9 ms·

"The End of Silicon Valley" Is Nonsense

37 points by eladgil 14y ago

ChuckMcM 14y ago
"Personal financial stability and past experience can go a long way for people to take big bets." Really liked that quote. One of the benefits silicon valley gets when it mints a few hundred or so millionaires is that those people now go out a bit more fearless. Tom Lyon who is a serial entrepreneur once told me that you really needed three wins, the first was you joined a company that taught you about what being a tech company entailed, the second was a startup where you made enough out of it that you could do a third where you could better control the economics and the vision. There may be a number of attempts in that thread but its really true. A number of people I know seem to have various milestones for fearlessness, but they roughly correlate to; 1) they own their house free and clear, 2) they have enough money set aside for their kids educations, 3) they have enough money set aside to keep them in Ramen indefinitely[1]. Each level brings its own level of fearlessness. [1] generally the 'retirement' calculators ask you to predict when you're going to die. So you take that number, the cost of paying taxes/insurance on your house and your own health + ramen and that is your 'ramen retirement' number. Note that you leave behind a giant asset (the house) so many folks assume selling the house and moving to a smaller/cheaper place in that number.
- 001sky 14y ago
  This is a great post and a real eye opener. Translation: In maths for SF 1) $1-2 million, minimum for a house for 4 2) $250K per kid x 2 = $500k, assuming public high school 3) Min $1 million per head, 50k pre tak 30-40k post tax total: $3.5 million to $4.5 million, NAV ~= 5% pretax of $100m exit Sorta-back-of-the-envelope This is why you need N exits, not just 1
  - mahyarm 14y ago
    With a little bit of 'shopping', you can reduce that number to 1/2 a million. Look at Mr.Money Mustache for example.
    - 001sky 14y ago
      Go ahead, but post you're numbers...
      - mahyarm 14y ago
        MMM's multiple children family in a colorado suburb lives very nicely on an annual budget of ~$25k annually in a place where houses are around $100-300k vs $800k-3million. According to his math, the safe indefinite withdrawal rate for retirement is around %4, which works out to around $500k. How does he keep a $25k budget? By not spending his money foolishly and 'shopping' for the most optimal deal. He goes into great detail about this in his blog. http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/ http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need...
        001sky 14y ago
        This is good data. Just to sum it up though. 3) 500k per your note 2) 500k for two kids in university 1) 200k for house ____________ = 1.2 million after tax = 1.5 million pre tax
        mahyarm 14y ago
        I bet with some smart education shopping, you can reduce that figure to 100k for the university. A lot can happen in 15 years.
        001sky 14y ago
        A lot can happen in 15 years Try this: In 8 years, 80% of what we spend on the entire US Armed forces will be spent to pay rent on the National debt.[1] And, if we think about that, thats about $250K per 2 tax-payer household of assumed govt debt.[2] Not trying to be a kill-joy. Just adding stuff up. _____________ [1] Per the latest budget, approx $800b vs $1000bn/yr [2] 20bn/300 us pop x 50% tax base x 2 earners
  - moocow01 14y ago
    Or just don't live in the SF / Bay Area. If you want to have a crazy runway for your startup work towards paying off a 250k (or less) house with solar on it just about anywhere else in the US. The counter-argument to this is that being in SF,NY,etc gives you connections, opportunities, etc. but Id rather just not have to worry about coming up with a sizable chunk just to make sure my family has a roof over their heads.
    - 001sky 14y ago
      Good post too, but this is only a ~21% reduction in the total (2.75 vs 3.5). You're still looking at ~80% of the cost base. The neutral decision point is only @ 25% increase in exit/success neede to make the switch to metro (80 to 100).
      - moocow01 14y ago
        That is true - there is no math to this one but I do know from observation that if you have a decent roof over your head, running water and electricity, decent transportation, an internet connection and a computer all "paid off"... the rest of life can be lived well and paid for very very cheaply. May be an entrepreneurial way to think about for those that are prone to being a cheap ass like me
