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Startup Investing Trends

374 points by anateus 13y ago

captiva12 13y ago
It makes sense to invest in a company where the founders want to control the ownership. That really means the strongly believe in what they are doing. And other thing they should look in for founders is Perseverance.
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- beachstartup 13y ago
  what it really is is a prime example of solipsism.
- anateus 13y ago
  Key word: "seem", he even uses it several times.
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- counterpointer 13y ago
  Can you elaborate why do you think so? Also, http://www.paulgraham.com/disagree.html http://www.paulgraham.com/disagree.html
- garry 13y ago
  You're new here, so I thought I'd let you know: Hacker News is about actual conversation and debate, and not a contest on who can be most negative or contrary. There's not enough to be learned from that, and we might as well not have that conversation at all. It's not enough to say something is bullshit. Why is it? What part? How do you know?
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    - kevingibbon 13y ago
      "it's becoming cheaper to start a startup, and startups are becoming a more normal thing to do" You can now start a company with a few hundred dollars. All that's left is food and rent. This is the first time in history when this has been possible.
      - kevingibbon 13y ago
        My co-founder and I have $2500 into our business http://shyp.com http://shyp.com. This includes the domain name and all server usage to date. We use zipcars to do pickups and are already profitable on a per transaction basis. We have a large house in SF and rent our extra rooms on Airbnb. This covers rent + food. We have yet to take any external funding.
      - _delirium 13y ago
        > This is the first time in history when this has been possible. That's overstating it a bit. Plenty of '80s software companies were bootstrapped for the cost of food+rent+computer, with shareware demos distributed via BBS.
        rdouble 13y ago
        Even Apple was started as a bootstrapped effort.
        adventured 13y ago
        Microsoft as well. They required no outside capital, and Gates & Allen put in a modest sum (equal to maybe $10,000 today). Their customers funded the business.
        kevingibbon 13y ago
jfarmer 13y ago
"I think one of the biggest unexploited opportunities in startup investing right now is angel-sized investments made quickly. Few investors understand the cost that raising money from them imposes on startups." Oh lord yes. Having been through the fundraising process a few times, it's hard to describe the sheer relief when you find an investor willing to give a quick yes or no. The best I can describe it is like the feeling of getting a Christmas present you really, really wanted but didn't think to ask for. SV Angel and a16z are two of the best I've ever interacted with in this regard. It's clear both firms deeply respect entrepreneurs' time.
- privacybuff 13y ago
  I propose that investing is a market and the state of that market will depend on how the participants act. So, let me throw this idea out there: Be the kind of company that can pitch a VC and if they don't have a YES/NO answer to you within a week, pass on the VC. I think there's a power imbalance because founders want money more than VCs need to invest. I think the economics are such that founders should have a lot more power. When founders start demanding quick decisions (or more specifically, requiring them) ... the decision making process will become quicker.
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- jmtame 13y ago
  It's interesting that you point this out. I have always felt that way about investors: I would much rather have a fast "no" than an indefinite answer indefinitely. For that reason, whenever my friends give me a pitch deck and are looking for recommendations, I'll usually pass them along to Kevin from SVA, who is not only an awesome person but has always acted quickly. When I think of the slow investors, I never recommend them to friends. Decisiveness may be the new proxy for judging how good investors are (aside from their portfolio, which currently acts as the main signal).
- peloton 13y ago
  The unfortunate reality is that it's not about the firms, it's about whether the individual partner at the firm respects founders' time. For example, I know founders who have had unpleasant experiences with an investor at a16z.
yarou 13y ago
I don't find the trends to be too surprising. After the major bubbles of the dotcom era and the 2008 financial crisis (I wasn't alive for the LBO bubble), a lot of energy is focused in creative pursuits, rather than those simply engaging in wealth transfer. Bootstrapping will become easier as time goes on, with the advent of b2d/open-source toolkits, as well as the perpetual cost-savings of Platform-As-A-Service providers such as Heroku and AppEngine.
natural219 13y ago
I'm more skeptical. That there will be "more good startups" seems more like a wish than a prediction. Why will there be more good startups? Based off of what evidence? I'm not necessarily disagreeing, I just wonder why he thinks so. That there will be more startups in general seems obvious, but "good" startups seem to be increasingly more elusive, at least to me.
- kevingibbon 13y ago
  "it's becoming cheaper to start a startup, and startups are becoming a more normal thing to do" The number of good startups will grow with the number of overall startups.
  - robryan 13y ago
    Maybe, in many markets the total value to capture, while likely heading up over time, is unlikely to double because there are 2 top quality startups in the space rather than one. So often it could be the case that the competition to dominate a particular market will just be more intense. Of course in some spaces the quality of product/ service from more startups might alter the capital distribution of customers to create a much larger pie.
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bryanh 13y ago
Right now, VCs often knowingly invest too much money at the series A stage. They do it because they feel they need to get a big chunk of each series A company to compensate for the opportunity cost of the board seat it consumes. Which means when there is a lot of competition for a deal, the number that moves is the valuation (and thus amount invested) rather than the percentage of the company being sold. Which means, especially in the case of more promising startups, that series A investors often make companies take more money than they want. Seems like this is a plausible explanation of what happened to Color (http://www.crunchbase.com/company/color-labs http://www.crunchbase.com/company/color-labs)? Also, I rather enjoyed reading: Which means the first VC to break ranks and start to do series A rounds for as much equity as founders want to sell (and with no "option pool" that comes only from the founders' shares) stands to reap huge benefits. As I always thought the big, required option pool that so heavily diluted founders/early employees was a bit out there. Seems much more sane to practice JIT dilution.
- lumens 13y ago
  The bigger issue is not that the dilution from the option pool creation happens at that early stage (rather than JIT), it's that VC's require the creation, and therefore dilution, to happen pre-money. Because of this, the founders carry the burden and the new investors don't -- despite the fact that the investors will reap some of the benefit (equity being available to grow the business they now own).
utnick 13y ago
Interesting article As an outsider, it was surprising to me that seed investors don't have access to a company's revenue numbers. I would think there would be some kind of quarterly report that goes to all investors.
- mikeg8 13y ago
  There's no definitive rules for stuff like that. Some seed funding happens pre-revenue and other founders are more than willing to share revenue figures with potential seed investors. We are in the seed funding stage and are starting a bi-monthly email update to our advisors, potential investors ect that will definitely mention revenue numbers.
jbapple 13y ago
"[5] This trend is one of the main causes of the increase in economic inequality in the US since the mid twentieth century. The person who would in 1950 have been the general manager of the x division of Megacorp is now the founder of the x company, and owns significant equity in it." What economic evidence is there to support this claim about the causes of economic inequality?
- CleanedStar 13y ago
