5 ms·

Tight investors force young entrepreneurs offshore

21 points by apapli 14y ago

7Figures2Commas 13y ago
What if the title of this article is wrong? Isn't it possible that American investors are loose? If you believe the hype, foreign investors are scared of failure, less willing to take chances, etc. Yes, investors have different risk tolerances, but most professional investors are not entirely risk averse. Looking at the performance of most venture capital funds, and the venture capital "asset class" as a whole, over the past decade-plus, I think more intelligent investigation of foreign investors' preferences would reveal that there are very good reasons they aren't chomping at the bit to throw money at every tech entrepreneur in need of a few million dollars.
gridmaths 14y ago
The PWC report they mention can be found here : http://www.startupaus.org/research---startup-economy http://www.startupaus.org/research---startup-economy [ PDF here : http://www.digitalpulse.pwc.com.au/wp-content/uploads/2013/04/PwC-Google-The-startup-economy-2013.pdf http://www.digitalpulse.pwc.com.au/wp-content/uploads/2013/0... ]
michaelochurch 14y ago
What gets me, in the US, is that investors only want to fund companies in red-ocean star cities where studio apartments cost more per month than the average American fucking makes after taxes. I enjoy many things about living in New York-- you fucking hate it when you sign a rent check or change jobs; other than that, it's quite nice-- but it pisses me the fuck off to pay these ridiculous rents (and the real estate costs reflected in restaurant pricing; I wouldn't mind paying $20 for sushi if the money went to the chef and wait staff and not real-estate fuckers). The reason the city's expensive is because top-talent people like me come here and work their asses off, providing a healthy substrate for economic activity that generates lots of value. I'm bringing the real fucking ingredient (talent) and not these unproductive and fucking uncultured absentee landlord fucksticks (half of whom don't even live in the city, and what the fuck are we doing allowing foreign speculators, i.e. third-world despots and their henchmen, to own property here when we can't even provide for our own fucking people?) who've stolen most of my savings. Who the fucking fuck thought "Talent Pays" is a fair or good fucking system? It wasn't fucking me, I'll tell you that much. The talent argument for startups only being in star cities is specious. All it would take is for a few hundred top engineers to move to any city X in unison and that would start something. Fuck, you might be able to build a kernel with 20. You could use a #4-10 tech hub (Austin, Seattle) or somewhere that's not even on the map (e.g. Iowa City). Now, if you're selling to a specific clientele, living in a star city makes sense. If 80% of your clients are going to be financial firms, you want to be in New York. I get that. But there's so much that can be done from anywhere; so why is all the investor money limited to a couple of cities? I am a genetic contrarian so I tend to be one of the first to see when going assumptions are wrong. I think that if you want to build a stable company, you want to be outside of the fuxpensive star cities right now. When the culture is one where you have to become some parasitic VP who doesn't do anything, and then "exit", just to own a house, you're not nurturing the lifelong software engineers who will actually be motivated to build awesome shit. Whereas outside of the star cities, your burn rate is lower, and the "job hopping" climate isn't as fluid (which is good and bad) so you can really invest in people and build for the long-term, instead of being fucking toast if Facebook doesn't buy you before trick-or-treat night.
- cafard 14y ago
  With all due respect, I don't see what this has to do with Australia.
  - michaelochurch 14y ago
    OP talks about how much easier it is to raise MegaMillions in the US, but that's only true in a couple of locations that are right now congested and expensive thanks to the Social Media Bubble Douchepocalypse of 2010-13[?]. It's about the location problem in general. SELECT FROM places WHERE funding_avaliable = true AND cost_of_living < fuxpensive returns a very small result set, and that's unfortunate.
- gridmaths 14y ago
  The rent in Melbourne and Sydney is pretty insane also... we have the very same problem. This is why a few people bootstrap from SouthEastAsia : low_rent == longer_runway :]
  - seanmcdirmid 13y ago
    Beijing and Shanghai also have high rents. I've heard Bangkok is reasonable, far from cheap.
    - michaelochurch 13y ago
      One misconception is that real estate prices have something to do with a robust economy or value-driven demand. Those are, at most, 5% of the picture. 95% of it is regulatory corruption and the legacy cruft it generates. Even good land-reform programs get abused (cf. NYC's 1947 legacy rent control, many of whose beneficiaries today are upper-middle-class transplants who stalked obituaries and paid "key money" to a dead person's out-of-city children to get an arrangement literally better than ownership). That's why Luanda and Moscow are more expensive than New York. Real estate demand is extremely price-inelastic, which is why a disaster that destroys 5% of supply would actually double (at least) the supposed "value" of the remaining land. Regulatory corruption often has the same supply-destructive effects. High rent is an undesirable (and, one hopes, temporary) byproduct of urban health, but not a real correlate because its long-term effects are disastrous.
schappim 13y ago
I partially agree with this. I run a startup in Sydney and raised $1M from angels and VCs in both Australia & the US. When I first presented to angels in Sydney I found them initially "tight", and they laughed at the $2M valuation I was pitching. After this I pitched at 500 and at a whim doubled the amount I was raising (and our valuation). The response from valley investors was that it was refreshing I was only asking for a $4M pre and I was able to secure some investment (in the context of several YC companies wanting a 10-15M valuation post YC). I found that with this strike price established by the Americans, the previously "tight" Australian investors then followed suit. Just my 2c.
- michaelochurch 13y ago
  When I first presented to angels in Sydney I found them initially "tight", and they laughed at the $2M valuation I was pitching. I feel like the one-time cash-drop is a terrible model for early-stage businesses. A good (1.5+) programmer is worth at least $300k/year working on his own stuff, because (a) he actually gives a shit, and (b) his competence will grow faster than it would in a typical paid job. So for 4 years of a good engineer's work, $1.2M is a fair sight-unseen valuation. Scale this up for team size and include existing validations from the market, and $5-10M isn't unreasonable (with a 4-year vesting period on founder equity; unvested stuff going to investors). The indefinite duration to profitability is a problem, because it's such a huge unknown that renders valuation calculation a joke. When you're valuating a person, any number that comes without an amount of work (e.g. a duration) is meaningless. I feel like an Autonomy Fund model is better. Broad-strokes overview, minus the regulatory stuff and incentive problems and adverse-selction protections: there isn't a specified time line, but you get 75% of your market salary, and investors get a passive 30% equity in whatever you build (including side projects, that being the one downside for employee). The going assumption is that you're worth 2.5x more to the economy when you work on your own stuff than when you work for a typical company. Of course, there are various protections that need to be in play to prevent people from scamming it (i.e. quitting the Fund, then launching something next-day with 100% equity) and there would be a need for some kind of audit cycle (to push out people who are coasting) but I think the overall model is superior to anything that exists now. One thought I had is that local governments would have an interest in setting these kinds of things up, because even if the concept fails and they "lose" money, it goes back into the city and the network effects also build up the technology ecosystem there.

