4 ms·

The discussion of expected return sounds good from an investors perspective, but founders have no diversification, so a 1% chance of $100m or 99% chance of wast

The discussion of expected return sounds good from an investors perspective, but founders have no diversification, so a 1% chance of $100m or 99% chance of wasting five years sounds pretty lousy. This is my biggest issue with the VC world from a founder's standpoint. The situation gets even worse once you throw the decreasing marginal utility of money into the mix, because now the expected value of $100m is not worth 10x as much to me as $10m. In terms of ability to change my life, $10m provides probably 50-70% of the value that $100m provides. So if my odds of succeeding with a $10m payout from a bootstrapped business are 10%, and my odds of succeeding with a $100m payout from a VC business are 1%, those expected returns are equal in math terms, but not utility terms, and I'd be crazy to raise money.

andrew_null 14y ago
The whole 1% of $100M versus 10% of $10M calculation vastly oversimplifies the outcome of these companies as binary. This is totally wrong. In my experience in silicon valley, people start with building something small/simple (but in a big market), get little drips of funding from investors as they show progress. If they fail at any point along the way, there's value in what they've created, and they exit for whatever they get. The later you exit, typically the further along you get, and the bigger the exit. That's why the diversity of outcomes in the valley are everything from zero to billions, and companies raise anywhere from zero to a dozen rounds of funding. At any inflection point in the business, you have lots of options: you can sell, raise more money, raise more and cash out some shares, you can quit, you can make yourself chairman and have your cofoudner run it, you can do nothing and grow it organically, etc., etc. Each one of the choices above are part of your arsenal of options at almost any point. The people who choose to raise tons of money, not cash out at all, and then who fail- well, they made a series of active decisions to do all of that. They're big boys. My point is, when you're building a company you can make a lot of choices along the way, and it's not just setting out for a suicide run of either 1% of $100M or 10% of $10M. Choosing to raise outside financing is sort of like deciding whether or not you want a cofounder (or 2, or 3) - it just another form of business partner. You get less %, but hopefully they add to the business in a meaningful way that leaves you better off.
- ryanwaggoner 14y ago
  At any inflection point in the business, you have lots of options: you can sell, raise more money, raise more and cash out some shares, you can quit, you can make yourself chairman and have your cofoudner run it, you can do nothing and grow it organically, etc., etc. Ah, but this is only true for bootstrapped companies or very early stage companies with little funding. Once you raise a Series A or B, your options are basically to grow as fast as possible or get fired and replaced by someone who will. And this narrowing of options and loss of control is another thing I dislike. A successful bootstrapped company can always go raise money at great terms. But once you do, you can't go back. To be clear, I'm not blaming investors or saying anyone is being cheated. But I do think that many young, naive, overly-optimistic people end up taking a path they wouldn't take if they saw the world a little more realistically. It's the same situation with early startup employees, who almost always get shafted.
  - nostrademons 14y ago
    That also depends on the terms of your funding. It's your choice to give up board control; you can negotiate for a majority voting stake, but you have to have negotiating leverage. Zuckerburg not only kept sole control of his company, he also took cash off the table, so even if Facebook tanked in 2006 he would still end up a millionaire.
tlb 14y ago
Yes, if you value money at log($) like microeconomics says you should, then you should start something less risky than a startup. As Charlie Stross's essay (http://www.antipope.org/charlie/blog-static/2012/09/on-the-diminishing-marginal-ut.html http://www.antipope.org/charlie/blog-static/2012/09/on-the-d...) points out, there's another level. Elon Musk might get to retire on Mars. Bill Gates will probably cure malaria and several other big world problems. So if your goal in life is not just having enough food & toys but changing the world, the big money comes in handy.
- ryanwaggoner 14y ago
  Do it on your second venture, especially since now you're talking about levels of wealth that offer odds of first-time-founder success far, far below 1%.
- astrofinch 14y ago
  See also: http://80000hours.org/blog/12-salary-or-startup-how-do-gooders-can-gain-more-from-risky-careers http://80000hours.org/blog/12-salary-or-startup-how-do-goode...
emmett 14y ago
This is why, as the balance of power has shifted towards founders, new things have appeared in the funding rounds. The most prominent is the trend towards allowing founders to cash out in a portion of their ownership as part of the deal. Another is the trend towards smaller rounds where the founder gives up less control and fewer liquidation preferences.