  The whole essay is rife with upper class Panglossian obliviousness. Right before he talks about economic inequality he says "When I graduated from college in 1986, there were essentially two options: get a job or go to grad school". Only 8% of over-25 Americans have a graduate degree today, and that percentage was even lower 27 years ago. From this view of the world, people going to night school to get their Bachelors don't exist, because these people didn't go to the $40k a year college you went to. For most people in the world, someone at 21 with Bachelors in hand deciding on either grad school or a professional career, is already someone who is living the life of Riley. There's nothing incorrect in his statement, although it does give an idea of the bubble of the world he lives in. Income inequality clearly all is at the level of VCs and founders in his world - even the upper middle class programming minions don't come into consideration. Income inequality connections clearly do not come to mind in the case of, say, the US army marching into Los Angeles in 1992 to restore order among the poor and working poor there. It's a kind of solipsism you can read about in the unofficial minutes of the councils of the Czar's ministers in 1916. The earthquake in class relations coming is not in minor percentage differences between enormously wealthy VC limited partners and upper middle class founders. It's what happens when the world economy comes to a stop like it did in the late 1920s. We got a small preview of it in 2007 and 2008. In the years and decades ahead, financial shenanigans on Wall Street will eventually lead to an economy that will not start up again, no matter how much priming. THEN is when we will start seeing real shifts in the relations of production.
  - whiddershins 13y ago
    I think this is a great point. That oblivious bubble takes a bite out of otherwise very insightful words. And I observe this perspective has spread out among the startup community. It always surprises me that people who are so intelligent in many ways can be so narrow in their social and economic context.
CleanedStar 13y ago
"This trend is one of the main causes of the increase in economic inequality in the US since the mid twentieth century. The person who would in 1950 have been the general manager of the x division of Megacorp is now the founder of the x company, and owns significant equity in it." Boy, is this a load of bollocks. I guess the 20th century war against socialism ("the means of production in the hands of those who work it") and worker's organizations and parties doesn't come much into play into these analyses. Up to the bickering a few months ago in Wisconsin with Walker - although we're so far down the road, that example isn't very useful as a specific case. Yes, the entrepreneurial middle manager starting his own business, this is the source of income inequality! Meanwhile, half the Forbes 400 inherited their way onto the list. Where's the plucky entrepreneur in that equation? Even "self-made" people like Warren Buffett had a congressman father and a grandfather with a chain of stores. Not exactly a guy pulling himself up by his bootstraps. I mean, the fact that this speech was made to investors is a signal. Not the tone, but the fact that it's investors who are the ones who sit and hear these things. The programmer in the trenches, working 50-60 hours a week creating wealth is not a part of these decisions on production. There's a good documentary called "Born Rich" that is on Youtube right now. I would recommend people watch it. This is who the money goes to, not the plucky, hard-working entrepreneur. Blogs are filled with stories of angels and VCs backstabbing founders. As is HN. And the founders usually get the best deal in the company, far better than schlub programmers. Even hackers of the caliber of Jamie Zawinski have attested to this. This idea of income inequality happening because some hard-working founder gets all of the money is a complete farce. Propaganda even. If we want to really get into a discussion of this - just who are the "limited partners" the VCs are raising money from, and where did they get their money? We always see a fresh-faced Mark Zuckerberg or Drew Houston, or a Paul Graham or even a Ron Conway, or John Doerr or Michael Moritz. But who are the limited partners they're raising money from? Who is calling the shots on how money gets spent?
kevingibbon 13y ago
It will be interesting to see if VCs take Pauls advice. Recently a lot of VCs have been offering value add services like design expertise and recruiting. I hope they also include quick decisions and less dilution. Why does it take some VCs so long to make a decision? Ron Conway makes a decision to fund a founder within 10min of meeting them.
lnsignificant 13y ago
I wish someone would redesign Paul's site. I always think I click the wrong link when I initially land on it.
- pixelmonkey 13y ago
  paulgraham.com's design is actually quite similar to the design of default templates for Viaweb online stores, the company pg founded. Every Viaweb site had a left-hand row of buttons with navigation elements and simple sans-serif text in the center. I actually have a theory that the software running paulgraham.com is a sort of stripped down version of the original Viaweb content management system. You can see in the view-source that there is still "Y! Store" JavaScript running on his pages, and that, for example, the titles of each essay on his site are actually images hosted at yimg.com (e.g. for this essay, http://ep.yimg.com/ca/I/paulgraham_2270_385 http://ep.yimg.com/ca/I/paulgraham_2270_385). pg has spoken about how one of Viaweb's major features early-on was that it worked around the limitations of browser fonts by auto-generating images (GIFs) with rendered anti-aliased fonts and served those in the browser. Looks like his site continues to do the same thing to this day. If my theory is true, I really hope pg never redesigns it. It serves as a pretty cool historical reference to the company he founded, that made him wealthy in the sale to Yahoo, and that ultimately allowed him to start YC / HN. The left-side navbar is also an image map! (remember those?) My guess: Viaweb generated a single image out of the navbar description and markup for an image map. In those days, browsers didn't handle parallel downloading well. A single navigation element with an image map probably loaded faster in browsers than several navigation image buttons. Yes, image maps are out of vogue and text-as-images is unnecessary with modern browsers. But, if the software running paulgraham.com truly has lineage to Viaweb, then that is so much cooler than any modern redesign could possibly be.
  - pg 13y ago
    It's not a version. My site is actually made with Yahoo Store.
dave1619 13y ago
Seems like PG is advocating the following to VCs: 1. Don't grow pessimistic over the growing number of startups because there will be a growing number of great founders. If you focus on finding them, you can make more money than before. 2. To find them, you need a competitive advantage which could be doing what founders want/need: smaller Series A rounds and quick decisions. He's practically daring the VC community to see who will step up.
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kapilkale 13y ago
One thing I suspect will change for VCs is the 2/20 model. Because the cost of building a startup is going down, and assuming the opportunity lies in early stage investments, VCs are going to have to make more early stage investments than they are now. VC operating expenses are covered by a 2% management fee levied on assets under management. This incentivizes VCs to create megafunds so that they can have proportionally mega salaries. Seed stage investments come at a totally different operating cost. Seed-stage investing is pretty hard with a megafund because they are so expensive operationally. VCs would much rather write a 50M check in a growth round for 33% of a company than a 100 $500K checks for 5% of each company. They might have to talk to 20 companies for the growth rounds to make 1 investment, but they'd probably have to talk to thousands to make the 100 investments in seed rounds. That means they need a bigger staff and that 2% model won't work. In fact, I've heard VCs say that the only reason they write small checks in seed rounds is so that they have a strong relationship with the founders and pro-rata rights if the company happens to blow up. I suspect that VC salaries will go down like crazy, and they'll be forced to rely on carry for the funds earnings. Which is probably a good direction for VCs to go. Chris Dixon outlined the problem here too: http://cdixon.org/2009/08/26/the-other-problem-with-venture-capital-management-fees/ http://cdixon.org/2009/08/26/the-other-problem-with-venture-...
sdoowpilihp 13y ago
The article was a good read. Through out the article though, I couldn't help but feel that Paul Graham wants to change how startups are invested in, specifically the 24 hour turnaround on investment decisions and the A round change, and framed it as "I see x as a trend that is developing". It makes me wonder if a sufficiently influential person in a given industry claims to see a trend that is closely tied to human behavior, could that trend become a reality?
- _delirium 13y ago
  Yes, I think it's best read as an advocacy piece.
- abalashov 13y ago
  Yes. I think there is no question that people like PG have a vested interest in taking patterns that favour them and socialising them into the wider industry as a descriptive account of an ongoing trend, rather than a prescriptive self-fulfilling prophecy. Any good marketer-pundit will do that. :-)
mathattack 13y ago
"When I graduated from college in 1986, there were essentially two options: get a job or go to grad school. Now there's a third: start your own company." This is an important observation. 20 years ago, the smartest people went to large companies. Now it's a question of "Join someone else's startup or start my own?" The alternative of career paths at large companies no longer exist. It isn't just social acceptance and lower cost of entry, it's that the alternative is long gone.
- drugthrowaway 13y ago
  You're only talking about a very, very small slice of the population - geographically centered around maybe 3 or 4 cities. This is absolutely not the case in reality though.