21 points by apapli 14y ago

What if the title of this article is wrong? Isn't it possible that American investors are loose? If you believe the hype, foreign investors are scared of failure, less willing to take chances, etc. Yes, investors have different risk tolerances, but most professional investors are not entirely risk averse. Looking at the performance of most venture capital funds, and the venture capital "asset class" as a whole, over the past decade-plus, I think more intelligent investigation of foreign investors' preferences would reveal that there are very good reasons they aren't chomping at the bit to throw money at every tech entrepreneur in need of a few million dollars.

gridmaths 14y ago

The PWC report they mention can be found here : http://www.startupaus.org/research---startup-economy http://www.startupaus.org/research---startup-economy [ PDF here : http://www.digitalpulse.pwc.com.au/wp-content/uploads/2013/04/PwC-Google-The-startup-economy-2013.pdf http://www.digitalpulse.pwc.com.au/wp-content/uploads/2013/0... ]

michaelochurch 14y ago

What gets me, in the US, is that investors only want to fund companies in red-ocean star cities where studio apartments cost more per month than the average American fucking makes after taxes. I enjoy many things about living in New York-- you fucking hate it when you sign a rent check or change jobs; other than that, it's quite nice-- but it pisses me the fuck off to pay these ridiculous rents (and the real estate costs reflected in restaurant pricing; I wouldn't mind paying $20 for sushi if the money went to the chef and wait staff and not real-estate fuckers). The reason the city's expensive is because top-talent people like me come here and work their asses off, providing a healthy substrate for economic activity that generates lots of value. I'm bringing the real fucking ingredient (talent) and not these unproductive and fucking uncultured absentee landlord fucksticks (half of whom don't even live in the city, and what the fuck are we doing allowing foreign speculators, i.e. third-world despots and their henchmen, to own property here when we can't even provide for our own fucking people?) who've stolen most of my savings. Who the fucking fuck thought "Talent Pays" is a fair or good fucking system? It wasn't fucking me, I'll tell you that much. The talent argument for startups only being in star cities is specious. All it would take is for a few hundred top engineers to move to any city X in unison and that would start something. Fuck, you might be able to build a kernel with 20. You could use a #4-10 tech hub (Austin, Seattle) or somewhere that's not even on the map (e.g. Iowa City). Now, if you're selling to a specific clientele, living in a star city makes sense. If 80% of your clients are going to be financial firms, you want to be in New York. I get that. But there's so much that can be done from anywhere; so why is all the investor money limited to a couple of cities? I am a genetic contrarian so I tend to be one of the first to see when going assumptions are wrong. I think that if you want to build a stable company, you want to be outside of the fuxpensive star cities right now. When the culture is one where you have to become some parasitic VP who doesn't do anything, and then "exit", just to own a house, you're not nurturing the lifelong software engineers who will actually be motivated to build awesome shit. Whereas outside of the star cities, your burn rate is lower, and the "job hopping" climate isn't as fluid (which is good and bad) so you can really invest in people and build for the long-term, instead of being fucking toast if Facebook doesn't buy you before trick-or-treat night.

