing unrealistic fast returns has led to self-fulfilling failures, and a toxic culture that promotes that. The original statement: > do you want to grow slowly and steadily over a 20+ year period only to find that the economics don't work, or do you want to fail fast with some extra waste in the middle Seems highly dubious because you can take a perfectly fine business model and create an unattainable, doomed-to-fail situation out of it by subjecting it to unrealistic expectations, as we have seen in dozens of examples from the current bubble. Stress testing is not useful if it sets artificial pressures that destroys the business.
  - scarface74 6y ago
    None of the top six companies were funded by billions of dollars that were lit on fire like today’s companies. The early companies like Apple and Microsoft were started with a few million not even a billion in today’s dollars. As I said earlier, Microsoft didn’t even need the later rounds of funding and wanted to bring expertise on board. The only one of the current top tech companies that weren’t GAAP profitable at IPO is Amazon and even it used its own operating cash to fund growth.
mulmen 6y ago
Isn’t this textbook survivorship bias? Dozens of successes out of how many failures and how much misallocated capital?
- kahnjw 6y ago
  Ask that to someone trying to find housing off Sand Hill Road in Palo Alto.
  - deleted 6y ago
    [deleted]
- samatman 6y ago
  Well, no, because for each VC portfolio, it's either profitable off the survivors, or it isn't. The point is that from the perspective of investors, the survival of an individual startup is an irrelevant metric. What they're interested in is the profitability of the whole portfolio. And so far, a 90% failure rate with <5% wild success is a profitable formula. As long as that remains true, they have no reason to change it.
freepor 6y ago
There were two changes in the "Softbank model" -- first was investing at this scale without a real network effect or any sort of "moat," and the other was just the sheer speed of the investment -- an avalanche instead of a snowball. A company like WeWork doesn't have any real reason that it needs to grow hyper-fast -- it's a Ben and Jerry's. https://www.joelonsoftware.com/2000/05/12/strategy-letter-i-ben-and-jerrys-vs-amazon/ https://www.joelonsoftware.com/2000/05/12/strategy-letter-i-...

Except for dozens of counter examples that make up for literally multiple trillions of dollars in market capitalization.

by kahnjw 6y ago

Except for dozens of counter examples that make up for literally multiple trillions of dollars in market capitalization.

Apocryphon 6y ago

And how much money has been squandered funding the startups that do fail? Survivor bias.

kahnjw 6y ago
I'm not sure what you're getting at. Here are the facts: Companies following these accelerated growth trajectories now make up a total of 4 trillion in market capitalization depending on how you count it. That's really just the FAANGs, not the smaller companies that are profitable or on the road to profitability [1]. If you count everything you can safely say the number is closer to 8 trillion. Every year, VC in the US _as a whole_ invests roughly 100B [2]. If you cut out non-growth and non-tech sectors I'd guess that number total goes to around 40B, and roughly 100B (very rough number) globally. So yeah, some money gets "wasted" but it creates huge market capitalizations that are around two full orders of magnitude larger than a single years investment, and growing strong year over year. [1] https://www.investopedia.com/terms/f/faang-stocks.asp https://www.investopedia.com/terms/f/faang-stocks.asp [2] https://www.prnewswire.com/news-releases/us-venture-capital-investment-surpasses-130-billion-in-2019-for-second-consecutive-year-300986237.html https://www.prnewswire.com/news-releases/us-venture-capital-...
- scarface74 6y ago
  Facebook - didn’t raise billions and was profitable when it IPOd Amazon - operates on thin to non existent profits for years but use much of its own money to grow through operating cash. Apple - definitely didn’t raise billions in the 70s and was profitable at IPO. Netflix - I don’t know much about Netflix. Google - grew fast but it also had a profitable business. Microsoft - famously, MS didn’t even need the VC money it got early on. It took the money because it wanted the expertise of the investors.
  - Apocryphon 6y ago
    Netflix started in the original dot-com bubble as a DVD rental service, and only began streaming in 2007, a decade after they were founded. Reed Hastings put up $2.5 million himself. Not exactly a case of rapid illusory hypergrowth like the poster children unicorns of the current gig/sharing economy dot-com bubble.
  - malandrew 6y ago
    None of these companies had to deal with the current investment environment. It's an arms race. While it's a chicken and the egg issue since both Facebook and Google provide virality and discovery, respectively, and it is those two features, virality and discovery that lead to a positive return on investment from blitzscaling. Besides discovery and virality, there is also the issue of falling transaction costs. When Google, Facebook and Amazon were founded, you had to maintain your own datacenters and infrastructure. That alone produced a massive barrier to entry that made competition less fierce. Since the advent of AWS and other cloud computing platforms, transactions costs for tech companies have dropped dramatically so you can't rely on infrastructure prowess as a competitive advantage for many tech verticals. You simply can't compare companies that were born and matured in different markets with different dynamics to those founded in the past 10-15 years. It's apples and oranges.
    - scarface74 6y ago
      How’s that working out for them? Name one tech company founded since Facebook that has been massively successful - ie massively profitable.
      - kahnjw 6y ago
        Becoming a massively profitable megacorp isn't the only winning formula. Were Linkedin, Instagram, Beats by Dre, WhatsApp, Tableau, Skype, GitHub, MuleSoft all failures because they were acquired for billions, making lucrative paydays for their founders and investors?
        6y ago
- neuromancer2701 6y ago
  Netflix - created in 1997 with profit from selling Reed Hasting previous company. They IPOed 5 years later in 2002 don't see anything about VC money. Could be some but definitely not the Softbank model back then.