  - mathattack 13y ago
    The slice is the top students, who used to exclusively go to large companies. Now it's not so many. My impression is the top CS and Engineering students can successfully conduct a national job search.
    - _delirium 13y ago
      The top students still mostly go to large companies. Compared to the number of top students going to companies like Google (who hired something like 6,000 people last year), grad school, quantitative finance companies, and several other options, the number of top students going to YC or otherwise starting companies is not a large number. Among my own acquaintances it seems to have more to do with people's strengths and lifestyle interests. People who are strong techies but entirely uninterested in business would rather go to Google, or even to somewhere like NASA or Boeing or IBM or Intel. People who are a bit more into entrepreneurship, and/or don't like having a boss, would rather go into starting a business. Depends on the specific technology as well: a lot more web-tech people go the startup route than hardware engineers, and certainly compared to aerospace engineers.
- mikeg8 13y ago
earbitscom 13y ago
Oh man. This may be my favorite startup quote in all of history. "Investors make more money as founders' bitches than their bosses."
- tptacek 13y ago
  I am not as in love with that quote as you are. I'm not a fan of the term, but also, it screws with the tone. You know it's janky writing when the reader stops and rereads to make sure they just read what they think they read.
  - earbitscom 13y ago
    That's why I enjoyed it so much. PG puts thought into every word of these essays. If I know him well enough to have an opinion, that sentence was crafted as much for its contents as for its tone, and that's what made it so awesome. Any disgruntled founder saying it would have been status quo. PG saying that in an essay is just pure entertainment to me.
  - jacques_chester 13y ago
    I think he liked the alliteration too much to give it up.
    - tptacek 13y ago
      Masters/minions also would have worked.
      - jacques_chester 13y ago
        I was trying to think of an alternative myself and didn't strike on one.
      - sneak 13y ago
        ...and without the terribly sexist undertones, at that.
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privacybuff 13y ago
After many years dealing with VCs as an employee of startups (often very early employee) when it came time to start my own company, I knew I wanted one that would not require venture capital. Making money is not that hard (for me, anyway, I think this might be a talent, but I think it's not as rare a talent as it might seem.) I think there are a lot of startups out there who build an Instagram when they could be building a Basecamp. Further, if you're profitable, the cost of scaling is lower. The reason for this is that there are three major costs to VCs (and Paul touches on some of them). There's the huge distraction of dealing with them when raising money, but this also becomes and ongoing distraction of keeping them happy, and fielding their calls where they tell you some sector is hot and maybe you should pivot into it. (Much better than the bad old days when they would force bad decisions on you, or at least, I hope that is less common now.) The second major cost is not just the equity (which Paul touches on) but the terrible, terrible, lopsided deal terms. "Standard" terms are basically a ripoff that in no other sector of investing would be acceptable. (I'm talking about liquidation preferences and the manifold other ways of double dipping, stripping founders of their stock, etc.) Yes, they get away with this because they're investing in "to the moon" type businesses run by mostly young guys and this has been the culture. But the consequence of this is that the terms are bad for employees as well. (At least founders have a big chunk of stock, for employees the shrinking of the pool is more dramatic.) But the biggest cost of a VC is starting the clock. They will put you on a track to "go big" which really means "spend more than you're taking in and keep raising more funds", which further dilutes you. You do this until you die or get aquihired or are able to raise enough rounds to have a really big business. Everyone seems to go into it thinking they're shooting for the moon and that they'll be the next Instagram. But they won't. (almost certainly. 1/1000? 1/10,000? 1/1,000,000,000?) I think github is the model we should be striving for. Profitable almost from day one. Reinvest the profits, grow the business. Later if you want to take money, you can get a deal like they got. And if times are tough and you need to pivot, well, at least you have cash flow to fund it. I'll never forget the experience of one company I worked for. I was in right after the founders. They had a profitable business doing consulting right in their line of technology, which meant that the consultants were producing code that made the product more valuable. The consultants were paying for the product team all the overhead and the company was slightly profitable. As part of the deal to get venture capital, they had to shut down the consulting team and "focus". There was no focus being taken away by that team-- they were run by a manager and the rest of the company could ignore them... they just increased the value of the product on other people's dimes. So the team was shut down, then the VC firm dragged it all out for 6-8 months until the company was almost out of money, and gave us a bridge loan (really choice terms too, choice for the VC that is.) They put us over a barrel. It turned out the company was about 3 years too early. They would have been well ahead of the competition when the market hit and things really took off... but by the time the VC had run them into the ground. (Forcing many other terrible decisions on them in the interim.) They could have made it without taking VC money and would have been a $400M business.... (what one of the competitors sold for, even though they were much worse off than we were.) I think this story is very common. But you don't see a lot of stories like this on HN and other "startup" hangouts. You see a lot of self aggrandizing blog posts from VCs (not talking about PG here, his article is perfectly fine and he's generally on the good side of things). So, I think we have a culture of startup founders whose entire understanding of what it means to do a "startup" is one that lacks an undertanding of how VCs actually work and how dangerous they are. And most importantly, what they really cost.
newnewnew 13y ago
And this is all bad, bad, bad news for recruiting. These companies will all be fighting over the same talent pool that is growing only slowly.
- privacybuff 13y ago
  Are you assuming these startups are all in the bay area? I don't think PG is. I think he's saying that doing startups is becoming a broad cultural phenomenon. I think the "talent pool" really should be the whole world. There are several startups I know of who hire people completely remotely. One guy lives in thailand, the other in spain, etc.
- beambot 13y ago
  Actually, it sounds like a golden startup opportunity: disrupting the recruiting industry. Besides, strong job creation dynamics sounds like a generally-good problem.
- mhartl 13y ago
  On the other hand, it's good news for people who sell programming tutorials.
- spamizbad 13y ago
  I'm genuinely surprised by the wherewithal entrepreneurs have at hiring domestic talent. Anyone know why outsourcing isn't more popular- particularly among B2B startups? I'm a developer myself, but if I was an entrepreneur with no coding skills, I'd hire some guys in India to crank out my lo-fi MVP and use that to find a product/market fit and then raise money. I suppose it's not that easy though, is it?
  - RyJones 13y ago
    I have seen outsourcing done many times. I have never seen even a partial success.
    - spamizbad 13y ago
7Figures2Commas 13y ago
I don't disagree with all of PG's points, but I always find it intriguing that in discussions of the current startup landscape and the future of startup investing, there's almost never any mention of the impact of the easy money policies of the major central banks over the past several years. Cheap money on an unprecedented scale has affected just about every asset class, including VC, so to discuss the future of startup investing without even considering the extraordinary monetary policies we've seen implemented since 2008 is interesting to say the least.
- jacques_chester 13y ago
  The effect of deep pools of capital varies from country to country. In Australia, for example, superannuation funds hold about AU$1.5 trillion under management (not a large number by global standards, but Australia is a country of only 23 million). That amount will continue to rise steadily, and the rate at which it will rise is being pushed up by laws increasing the level of compulsory retirement savings. In the USA, retirement funds, hedge funds, college endowments and so on and so forth all invest in VCs. A few percent. How much do Australia's superannuation funds invest in venture? So far as I am able to determine -- nothing. We have venture funds here, but they're not really venture funds at all. They were seeded with government money; no such fund has an incentive to take true risks. The other problem with a pure monetary explanation is that it predicts that all other asset classes should have moved in the same direction. One of the reason VCs got so much money is because shares were flat for a long time; the unadorned Austrian interpretation says that shares should've risen too.
