6 ms·

The Instagram Effect: Causing Silicon Valley to fund the wrong companies?

39 points by iProject 14y ago

indiecore 14y ago
In addition to social apps being simpler and easier to start you also don't have to deal with the reams and reams of paperwork and certifications that getting into healthcare entails.
amirmc 14y ago
"13 percent of deals were in the mobile sector with 30 percent of those companies involved in photo or video technology." So I work that out to be >95% of VC deals were with companies that were not mobile/video/photo related. Unless I'm missing something, I don't see a problem here.
michaelochurch 14y ago
The reason VCs are funding lightweight companies isn't that VCs want to fund lightweight companies. It's something else, and it's easy to see the reason if you understand the sociology of VC-istan. VC-istan has become a good-ol'-boy network like any other. You need connections. You need the VCs to see you as a real person so that, instead of getting an indefinite put-off or a horrible term sheet, you either get (a) funding, quickly, on decent terms, or (b) a sit-down explanation of why your idea was rejected and either (i) introductions to investors who might be interested, or (ii) an EIR gig to pay the bills until you happen upon an idea that has wings. If you're not on those kinds of terms with VCs, and I doubt more a very small percentage of people are, then you shouldn't be wasting your time in VC-istan. If you're a real founder, not getting funding means that a VC will pop you in to a high-level position at a portfolio company that one would never get on the open job market, and that will make up for the 6 months you spent without income. Actually, you're going to have more than one of these offers. If you're not a real founder, not getting funding means that, congratulations, you spent months hustling with no income and no results. The reason why lightweight companies are getting all the funding is that building up and maintaining those VC contacts is expensive and time-consuming. It's easily as large a time commitment as a full-time job, if not worse, and it takes months before you see any payoff. VCs aren't preternaturally biased in favor of lightweight companies, but the people who are doing heavyweight stuff don't have the time to become "real founders" (i.e. "made men" in the VCs' eyes, who are entitled to sit-down explanations and EIR gigs upon rejection). So they have to pursue other routes to funding.
- legutierr 14y ago
  This sounds very sub-optimal from the VCs' perspective.
- pg 14y ago
  This is simply false. VCs have a network among themselves, but they don't expect founders to be part of it.
  - j_s 14y ago
    There is a huge space between the OP and your response... I think reality varies in-between, particularly outside YC.
  - vwoolf 14y ago
    Peter Thiel thinks VCs are biased against big ideas: http://blakemasters.tumblr.com/post/24122680868/peter-thiels-cs183-startup-class-15-notes-essay http://blakemasters.tumblr.com/post/24122680868/peter-thiels... . (This is in response to the grandparent: "VCs aren't preternaturally biased in favor of lightweight companies, but the people who are doing heavyweight stuff don't have the time to become "real founders.")
  - michaelochurch 14y ago
    I think it's pretty accurate to say that they'll readily fund a band of outsiders if they think the idea's good, but still, they also put out terms that make it easy to take over the company if they don't see the founders as "real founders", "made men", "like us", or however you want to describe that status. Also, here's the difference for real founders vs. the rest of us. Real founders get alternatives put in front of them when their ideas are rejected-- EIR gigs to pay the bills, spots in portfolio companies. The rest of us get zilch; spent months with no income and nothing to show for it. Real Founder social status doesn't mean that bad ideas get funded, but it does mean you don't have to deal with the extreme income risk associated with startups for non-Real Founders-- a risk that stops making sense to take after age 25.
    - deleted 14y ago
dkrich 14y ago
“You see people graduating from top tech schools… and they’re starting companies in internet and mobile,” said Corey Reese, CEO and co-founder at Ness Computing. “They’re not starting companies to enhance the life expectancy, by and large.” This is what's known as the law of supply and demand, and isn't going to change. Sure I can start a business trying to sell salads because that's what people should be eating, but I'm not going to stay in business if people really want cheeseburgers and pizza. This whole article also kind of points the finger at people in Silicon Valley and seems to say "Hey, you went to a good school and there are a lot of people around you with a lot of money. Why aren't you curing cancer?" Two things- first, curing cancer is really fucking hard. Has the author of this article ever tried? Or is he assuming that some smart people somewhere else should be trying? I highly doubt that the guys behind Instagram are capable of curing cancer. So it's not as if for them it was interchangeable. It's also not as if the money that went to them would have resulted in a cure for cancer. To assume that it would have is to assume that there is somebody out there in SV going door-to-door trying to get funding for a cancer cure that would work. Secondly, there is a lot of ongoing research in the "important" industries at Universities and research laboratories that do not rely on VC money. VC's couldn't afford to fund this research. It requires grants and donations on a massive scale. The simplicity behind this article is absurd.
- eshvk 14y ago