scarface74 6y ago

What are those dozens of counter examples? The big profitable tech companies today didn’t raise billions in VC money.

pembrook 6y ago
Literally every single company in the top 6 of the S&P 500 was financed via private VC-style funding at the beginning. Whether the numbers crept into the billions when the company was private or public is irrelevant. The point is that for a company to reach scale, they need billions in funding from somewhere. Somebody has to take the risk, and all investors want returns for that risk. Public market growth investors want rapidly growing companies just as VC investors do.
- Apocryphon 6y ago
  One would assume that there are different styles of VC-style funding, with different time horizons. My original point isn't disputing the need for the existence of VCs in some funding cases- I'm not DHH arguing that every startup needs to bootstrap- my point is that this cycle has shown that VCs pumping in dumb money while chasing unrealistic fast returns has led to self-fulfilling failures, and a toxic culture that promotes that. The original statement: > do you want to grow slowly and steadily over a 20+ year period only to find that the economics don't work, or do you want to fail fast with some extra waste in the middle Seems highly dubious because you can take a perfectly fine business model and create an unattainable, doomed-to-fail situation out of it by subjecting it to unrealistic expectations, as we have seen in dozens of examples from the current bubble. Stress testing is not useful if it sets artificial pressures that destroys the business.
- scarface74 6y ago
  None of the top six companies were funded by billions of dollars that were lit on fire like today’s companies. The early companies like Apple and Microsoft were started with a few million not even a billion in today’s dollars. As I said earlier, Microsoft didn’t even need the later rounds of funding and wanted to bring expertise on board. The only one of the current top tech companies that weren’t GAAP profitable at IPO is Amazon and even it used its own operating cash to fund growth.

mulmen 6y ago

Isn’t this textbook survivorship bias? Dozens of successes out of how many failures and how much misallocated capital?

kahnjw 6y ago
Ask that to someone trying to find housing off Sand Hill Road in Palo Alto.
- deleted 6y ago
  [deleted]
samatman 6y ago
Well, no, because for each VC portfolio, it's either profitable off the survivors, or it isn't. The point is that from the perspective of investors, the survival of an individual startup is an irrelevant metric. What they're interested in is the profitability of the whole portfolio. And so far, a 90% failure rate with <5% wild success is a profitable formula. As long as that remains true, they have no reason to change it.

freepor 6y ago

There were two changes in the "Softbank model" -- first was investing at this scale without a real network effect or any sort of "moat," and the other was just the sheer speed of the investment -- an avalanche instead of a snowball. A company like WeWork doesn't have any real reason that it needs to grow hyper-fast -- it's a Ben and Jerry's. https://www.joelonsoftware.com/2000/05/12/strategy-letter-i-ben-and-jerrys-vs-amazon/ https://www.joelonsoftware.com/2000/05/12/strategy-letter-i-...