        001sky 14y ago
        various milestones for fearlessness Yes, some are only in mind-- including ability to overcome fear, in general
IsaacL 14y ago
Very well said. I've been planning a blog post for some time on "hidden principles of Silicon Valley"; basically the unsaid assumptions that the top investors seem to follow but the startup peanut gallery don't grasp. Just little tidbits I've gained from the writings of Peter Thiel, Paul Graham, Marc Andreesen, Mark Suster, Ben Horowitz, etc. One example: lots of people decry the trend for valley startups to burn cash to grow market share. Silly startups, why can't they bootstrap? Why is LinkedIn trading at a 300+ P/E ratio? But the hidden assumption (which may be wrong) is that the winners of today's tech game will be around for a long time, generating billion-dollar cashflows for decades. Peter Thiel explained it better than I can: "PayPal is illustrative. 27 months in, its growth rate was 100%. Everybody knew that rate would decelerate, but figured that it would still be higher than the discount rate. The plan was that most of the value would come around 2011. Even that long-term thinking turned out to undershoot; the discount rate has been lower than ex- pected, and the growth rate is still at a healthy 15%. Now, it looks like most of PayPal’s value won’t come until in 2020. LinkedIn is another good example of the importance of the long- term. Its market cap is currently around around $10B and it’s trading at a (very high) P/E of about 850. But discounted cash flow analysis makes LinkedIn’s valuation make sense; it’s expected to create around $2B in value between 2012 and 2019, while the other $8B reflects ex- pectations about 2020 and beyond. LinkedIn’s valuation, in other words, only makes sense if there’s durability, i.e. if it’s around to cre- ate all that value in the decades to come." It never fails to amuse me that the mean HN poster is actually quite cynical about startups -- I think this is partly due to cynical people posting more.
- 001sky 14y ago
  So, how does this relate to PG's article: Black Swan Farming? There is a huge difference in profiting from a stochasitic-but-diversified portfolio with massive variance and extrapolating from the outlier data. The properties of the outlier data, by definition, are not charachteristic of the data-set as a whole. The properties of the outlier data are useful for talking about the potential of future outliers and possible portfolio variance. 'The sink or swim strategy was successful for all 1% of the successes'? [1] Its easy to overgeneralize. __________ [1] 'The sink or swim strategy was not successful for all 99x1% of the non-successes.'
NickKampe 14y ago
No, it's really not nonsense at all. I honestly couldn't think of a worse place to start a company than Silicon Valley, other than potentially a third world country with no internet. Extremely high costs of living, constant talent warfare, and absolutely terrible traffic at peak hours. Unless you're venture backed, stay the hell away from the bay.
- brador 14y ago
  Care to name a few better places?
  - cobrausn 14y ago
    I'll just throw this out there: Kansas City? I am actually wondering if the Google Fiber initiative there will cause a startup boom.
    - brador 14y ago
      Is fast personal internet really that much of a driver? SV has the money, it has the talent, it has the beautiful weather. Yeah the rent sucks, but that's the only downside I know.
      - jes5199 14y ago
        I hate SF weather. Foggy and cold year round. Not that it matters, startup people never see the outdoors.
        Domenic_S 14y ago
        SF != SV
        jes5199 14y ago
        I'd rather live in a bad city than a nice suburb.
zwieback 14y ago
A better title would be "The End of software startups in Silicon Valley Is Nonsense". There are plenty of companies in the SV that will still be there when the software startups are gone. Also, behind the strawman arguments there are some hidden truths but they have to be rephrased to be interesting, e.g. software isn't easy but it appears to be easy so lots of people enter the field that shouldn't. Also, people should be working on harder things but not for the reasons discussed in the article.
- cli 14y ago
  Are there any good websites that cover non-software startups? As a physical scientist/engineer in training, I am more interested in the "physics or advanced materials" type of startups mentioned in the article.