  I think there is this (from my limited experience rather naive) belief that if a bunch of smart computer people get together, they can solve problems that have flummoxed biologists for long. This is something pervasive which afflicts even the smartest ones (See Steve Yegge's talk http://www.youtube.com/watch?v=vKmQW_Nkfk8 http://www.youtube.com/watch?v=vKmQW_Nkfk8 on how The Data Mining needs to be used more to solve problems in biology). Having spent some time in grad school foolishly believing that all biology needed was a sprinkle of math and a generous dollop of python skills, I think the problem is that in Computer Science we have problems that are sometimes insanely hard but due to the several layers of abstraction, are inherently rather deterministic and much less noisy than real-world systems. I think the best comprehensible example comes from the physical layer of most electronics where several of the modeling equations are naive approximations designed to work under specific conditions. The complexity becomes even more overwhelming when you look at biological systems: The nonlinearity especially in say genetic hacking becomes apparent when you realize that each tiny modification has so many unintended effects (making modeling in a computer environment especially difficult) which is why biologist go through the grind of running all those "boring" real world experiments in labs. I think there are quite a few research labs that are using data mining and machine learning techniques to try to solve problems but we are at most quality places well beyond needing "smart people with computer skills". After a while, fundamental research requires, like you said, money on a massive scale which VC's really can't afford.
dasil003 14y ago
It's a gold rush. We can't sit around and wring our hands over this. Mobile/social are cheap and easy to get into and as long as Facebook is buying them for a billion dollars, it's going to give better ROI than more "important" ideas. Now I'm pretty sure this will all wash out over the coming years as Facebook works harder to monetize and the true value of this stuff becomes better understood. The bottom line is that a lot more people will pay a lot more money to live longer than they will to send instagrams. But in the meantime you can't blame VCs for irrational exuberance when year-old, twenty-employee companies are selling for a fucking billion dollars.
- wpietri 14y ago
  I can blame them a little. People who are chasing currently hot things are missing the chance to invest in the next hot thing. VCs have a sweet deal: they get fat salaries, have nice offices, and have plenty of support staff. If anybody can afford to play the long game, it's them. The only reason things are flipping for $1bn is that they are worth that to a much bigger company. Instead of going after the quick $1 billion company, I'd rather see them going for the "slow" $60 billion company (Facebook) or $200 billion company (Google).
  - aclimatt 14y ago
    Venture Capital doesn't generally work that way unfortunately. VCs typically shoot for 10x over 5 years with the fund's total lifespan being approximately 10 years (from initial investment to return). So it's hard for VCs to make longer-term investments in companies like Google which took 14 years to get where they are today. (Sure, in the case of Google they could have flipped it sooner, but even a few years ago it wasn't worth what it is today.)
    - lurker14 14y ago
      Google's IPO was in 2004 at age 6-years and returned 100x on investment, and has had "regular" (on the high-end) big-cap growth since.
sreyaNotfilc 14y ago
Is Instagram really worth $1 Billion? Honestly we don't know. I would say no, but I'm wrong on a lot of things. I'm also right on a lot of things. Who really knows? As far as Facebook is concerned (well Mark is concerned) it is. But it begs the question of "Why?". * Surely Facebook has all the users in the world. Getting a few more million really isn't that substantial. * And even getting more users is a good thing, I'm fairly certain that 90% of those users are already on Facebook. So what are they really gaining? * The technology behind Instragram isn't remarkable. From what I've read, they are a picture app with filters. Yes, those effects are pretty cool, but I find it hard to believe that a group of people that are able to build the social juggernaut that is Facebook couldn't set aside 10 guys to create filters and effects already built into Facebook. Now perhaps its something else. Mark probably realized that they system was already in place through Instagram that all that was needed was to purchase them and slap a big ol' Facebook sticker on the cover. Done... Next task... I really don't know. I believe that Mark is allowed to do whatever. Afterall, he did invent Facebook. A potential money-making powerhouse. We are essentially the outsiders looking in. We haven't built a multibillion dollar company, so we can't really dictate that this is a bad move or not. Its working so far for Facebook (yes the stocks are not as great as they wanted, but hey at least they are out there playing the game). All I know is, its not my money, so it doesn't affect me. I would've just built the thing myself. But then again, I'm not the billionaire 28 year old. I'm just the 28 year old trying to start my own company.
- deleted 14y ago
  [deleted]
- veyron 14y ago
  Instagram, if it was allowed to expand and develop more social features, could have actually left Facebook in the dust. Seeing as how Facebook is perceived to be worth far more than a billion dollars, 1B is relatively cheap.
  - pcwalton 14y ago
    Exactly. Facebook is determined not to become MySpace by heading off competition before it becomes too late. One of the most effective ways to head off that competition is to purchase it.
paulsutter 14y ago
“You see people graduating from top tech schools… and they’re starting companies in internet and mobile,” said Corey Reese, CEO and co-founder at Ness Computing. “They’re not starting companies to enhance the life expectancy, by and large.” Good for them. Internet and mobile are perfect for the first company you start. Elon Musk's first company was a non-world-changing Internet company (Zip2), but good for him that he started it. I'm sure he learned a ton about building a company, hiring people, etc.