  - 7Figures2Commas 13y ago
    I am not suggesting that monetary policy is everything. Secular trends, like the tendency for software and hardware to get cheaper, can't be ignored. But to ignore the direct and indirect impacts of monetary policy altogether doesn't make sense either. Silicon Valley-specific example: Facebook goes public during what many believe is a Fed-supported bull market. Insiders sell stock at close to a $100 billion valuation; it's estimated that more than 1,000 employees get to sell stock worth at least $1 million a few months later. Some of the gains realized by insiders and employees will be funneled back into startup investments as those insiders and employees become limited partners in venture funds or angel investors themselves. Now consider this dynamic across the entire tech industry. Numerous companies have taken advantage of the IPO window of the past several years, and have been able to go public at rich valuations. Many employees with equity compensation at established publicly traded tech companies have done very well too, and ironically some of the most exorbitant valuations are at large companies lacking earnings. It would be foolish to believe that none of this has impacted the amount of money being thrown at VC firms, super angel funds and startups through direct angel investment, which in turn impacts valuations, deal terms, etc. The big question: when the great experiment of the central banks ends, how will this affect the landscape for investments in startups? I have some ideas which may or may not be right, but it's simply not credible to believe that there will be no change. The fact that few investors in Silicon Valley seem to be talking about this, however, suggests that they believe they live in a vacuum completely disconnected from the rest of the economy and global financial system. The last time this happened, it didn't end well.
jacques_chester 13y ago
> One thing we can say for sure is that there will be a lot more startups. The monolithic, hierarchical companies of the mid 20th century are being replaced by networks of smaller companies. This process is not just something happening now in Silicon Valley. It started decades ago, and it's happening as far afield as the car industry. It has a long way to run. I think this is predicted in part by Coase's theory of the firm. As the transactional cost of coordinating between firms falls, the size of a firm necessary to sustain complex projects and processes shrinks. For example, it used to be that getting computing done meant leasing mainframe time. IBM wouldn't deal with small-fry, just too much work for too little return. So to get started, you needed mondo capital. Later, provisioning a server meant some faxes, phonecalls and maybe some emails; followed by sending some staff to a data centre to meet a shipment from the manufacturer and install it. This meant that you needed several actual people in the company to do this. Usually the founders and a few other people, on a weekend. These days? I type a command. My computer talks to a remote computer and they set up any amount of computing that I need. Now I need to jump in here and point out that it's not simply sticker cost. It's the full transactional cost -- cost of search, cost of integration, cost of coordination etc etc -- that is falling on many fundamental inputs to software development. The other thing that predicts the fall in firm size is the increasing productivity of developers. One of the principal ways to improve the productivity of labour is to use capital, and the past decade has seen an accumulation of capital that is stunning in its breadth and scope. For example, a decade ago, Rails didn't exist outside of 37signals. Neither did the vast ecosystem of tools that has grown up around it. Collectively these represent amazing amounts of capital that any individual can access and apply.
- nileshtrivedi 13y ago
  > As the transactional cost of coordinating between firms falls To be pedantic, it has to fall faster than the transactional cost of coordinating within a firm. Your point stands though.
  - jacques_chester 13y ago
    Thanks, you're right. I smooshed two different costs into an aggregate when they ought to be considered independently as well.
JumpCrisscross 13y ago
"If there were a reputable investor who invested $100k on good terms and promised to decide yes or no within 24 hours, they'd get access to almost all the best deals, because every good startup would approach them first. It would be up to them to pick, because every bad startup would approach them first too, but at least they'd see everything." Sounds like a classic intermediation problem. The classic intermediation solution is a market maker who defaults to funding any start-up that meets pre-posted requirements. The intention would be to off-load the illiquid stake as soon as possible. The thesis is that liquidity conditions are restraining venture capital flows more than any shortage of risk capital. The plan may still achieve escape velocity if net transaction efficiencies outweigh the information asymmetry costs, i.e. the "6 weeks" liberated from fund-raising enhances valuations fast enough to make up for the duds accepted in the name of speediness. ROFRs and other anti-transfer mechanisms diminish the appeal of this idea.
rdl 13y ago
If investors don't do the option pool shuffle, don't have mandatory minimum amounts to invest, don't waste everyone's time, and don't dick around for control provisions (board seats, etc.), I wonder if that ceases to be a "Series A" and is just followup very large seed rounds. i.e. does calling it a "Series A" when in fact it has terms closer to seed make it more or less likely to happen? Doing two seed rounds (maybe one for $1-2mm, and a later one for $5-10mm) seems like an easier way for this to "just happen without conscious thought" than redefining A rounds themselves. I've certainly heard of people raising <$500k early on genuine seed terms, and then $5mm+ on "seed rounds" which are essentially Series A minus control. Then you end up with crazy $100mm Series A rounds happening later.
Eduard 13y ago
I'm curious about the n² algorithm, and what n stands for with respect to batch size.
- TheMakeA 13y ago
  PG discussed this a bit over here: https://news.ycombinator.com/item?id=5464451 https://news.ycombinator.com/item?id=5464451
hooande 13y ago
The current venture capital model is all about social dynamics. Almost everything that VCs do is intended to remind founders that they are the supplicants asking for money, and the VCs are the wealthy financial professionals who are the gatekeepers of their social class. If you've ever been to a major VCs office you'll know exactly what I mean. The decor is all marble and old money. It's designed to let visitors know that the VCs are rich, powerful and important, more so than the founder who is coming to seek capital. It's not that the VCs are bad people, trying to manipulate founders with psychological mind games. It's that this is the way things were done for most of the 20th century and most VC firms are still playing by the old rules. Most of the things that pg complained about specifically fall into this category of social dynamic reinforcement. Why do VCs make raising money into a ridiculously drawn out process of months of email after email? Because only the powerful side of the negotiation can do that. Those who are serious about getting a deal done answer the phone when it rings. The boss can afford to wait until they have time on their schedule. Why do VCs compel founders to accept more investment money than they might need? Again, it's a power thing. When you go to the bank and ask for a loan they don't convince you to take $5MM more than you asked for. This is because bank loans have become a commodity and they need your business as much as you need their money. VCs are fighting commoditization with everything they have. They like a system that makes them much more important than the other side. The kind of VC that pg said would get "all the best deals" is one that valued founder's time as much as their time. That placed the founders financial needs on the same level of their financial needs. Well, what VC wants to play that game? It's smarter to preserve a system that you are firmly at the top of than it is to lower standards to get more deal flow. Right now the Sequoia brand is worth it's weight in platinum, which means that they get to dictate terms entirely. It will be a long time before they change the way that they do business in order to cater to the needs of any given founder. I'm not saying that VCs are malicious or evil. They are generally very intelligent, capable and good people. It's just that they are they are caught up in an antiquated system that places too much value on social status and position. Most VCs worked their lives to get there, they aren't going to give it up even if it's the right thing to do. I think the real question is: Why doesn't Paul Graham start this mythical founders first VC firm? People trust him with money and he's proven that he can put common sense over his ego. He has the respect of the community and as he said himself, if he followed his own advice he could get all the best deals.
brudgers 13y ago