andrew_null 14y ago

The whole 1% of $100M versus 10% of $10M calculation vastly oversimplifies the outcome of these companies as binary. This is totally wrong. In my experience in silicon valley, people start with building something small/simple (but in a big market), get little drips of funding from investors as they show progress. If they fail at any point along the way, there's value in what they've created, and they exit for whatever they get. The later you exit, typically the further along you get, and the bigger the exit. That's why the diversity of outcomes in the valley are everything from zero to billions, and companies raise anywhere from zero to a dozen rounds of funding. At any inflection point in the business, you have lots of options: you can sell, raise more money, raise more and cash out some shares, you can quit, you can make yourself chairman and have your cofoudner run it, you can do nothing and grow it organically, etc., etc. Each one of the choices above are part of your arsenal of options at almost any point. The people who choose to raise tons of money, not cash out at all, and then who fail- well, they made a series of active decisions to do all of that. They're big boys. My point is, when you're building a company you can make a lot of choices along the way, and it's not just setting out for a suicide run of either 1% of $100M or 10% of $10M. Choosing to raise outside financing is sort of like deciding whether or not you want a cofounder (or 2, or 3) - it just another form of business partner. You get less %, but hopefully they add to the business in a meaningful way that leaves you better off.

ryanwaggoner 14y ago
At any inflection point in the business, you have lots of options: you can sell, raise more money, raise more and cash out some shares, you can quit, you can make yourself chairman and have your cofoudner run it, you can do nothing and grow it organically, etc., etc. Ah, but this is only true for bootstrapped companies or very early stage companies with little funding. Once you raise a Series A or B, your options are basically to grow as fast as possible or get fired and replaced by someone who will. And this narrowing of options and loss of control is another thing I dislike. A successful bootstrapped company can always go raise money at great terms. But once you do, you can't go back. To be clear, I'm not blaming investors or saying anyone is being cheated. But I do think that many young, naive, overly-optimistic people end up taking a path they wouldn't take if they saw the world a little more realistically. It's the same situation with early startup employees, who almost always get shafted.
- nostrademons 14y ago
  That also depends on the terms of your funding. It's your choice to give up board control; you can negotiate for a majority voting stake, but you have to have negotiating leverage. Zuckerburg not only kept sole control of his company, he also took cash off the table, so even if Facebook tanked in 2006 he would still end up a millionaire.

tlb 14y ago

Yes, if you value money at log($) like microeconomics says you should, then you should start something less risky than a startup. As Charlie Stross's essay (http://www.antipope.org/charlie/blog-static/2012/09/on-the-diminishing-marginal-ut.html http://www.antipope.org/charlie/blog-static/2012/09/on-the-d...) points out, there's another level. Elon Musk might get to retire on Mars. Bill Gates will probably cure malaria and several other big world problems. So if your goal in life is not just having enough food & toys but changing the world, the big money comes in handy.

ryanwaggoner 14y ago
Do it on your second venture, especially since now you're talking about levels of wealth that offer odds of first-time-founder success far, far below 1%.
astrofinch 14y ago
See also: http://80000hours.org/blog/12-salary-or-startup-how-do-gooders-can-gain-more-from-risky-careers http://80000hours.org/blog/12-salary-or-startup-how-do-goode...

emmett 14y ago

This is why, as the balance of power has shifted towards founders, new things have appeared in the funding rounds. The most prominent is the trend towards allowing founders to cash out in a portion of their ownership as part of the deal. Another is the trend towards smaller rounds where the founder gives up less control and fewer liquidation preferences.