39 points by iProject 14y ago

In addition to social apps being simpler and easier to start you also don't have to deal with the reams and reams of paperwork and certifications that getting into healthcare entails.

amirmc 14y ago

"13 percent of deals were in the mobile sector with 30 percent of those companies involved in photo or video technology." So I work that out to be >95% of VC deals were with companies that were not mobile/video/photo related. Unless I'm missing something, I don't see a problem here.

michaelochurch 14y ago

The reason VCs are funding lightweight companies isn't that VCs want to fund lightweight companies. It's something else, and it's easy to see the reason if you understand the sociology of VC-istan. VC-istan has become a good-ol'-boy network like any other. You need connections. You need the VCs to see you as a real person so that, instead of getting an indefinite put-off or a horrible term sheet, you either get (a) funding, quickly, on decent terms, or (b) a sit-down explanation of why your idea was rejected and either (i) introductions to investors who might be interested, or (ii) an EIR gig to pay the bills until you happen upon an idea that has wings. If you're not on those kinds of terms with VCs, and I doubt more a very small percentage of people are, then you shouldn't be wasting your time in VC-istan. If you're a real founder, not getting funding means that a VC will pop you in to a high-level position at a portfolio company that one would never get on the open job market, and that will make up for the 6 months you spent without income. Actually, you're going to have more than one of these offers. If you're not a real founder, not getting funding means that, congratulations, you spent months hustling with no income and no results. The reason why lightweight companies are getting all the funding is that building up and maintaining those VC contacts is expensive and time-consuming. It's easily as large a time commitment as a full-time job, if not worse, and it takes months before you see any payoff. VCs aren't preternaturally biased in favor of lightweight companies, but the people who are doing heavyweight stuff don't have the time to become "real founders" (i.e. "made men" in the VCs' eyes, who are entitled to sit-down explanations and EIR gigs upon rejection). So they have to pursue other routes to funding.