A pyramid is a lousy model. It fights gravity. A better model with a similar shape is a funnel. With seives. Gravity does most of the sorting, though sometimes the apparatus needs a shake to keep things flowing. YC doesn't select stones to set on top of other stones. It filters a stream. It amplifies what makes it past the interviews. It reduces friction to help companies keep moving. There's less statefullness than in pyramid construction. HN is a scouting network, not a quarry. The process doesn't chisel companies to the desired batter. It develops talent and sells it on. Like Ajax. A pyramid is an anti-pattern for disruption.
adventured 13y ago
"If there were a reputable investor who invested $100k on good terms and promised to decide yes or no within 24 hours, they'd get access to almost all the best deals, because every good startup would approach them first" Mark Cuban does that, and you can email him at will. I've dealt with him and his team, he's extremely fast in deciding (an email or two), and his team is extraordinarily easy to work with. Cuban also doesn't care where you're located. The only catch is that he has to be personally interested, generally speaking, in what you're doing. However I don't think Cuban gets access to all the best deals. Being located in San Francisco or Silicon Valley is clearly a substantial benefit to having access to a lot of the best new startups. I think location will continue to matter in that regard.
jpdoctor 13y ago
I'll add a major forward-looking issue: The Federal Reserve has been issuing free money, and that party is over. It won't affect the next A or B rounds, but exits in about 3-5 years are going to dry up much like they did the last time the Fed tightened.
- calhoun137 13y ago
  I'm not sure where you got the 3-5 years figure, but my understanding was that the fed has issued a lot of money that has not entered the money supply yet. According to [1], there has been a 259% increase in the monetary base, but only a 35% increase in the money supply. This is obviously really scary, since it implies that the dollar is likely to suffer massive inflation at some point. [1]http://www.marketoracle.co.uk/Article40113.html http://www.marketoracle.co.uk/Article40113.html
  - jpdoctor 13y ago
    Since the money supply (M2, eg) includes the monetary base (M0), the link is confused (at least about nomeclature.) Monetary base in red (you can see where they started printing in the past few years), Money supply in blue http://research.stlouisfed.org/fred2/graph/?g=kcD# http://research.stlouisfed.org/fred2/graph/?g=kcD#
wilfra 13y ago
"investors make more money as founders' bitches than their bosses." Hall of Fame quote right there.
- harryh 13y ago
  Not really as it gets cause and effect backwards.
jseliger 13y ago
There are still a lot of people who'd make great founders who never end up starting a company. You can see that from how randomly some of the most successful startups got started. So many of the biggest startups almost didn't happen that there must be a lot of equally good startups that actually didn't happen. This is also true of a lot of writers; I wrote some about it here (http://jseliger.wordpress.com/2012/07/29/links-the-time-for-novels-technology-in-universities-programming-and-writing-academia-and-more/ http://jseliger.wordpress.com/2012/07/29/links-the-time-for-...), and will quote from Tim Parks’s “Does Money Make Us Write Better?“: When they are starting out writers rarely make anything at all for what they do. I wrote seven novels over a period of six years before one was accepted for publication. Rejected by some twenty publishers that seventh eventually earned me an advance of £1,000 for world rights. Evidently, I wasn’t working for money. What then? Pleasure? I don’t think so; I remember I was on the point of giving up when that book was accepted. I’d had enough. However much I enjoyed trying to get the world into words, the rejections were disheartening; and the writing habit was keeping me from a “proper” career elsewhere. John Barth and William Goldman almost quit too and have written about it. How many anonymous but important artists got within a hair of success but couldn't make it over that line, who, instead of being artists who "almost didn't happen," didn't happen? The Internet is enabling a much more direct way of judging artists, much as it does startups, and I'm struck by the comparisons between artists and startup founders that run throughout pg's essays.
quackerhacker 13y ago
there's a third: start your own company I'm going play the role of semantics really quick. I like how PG differentiates between a startup and a company. What I've learned while coding, and dealing with Angels are the differences in stages...so I'll share my definitions (with dev examples) 1. Idea: just a concept, like an app 2. Project: the investment (usually time) we as entrepreneurs put in, like coding an app 3. Startup: just launched/deployed and ready to improvise as you grow, now your in the App Store and are out of beta 4. Business: your in the black, or at least have a projected growth rate of being there (u made angry birds) I see why the startup stage is the greatest risk/reward investment, because in my eyes, it's like you just turned on the engine, everyone hears the growl, but you haven't spun the wheels yet.
csomar 13y ago
Right now the limiting factor on the number of big hits is the number of sufficiently good founders starting companies, and that number can and will increase. I do share this opinion. Creating value has no limits. You can create as much value and wealth as you can.
netcan 13y ago
"The monolithic, hierarchical companies of the mid 20th century are being replaced by networks of smaller companies." "There might be 10x or even 50x more good founders out there. As more of them go ahead and start startups, those 15 big hits a year could easily become 50 or even 100." I wonder how those two things work together. The first predicts a world with more, but smaller businesses. The second seems to predict no change in the threshold for success. If the future really does allocate a larger portion of the pie to medium seized companies (say, 100 - 500 employees to take an arbitrary definition of 'medium'), isn't that definition of success and associated financing model problematic? There isn't much of a market for medium sized tech companies that have moved past rapid growth. Without that market, VCs can't get their money back. The essay talks about opportunities for more risk tolerant investors at the bottom of the pyramid (earlier stage, smaller investments). That seems to cover the idea of more, cheaper, riskier startups. But, the other idea about a higher resolution economy implies (I think) a need for smaller lower risk investments too.
ubershmekel 13y ago
I'm very curious about the VC/Angel probabilities of success. Of the 511 startups, how many bootstrap or above? How many die after the first investment? From the post we know ~2% will grow to a ~billion usd valuation.
beat 13y ago
I worry about this a little, not because I think pg is wrong, but because what he's saying is what I as an early-stage founder really want to hear. Anytime someone is saying something I really want to hear, I turn on the extra radar, to make sure I'm not wishful-thinking.
beat 13y ago
Another little concern I have, and not touched on in the essay... will M&A activity keep up with the increase in the number of startups? The trend toward acqui-hires is distressing. The practical definition is buying out a startup for their staff, not their product. IPO is not the primary outlet for software startups. Most successful exits are from acquisition by larger companies. So while pg clearly illustrates a situation in which founders are gaining power over investors, I think we're looking at another, worrisome situation where potential buyers have more power over startups. Competition will be up, and prices will be down. Worse, handing more power to the relatively slow, cautious big corporations will encourage their already bad habits of dithering.
falicon 13y ago
With a larger number of startups, there will likely be some amount more of hits per year, but I think the cap (or even large percent of growth) is not actually determined by this. Rather, I suspect that the 'about 15 big hits a year' is actually more about the public (and how many 'new' things the masses will actually adopt a year) than it is about the overall number of new startups each year.
6thSigma 13y ago
Once the JOBS Act regulations go through and companies can crowd-fund for equity, early rounds should go lightning fast. The problem is it will be difficult for the crowd-funding websites to organize and adapt with regulations and the new marketplace that is being created. For instance, if there are 1,500 investors in the Seed round, how do you decide who the official advisors are? Will people be wary investing in companies without a known advisor or investor already "in?" And if so, will that mean that crowd funding won't be necessarily all that helpful to companies struggling to find that first investor?
balsam 13y ago
i think the most interesting takeaway, that none of the comments touch on, is PG thinks there are a finite number of good ideas (even though this is currently larger than the number of good startups.) this probably means that (he thinks) that the number of good ideas is a simple function of the number of technological breakthroughs in a given year. so, in fact, it might be possible to comprehensively list all of the good ideas, in a RFS, for example.