cafard 14y ago
With all due respect, I don't see what this has to do with Australia.
- michaelochurch 14y ago
  OP talks about how much easier it is to raise MegaMillions in the US, but that's only true in a couple of locations that are right now congested and expensive thanks to the Social Media Bubble Douchepocalypse of 2010-13[?]. It's about the location problem in general. SELECT FROM places WHERE funding_avaliable = true AND cost_of_living < fuxpensive returns a very small result set, and that's unfortunate.
gridmaths 14y ago
The rent in Melbourne and Sydney is pretty insane also... we have the very same problem. This is why a few people bootstrap from SouthEastAsia : low_rent == longer_runway :]
- seanmcdirmid 13y ago
  Beijing and Shanghai also have high rents. I've heard Bangkok is reasonable, far from cheap.
  - michaelochurch 13y ago
    One misconception is that real estate prices have something to do with a robust economy or value-driven demand. Those are, at most, 5% of the picture. 95% of it is regulatory corruption and the legacy cruft it generates. Even good land-reform programs get abused (cf. NYC's 1947 legacy rent control, many of whose beneficiaries today are upper-middle-class transplants who stalked obituaries and paid "key money" to a dead person's out-of-city children to get an arrangement literally better than ownership). That's why Luanda and Moscow are more expensive than New York. Real estate demand is extremely price-inelastic, which is why a disaster that destroys 5% of supply would actually double (at least) the supposed "value" of the remaining land. Regulatory corruption often has the same supply-destructive effects. High rent is an undesirable (and, one hopes, temporary) byproduct of urban health, but not a real correlate because its long-term effects are disastrous.

schappim 13y ago

I partially agree with this. I run a startup in Sydney and raised $1M from angels and VCs in both Australia & the US. When I first presented to angels in Sydney I found them initially "tight", and they laughed at the $2M valuation I was pitching. After this I pitched at 500 and at a whim doubled the amount I was raising (and our valuation). The response from valley investors was that it was refreshing I was only asking for a $4M pre and I was able to secure some investment (in the context of several YC companies wanting a 10-15M valuation post YC). I found that with this strike price established by the Americans, the previously "tight" Australian investors then followed suit. Just my 2c.

michaelochurch 13y ago
When I first presented to angels in Sydney I found them initially "tight", and they laughed at the $2M valuation I was pitching. I feel like the one-time cash-drop is a terrible model for early-stage businesses. A good (1.5+) programmer is worth at least $300k/year working on his own stuff, because (a) he actually gives a shit, and (b) his competence will grow faster than it would in a typical paid job. So for 4 years of a good engineer's work, $1.2M is a fair sight-unseen valuation. Scale this up for team size and include existing validations from the market, and $5-10M isn't unreasonable (with a 4-year vesting period on founder equity; unvested stuff going to investors). The indefinite duration to profitability is a problem, because it's such a huge unknown that renders valuation calculation a joke. When you're valuating a person, any number that comes without an amount of work (e.g. a duration) is meaningless. I feel like an Autonomy Fund model is better. Broad-strokes overview, minus the regulatory stuff and incentive problems and adverse-selction protections: there isn't a specified time line, but you get 75% of your market salary, and investors get a passive 30% equity in whatever you build (including side projects, that being the one downside for employee). The going assumption is that you're worth 2.5x more to the economy when you work on your own stuff than when you work for a typical company. Of course, there are various protections that need to be in play to prevent people from scamming it (i.e. quitting the Fund, then launching something next-day with 100% equity) and there would be a need for some kind of audit cycle (to push out people who are coasting) but I think the overall model is superior to anything that exists now. One thought I had is that local governments would have an interest in setting these kinds of things up, because even if the concept fails and they "lose" money, it goes back into the city and the network effects also build up the technology ecosystem there.