legutierr 14y ago
This sounds very sub-optimal from the VCs' perspective.
pg 14y ago
This is simply false. VCs have a network among themselves, but they don't expect founders to be part of it.
- j_s 14y ago
  There is a huge space between the OP and your response... I think reality varies in-between, particularly outside YC.
- vwoolf 14y ago
  Peter Thiel thinks VCs are biased against big ideas: http://blakemasters.tumblr.com/post/24122680868/peter-thiels-cs183-startup-class-15-notes-essay http://blakemasters.tumblr.com/post/24122680868/peter-thiels... . (This is in response to the grandparent: "VCs aren't preternaturally biased in favor of lightweight companies, but the people who are doing heavyweight stuff don't have the time to become "real founders.")
- michaelochurch 14y ago
  I think it's pretty accurate to say that they'll readily fund a band of outsiders if they think the idea's good, but still, they also put out terms that make it easy to take over the company if they don't see the founders as "real founders", "made men", "like us", or however you want to describe that status. Also, here's the difference for real founders vs. the rest of us. Real founders get alternatives put in front of them when their ideas are rejected-- EIR gigs to pay the bills, spots in portfolio companies. The rest of us get zilch; spent months with no income and nothing to show for it. Real Founder social status doesn't mean that bad ideas get funded, but it does mean you don't have to deal with the extreme income risk associated with startups for non-Real Founders-- a risk that stops making sense to take after age 25.
  - deleted 14y ago

dkrich 14y ago

“You see people graduating from top tech schools… and they’re starting companies in internet and mobile,” said Corey Reese, CEO and co-founder at Ness Computing. “They’re not starting companies to enhance the life expectancy, by and large.” This is what's known as the law of supply and demand, and isn't going to change. Sure I can start a business trying to sell salads because that's what people should be eating, but I'm not going to stay in business if people really want cheeseburgers and pizza. This whole article also kind of points the finger at people in Silicon Valley and seems to say "Hey, you went to a good school and there are a lot of people around you with a lot of money. Why aren't you curing cancer?" Two things- first, curing cancer is really fucking hard. Has the author of this article ever tried? Or is he assuming that some smart people somewhere else should be trying? I highly doubt that the guys behind Instagram are capable of curing cancer. So it's not as if for them it was interchangeable. It's also not as if the money that went to them would have resulted in a cure for cancer. To assume that it would have is to assume that there is somebody out there in SV going door-to-door trying to get funding for a cancer cure that would work. Secondly, there is a lot of ongoing research in the "important" industries at Universities and research laboratories that do not rely on VC money. VC's couldn't afford to fund this research. It requires grants and donations on a massive scale. The simplicity behind this article is absurd.

eshvk 14y ago
I think there is this (from my limited experience rather naive) belief that if a bunch of smart computer people get together, they can solve problems that have flummoxed biologists for long. This is something pervasive which afflicts even the smartest ones (See Steve Yegge's talk http://www.youtube.com/watch?v=vKmQW_Nkfk8 http://www.youtube.com/watch?v=vKmQW_Nkfk8 on how The Data Mining needs to be used more to solve problems in biology). Having spent some time in grad school foolishly believing that all biology needed was a sprinkle of math and a generous dollop of python skills, I think the problem is that in Computer Science we have problems that are sometimes insanely hard but due to the several layers of abstraction, are inherently rather deterministic and much less noisy than real-world systems. I think the best comprehensible example comes from the physical layer of most electronics where several of the modeling equations are naive approximations designed to work under specific conditions. The complexity becomes even more overwhelming when you look at biological systems: The nonlinearity especially in say genetic hacking becomes apparent when you realize that each tiny modification has so many unintended effects (making modeling in a computer environment especially difficult) which is why biologist go through the grind of running all those "boring" real world experiments in labs. I think there are quite a few research labs that are using data mining and machine learning techniques to try to solve problems but we are at most quality places well beyond needing "smart people with computer skills". After a while, fundamental research requires, like you said, money on a massive scale which VC's really can't afford.