374 points by anateus 13y ago

It makes sense to invest in a company where the founders want to control the ownership. That really means the strongly believe in what they are doing. And other thing they should look in for founders is Perseverance.

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beachstartup 13y ago
what it really is is a prime example of solipsism.
anateus 13y ago
Key word: "seem", he even uses it several times.
- deleted 13y ago
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counterpointer 13y ago
Can you elaborate why do you think so? Also, http://www.paulgraham.com/disagree.html http://www.paulgraham.com/disagree.html
garry 13y ago
You're new here, so I thought I'd let you know: Hacker News is about actual conversation and debate, and not a contest on who can be most negative or contrary. There's not enough to be learned from that, and we might as well not have that conversation at all. It's not enough to say something is bullshit. Why is it? What part? How do you know?
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  - kevingibbon 13y ago
    "it's becoming cheaper to start a startup, and startups are becoming a more normal thing to do" You can now start a company with a few hundred dollars. All that's left is food and rent. This is the first time in history when this has been possible.
    - kevingibbon 13y ago
      My co-founder and I have $2500 into our business http://shyp.com http://shyp.com. This includes the domain name and all server usage to date. We use zipcars to do pickups and are already profitable on a per transaction basis. We have a large house in SF and rent our extra rooms on Airbnb. This covers rent + food. We have yet to take any external funding.
    - _delirium 13y ago
      > This is the first time in history when this has been possible. That's overstating it a bit. Plenty of '80s software companies were bootstrapped for the cost of food+rent+computer, with shareware demos distributed via BBS.
      - rdouble 13y ago
        Even Apple was started as a bootstrapped effort.
        adventured 13y ago
        Microsoft as well. They required no outside capital, and Gates & Allen put in a modest sum (equal to maybe $10,000 today). Their customers funded the business.
        kevingibbon 13y ago