37 points by eladgil 14y ago

"Personal financial stability and past experience can go a long way for people to take big bets." Really liked that quote. One of the benefits silicon valley gets when it mints a few hundred or so millionaires is that those people now go out a bit more fearless. Tom Lyon who is a serial entrepreneur once told me that you really needed three wins, the first was you joined a company that taught you about what being a tech company entailed, the second was a startup where you made enough out of it that you could do a third where you could better control the economics and the vision. There may be a number of attempts in that thread but its really true. A number of people I know seem to have various milestones for fearlessness, but they roughly correlate to; 1) they own their house free and clear, 2) they have enough money set aside for their kids educations, 3) they have enough money set aside to keep them in Ramen indefinitely[1]. Each level brings its own level of fearlessness. [1] generally the 'retirement' calculators ask you to predict when you're going to die. So you take that number, the cost of paying taxes/insurance on your house and your own health + ramen and that is your 'ramen retirement' number. Note that you leave behind a giant asset (the house) so many folks assume selling the house and moving to a smaller/cheaper place in that number.

001sky 14y ago
This is a great post and a real eye opener. Translation: In maths for SF 1) $1-2 million, minimum for a house for 4 2) $250K per kid x 2 = $500k, assuming public high school 3) Min $1 million per head, 50k pre tak 30-40k post tax total: $3.5 million to $4.5 million, NAV ~= 5% pretax of $100m exit Sorta-back-of-the-envelope This is why you need N exits, not just 1
- mahyarm 14y ago
  With a little bit of 'shopping', you can reduce that number to 1/2 a million. Look at Mr.Money Mustache for example.
  - 001sky 14y ago
    Go ahead, but post you're numbers...
    - mahyarm 14y ago
      MMM's multiple children family in a colorado suburb lives very nicely on an annual budget of ~$25k annually in a place where houses are around $100-300k vs $800k-3million. According to his math, the safe indefinite withdrawal rate for retirement is around %4, which works out to around $500k. How does he keep a $25k budget? By not spending his money foolishly and 'shopping' for the most optimal deal. He goes into great detail about this in his blog. http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/ http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need...
      - 001sky 14y ago
        This is good data. Just to sum it up though. 3) 500k per your note 2) 500k for two kids in university 1) 200k for house ____________ = 1.2 million after tax = 1.5 million pre tax
        mahyarm 14y ago
        I bet with some smart education shopping, you can reduce that figure to 100k for the university. A lot can happen in 15 years.
        001sky 14y ago
        A lot can happen in 15 years Try this: In 8 years, 80% of what we spend on the entire US Armed forces will be spent to pay rent on the National debt.[1] And, if we think about that, thats about $250K per 2 tax-payer household of assumed govt debt.[2] Not trying to be a kill-joy. Just adding stuff up. _____________ [1] Per the latest budget, approx $800b vs $1000bn/yr [2] 20bn/300 us pop x 50% tax base x 2 earners
- moocow01 14y ago
  Or just don't live in the SF / Bay Area. If you want to have a crazy runway for your startup work towards paying off a 250k (or less) house with solar on it just about anywhere else in the US. The counter-argument to this is that being in SF,NY,etc gives you connections, opportunities, etc. but Id rather just not have to worry about coming up with a sizable chunk just to make sure my family has a roof over their heads.
  - 001sky 14y ago
    Good post too, but this is only a ~21% reduction in the total (2.75 vs 3.5). You're still looking at ~80% of the cost base. The neutral decision point is only @ 25% increase in exit/success neede to make the switch to metro (80 to 100).
    - moocow01 14y ago
      That is true - there is no math to this one but I do know from observation that if you have a decent roof over your head, running water and electricity, decent transportation, an internet connection and a computer all "paid off"... the rest of life can be lived well and paid for very very cheaply. May be an entrepreneurial way to think about for those that are prone to being a cheap ass like me
      - 001sky 14y ago
        various milestones for fearlessness Yes, some are only in mind-- including ability to overcome fear, in general