dasil003 14y ago

It's a gold rush. We can't sit around and wring our hands over this. Mobile/social are cheap and easy to get into and as long as Facebook is buying them for a billion dollars, it's going to give better ROI than more "important" ideas. Now I'm pretty sure this will all wash out over the coming years as Facebook works harder to monetize and the true value of this stuff becomes better understood. The bottom line is that a lot more people will pay a lot more money to live longer than they will to send instagrams. But in the meantime you can't blame VCs for irrational exuberance when year-old, twenty-employee companies are selling for a fucking billion dollars.

wpietri 14y ago
I can blame them a little. People who are chasing currently hot things are missing the chance to invest in the next hot thing. VCs have a sweet deal: they get fat salaries, have nice offices, and have plenty of support staff. If anybody can afford to play the long game, it's them. The only reason things are flipping for $1bn is that they are worth that to a much bigger company. Instead of going after the quick $1 billion company, I'd rather see them going for the "slow" $60 billion company (Facebook) or $200 billion company (Google).
- aclimatt 14y ago
  Venture Capital doesn't generally work that way unfortunately. VCs typically shoot for 10x over 5 years with the fund's total lifespan being approximately 10 years (from initial investment to return). So it's hard for VCs to make longer-term investments in companies like Google which took 14 years to get where they are today. (Sure, in the case of Google they could have flipped it sooner, but even a few years ago it wasn't worth what it is today.)
  - lurker14 14y ago
    Google's IPO was in 2004 at age 6-years and returned 100x on investment, and has had "regular" (on the high-end) big-cap growth since.

sreyaNotfilc 14y ago

Is Instagram really worth $1 Billion? Honestly we don't know. I would say no, but I'm wrong on a lot of things. I'm also right on a lot of things. Who really knows? As far as Facebook is concerned (well Mark is concerned) it is. But it begs the question of "Why?". * Surely Facebook has all the users in the world. Getting a few more million really isn't that substantial. * And even getting more users is a good thing, I'm fairly certain that 90% of those users are already on Facebook. So what are they really gaining? * The technology behind Instragram isn't remarkable. From what I've read, they are a picture app with filters. Yes, those effects are pretty cool, but I find it hard to believe that a group of people that are able to build the social juggernaut that is Facebook couldn't set aside 10 guys to create filters and effects already built into Facebook. Now perhaps its something else. Mark probably realized that they system was already in place through Instagram that all that was needed was to purchase them and slap a big ol' Facebook sticker on the cover. Done... Next task... I really don't know. I believe that Mark is allowed to do whatever. Afterall, he did invent Facebook. A potential money-making powerhouse. We are essentially the outsiders looking in. We haven't built a multibillion dollar company, so we can't really dictate that this is a bad move or not. Its working so far for Facebook (yes the stocks are not as great as they wanted, but hey at least they are out there playing the game). All I know is, its not my money, so it doesn't affect me. I would've just built the thing myself. But then again, I'm not the billionaire 28 year old. I'm just the 28 year old trying to start my own company.

deleted 14y ago
[deleted]
veyron 14y ago
Instagram, if it was allowed to expand and develop more social features, could have actually left Facebook in the dust. Seeing as how Facebook is perceived to be worth far more than a billion dollars, 1B is relatively cheap.
- pcwalton 14y ago
  Exactly. Facebook is determined not to become MySpace by heading off competition before it becomes too late. One of the most effective ways to head off that competition is to purchase it.

paulsutter 14y ago

“You see people graduating from top tech schools… and they’re starting companies in internet and mobile,” said Corey Reese, CEO and co-founder at Ness Computing. “They’re not starting companies to enhance the life expectancy, by and large.” Good for them. Internet and mobile are perfect for the first company you start. Elon Musk's first company was a non-world-changing Internet company (Zip2), but good for him that he started it. I'm sure he learned a ton about building a company, hiring people, etc.