jfarmer 13y ago

"I think one of the biggest unexploited opportunities in startup investing right now is angel-sized investments made quickly. Few investors understand the cost that raising money from them imposes on startups." Oh lord yes. Having been through the fundraising process a few times, it's hard to describe the sheer relief when you find an investor willing to give a quick yes or no. The best I can describe it is like the feeling of getting a Christmas present you really, really wanted but didn't think to ask for. SV Angel and a16z are two of the best I've ever interacted with in this regard. It's clear both firms deeply respect entrepreneurs' time.

privacybuff 13y ago
I propose that investing is a market and the state of that market will depend on how the participants act. So, let me throw this idea out there: Be the kind of company that can pitch a VC and if they don't have a YES/NO answer to you within a week, pass on the VC. I think there's a power imbalance because founders want money more than VCs need to invest. I think the economics are such that founders should have a lot more power. When founders start demanding quick decisions (or more specifically, requiring them) ... the decision making process will become quicker.
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jmtame 13y ago
It's interesting that you point this out. I have always felt that way about investors: I would much rather have a fast "no" than an indefinite answer indefinitely. For that reason, whenever my friends give me a pitch deck and are looking for recommendations, I'll usually pass them along to Kevin from SVA, who is not only an awesome person but has always acted quickly. When I think of the slow investors, I never recommend them to friends. Decisiveness may be the new proxy for judging how good investors are (aside from their portfolio, which currently acts as the main signal).
peloton 13y ago
The unfortunate reality is that it's not about the firms, it's about whether the individual partner at the firm respects founders' time. For example, I know founders who have had unpleasant experiences with an investor at a16z.

yarou 13y ago

I don't find the trends to be too surprising. After the major bubbles of the dotcom era and the 2008 financial crisis (I wasn't alive for the LBO bubble), a lot of energy is focused in creative pursuits, rather than those simply engaging in wealth transfer. Bootstrapping will become easier as time goes on, with the advent of b2d/open-source toolkits, as well as the perpetual cost-savings of Platform-As-A-Service providers such as Heroku and AppEngine.

natural219 13y ago

I'm more skeptical. That there will be "more good startups" seems more like a wish than a prediction. Why will there be more good startups? Based off of what evidence? I'm not necessarily disagreeing, I just wonder why he thinks so. That there will be more startups in general seems obvious, but "good" startups seem to be increasingly more elusive, at least to me.

kevingibbon 13y ago
"it's becoming cheaper to start a startup, and startups are becoming a more normal thing to do" The number of good startups will grow with the number of overall startups.
- robryan 13y ago
  Maybe, in many markets the total value to capture, while likely heading up over time, is unlikely to double because there are 2 top quality startups in the space rather than one. So often it could be the case that the competition to dominate a particular market will just be more intense. Of course in some spaces the quality of product/ service from more startups might alter the capital distribution of customers to create a much larger pie.
- deleted 13y ago
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bryanh 13y ago

Right now, VCs often knowingly invest too much money at the series A stage. They do it because they feel they need to get a big chunk of each series A company to compensate for the opportunity cost of the board seat it consumes. Which means when there is a lot of competition for a deal, the number that moves is the valuation (and thus amount invested) rather than the percentage of the company being sold. Which means, especially in the case of more promising startups, that series A investors often make companies take more money than they want. Seems like this is a plausible explanation of what happened to Color (http://www.crunchbase.com/company/color-labs http://www.crunchbase.com/company/color-labs)? Also, I rather enjoyed reading: Which means the first VC to break ranks and start to do series A rounds for as much equity as founders want to sell (and with no "option pool" that comes only from the founders' shares) stands to reap huge benefits. As I always thought the big, required option pool that so heavily diluted founders/early employees was a bit out there. Seems much more sane to practice JIT dilution.

lumens 13y ago
The bigger issue is not that the dilution from the option pool creation happens at that early stage (rather than JIT), it's that VC's require the creation, and therefore dilution, to happen pre-money. Because of this, the founders carry the burden and the new investors don't -- despite the fact that the investors will reap some of the benefit (equity being available to grow the business they now own).

utnick 13y ago

Interesting article As an outsider, it was surprising to me that seed investors don't have access to a company's revenue numbers. I would think there would be some kind of quarterly report that goes to all investors.

mikeg8 13y ago
There's no definitive rules for stuff like that. Some seed funding happens pre-revenue and other founders are more than willing to share revenue figures with potential seed investors. We are in the seed funding stage and are starting a bi-monthly email update to our advisors, potential investors ect that will definitely mention revenue numbers.

jbapple 13y ago

"[5] This trend is one of the main causes of the increase in economic inequality in the US since the mid twentieth century. The person who would in 1950 have been the general manager of the x division of Megacorp is now the founder of the x company, and owns significant equity in it." What economic evidence is there to support this claim about the causes of economic inequality?

CleanedStar 13y ago
The whole essay is rife with upper class Panglossian obliviousness. Right before he talks about economic inequality he says "When I graduated from college in 1986, there were essentially two options: get a job or go to grad school". Only 8% of over-25 Americans have a graduate degree today, and that percentage was even lower 27 years ago. From this view of the world, people going to night school to get their Bachelors don't exist, because these people didn't go to the $40k a year college you went to. For most people in the world, someone at 21 with Bachelors in hand deciding on either grad school or a professional career, is already someone who is living the life of Riley. There's nothing incorrect in his statement, although it does give an idea of the bubble of the world he lives in. Income inequality clearly all is at the level of VCs and founders in his world - even the upper middle class programming minions don't come into consideration. Income inequality connections clearly do not come to mind in the case of, say, the US army marching into Los Angeles in 1992 to restore order among the poor and working poor there. It's a kind of solipsism you can read about in the unofficial minutes of the councils of the Czar's ministers in 1916. The earthquake in class relations coming is not in minor percentage differences between enormously wealthy VC limited partners and upper middle class founders. It's what happens when the world economy comes to a stop like it did in the late 1920s. We got a small preview of it in 2007 and 2008. In the years and decades ahead, financial shenanigans on Wall Street will eventually lead to an economy that will not start up again, no matter how much priming. THEN is when we will start seeing real shifts in the relations of production.
- whiddershins 13y ago
  I think this is a great point. That oblivious bubble takes a bite out of otherwise very insightful words. And I observe this perspective has spread out among the startup community. It always surprises me that people who are so intelligent in many ways can be so narrow in their social and economic context.