IsaacL 14y ago

Very well said. I've been planning a blog post for some time on "hidden principles of Silicon Valley"; basically the unsaid assumptions that the top investors seem to follow but the startup peanut gallery don't grasp. Just little tidbits I've gained from the writings of Peter Thiel, Paul Graham, Marc Andreesen, Mark Suster, Ben Horowitz, etc. One example: lots of people decry the trend for valley startups to burn cash to grow market share. Silly startups, why can't they bootstrap? Why is LinkedIn trading at a 300+ P/E ratio? But the hidden assumption (which may be wrong) is that the winners of today's tech game will be around for a long time, generating billion-dollar cashflows for decades. Peter Thiel explained it better than I can: "PayPal is illustrative. 27 months in, its growth rate was 100%. Everybody knew that rate would decelerate, but figured that it would still be higher than the discount rate. The plan was that most of the value would come around 2011. Even that long-term thinking turned out to undershoot; the discount rate has been lower than ex- pected, and the growth rate is still at a healthy 15%. Now, it looks like most of PayPal’s value won’t come until in 2020. LinkedIn is another good example of the importance of the long- term. Its market cap is currently around around $10B and it’s trading at a (very high) P/E of about 850. But discounted cash flow analysis makes LinkedIn’s valuation make sense; it’s expected to create around $2B in value between 2012 and 2019, while the other $8B reflects ex- pectations about 2020 and beyond. LinkedIn’s valuation, in other words, only makes sense if there’s durability, i.e. if it’s around to cre- ate all that value in the decades to come." It never fails to amuse me that the mean HN poster is actually quite cynical about startups -- I think this is partly due to cynical people posting more.

001sky 14y ago
So, how does this relate to PG's article: Black Swan Farming? There is a huge difference in profiting from a stochasitic-but-diversified portfolio with massive variance and extrapolating from the outlier data. The properties of the outlier data, by definition, are not charachteristic of the data-set as a whole. The properties of the outlier data are useful for talking about the potential of future outliers and possible portfolio variance. 'The sink or swim strategy was successful for all 1% of the successes'? [1] Its easy to overgeneralize. __________ [1] 'The sink or swim strategy was not successful for all 99x1% of the non-successes.'

NickKampe 14y ago

No, it's really not nonsense at all. I honestly couldn't think of a worse place to start a company than Silicon Valley, other than potentially a third world country with no internet. Extremely high costs of living, constant talent warfare, and absolutely terrible traffic at peak hours. Unless you're venture backed, stay the hell away from the bay.

brador 14y ago
Care to name a few better places?
- cobrausn 14y ago
  I'll just throw this out there: Kansas City? I am actually wondering if the Google Fiber initiative there will cause a startup boom.
  - brador 14y ago
    Is fast personal internet really that much of a driver? SV has the money, it has the talent, it has the beautiful weather. Yeah the rent sucks, but that's the only downside I know.
    - jes5199 14y ago
      I hate SF weather. Foggy and cold year round. Not that it matters, startup people never see the outdoors.
      - Domenic_S 14y ago
        SF != SV
        jes5199 14y ago
        I'd rather live in a bad city than a nice suburb.

zwieback 14y ago

A better title would be "The End of software startups in Silicon Valley Is Nonsense". There are plenty of companies in the SV that will still be there when the software startups are gone. Also, behind the strawman arguments there are some hidden truths but they have to be rephrased to be interesting, e.g. software isn't easy but it appears to be easy so lots of people enter the field that shouldn't. Also, people should be working on harder things but not for the reasons discussed in the article.

cli 14y ago
Are there any good websites that cover non-software startups? As a physical scientist/engineer in training, I am more interested in the "physics or advanced materials" type of startups mentioned in the article.