CleanedStar 13y ago

"This trend is one of the main causes of the increase in economic inequality in the US since the mid twentieth century. The person who would in 1950 have been the general manager of the x division of Megacorp is now the founder of the x company, and owns significant equity in it." Boy, is this a load of bollocks. I guess the 20th century war against socialism ("the means of production in the hands of those who work it") and worker's organizations and parties doesn't come much into play into these analyses. Up to the bickering a few months ago in Wisconsin with Walker - although we're so far down the road, that example isn't very useful as a specific case. Yes, the entrepreneurial middle manager starting his own business, this is the source of income inequality! Meanwhile, half the Forbes 400 inherited their way onto the list. Where's the plucky entrepreneur in that equation? Even "self-made" people like Warren Buffett had a congressman father and a grandfather with a chain of stores. Not exactly a guy pulling himself up by his bootstraps. I mean, the fact that this speech was made to investors is a signal. Not the tone, but the fact that it's investors who are the ones who sit and hear these things. The programmer in the trenches, working 50-60 hours a week creating wealth is not a part of these decisions on production. There's a good documentary called "Born Rich" that is on Youtube right now. I would recommend people watch it. This is who the money goes to, not the plucky, hard-working entrepreneur. Blogs are filled with stories of angels and VCs backstabbing founders. As is HN. And the founders usually get the best deal in the company, far better than schlub programmers. Even hackers of the caliber of Jamie Zawinski have attested to this. This idea of income inequality happening because some hard-working founder gets all of the money is a complete farce. Propaganda even. If we want to really get into a discussion of this - just who are the "limited partners" the VCs are raising money from, and where did they get their money? We always see a fresh-faced Mark Zuckerberg or Drew Houston, or a Paul Graham or even a Ron Conway, or John Doerr or Michael Moritz. But who are the limited partners they're raising money from? Who is calling the shots on how money gets spent?

kevingibbon 13y ago

It will be interesting to see if VCs take Pauls advice. Recently a lot of VCs have been offering value add services like design expertise and recruiting. I hope they also include quick decisions and less dilution. Why does it take some VCs so long to make a decision? Ron Conway makes a decision to fund a founder within 10min of meeting them.

lnsignificant 13y ago

I wish someone would redesign Paul's site. I always think I click the wrong link when I initially land on it.

pixelmonkey 13y ago
paulgraham.com's design is actually quite similar to the design of default templates for Viaweb online stores, the company pg founded. Every Viaweb site had a left-hand row of buttons with navigation elements and simple sans-serif text in the center. I actually have a theory that the software running paulgraham.com is a sort of stripped down version of the original Viaweb content management system. You can see in the view-source that there is still "Y! Store" JavaScript running on his pages, and that, for example, the titles of each essay on his site are actually images hosted at yimg.com (e.g. for this essay, http://ep.yimg.com/ca/I/paulgraham_2270_385 http://ep.yimg.com/ca/I/paulgraham_2270_385). pg has spoken about how one of Viaweb's major features early-on was that it worked around the limitations of browser fonts by auto-generating images (GIFs) with rendered anti-aliased fonts and served those in the browser. Looks like his site continues to do the same thing to this day. If my theory is true, I really hope pg never redesigns it. It serves as a pretty cool historical reference to the company he founded, that made him wealthy in the sale to Yahoo, and that ultimately allowed him to start YC / HN. The left-side navbar is also an image map! (remember those?) My guess: Viaweb generated a single image out of the navbar description and markup for an image map. In those days, browsers didn't handle parallel downloading well. A single navigation element with an image map probably loaded faster in browsers than several navigation image buttons. Yes, image maps are out of vogue and text-as-images is unnecessary with modern browsers. But, if the software running paulgraham.com truly has lineage to Viaweb, then that is so much cooler than any modern redesign could possibly be.
- pg 13y ago
  It's not a version. My site is actually made with Yahoo Store.

dave1619 13y ago

Seems like PG is advocating the following to VCs: 1. Don't grow pessimistic over the growing number of startups because there will be a growing number of great founders. If you focus on finding them, you can make more money than before. 2. To find them, you need a competitive advantage which could be doing what founders want/need: smaller Series A rounds and quick decisions. He's practically daring the VC community to see who will step up.

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kapilkale 13y ago

One thing I suspect will change for VCs is the 2/20 model. Because the cost of building a startup is going down, and assuming the opportunity lies in early stage investments, VCs are going to have to make more early stage investments than they are now. VC operating expenses are covered by a 2% management fee levied on assets under management. This incentivizes VCs to create megafunds so that they can have proportionally mega salaries. Seed stage investments come at a totally different operating cost. Seed-stage investing is pretty hard with a megafund because they are so expensive operationally. VCs would much rather write a 50M check in a growth round for 33% of a company than a 100 $500K checks for 5% of each company. They might have to talk to 20 companies for the growth rounds to make 1 investment, but they'd probably have to talk to thousands to make the 100 investments in seed rounds. That means they need a bigger staff and that 2% model won't work. In fact, I've heard VCs say that the only reason they write small checks in seed rounds is so that they have a strong relationship with the founders and pro-rata rights if the company happens to blow up. I suspect that VC salaries will go down like crazy, and they'll be forced to rely on carry for the funds earnings. Which is probably a good direction for VCs to go. Chris Dixon outlined the problem here too: http://cdixon.org/2009/08/26/the-other-problem-with-venture-capital-management-fees/ http://cdixon.org/2009/08/26/the-other-problem-with-venture-...

sdoowpilihp 13y ago

The article was a good read. Through out the article though, I couldn't help but feel that Paul Graham wants to change how startups are invested in, specifically the 24 hour turnaround on investment decisions and the A round change, and framed it as "I see x as a trend that is developing". It makes me wonder if a sufficiently influential person in a given industry claims to see a trend that is closely tied to human behavior, could that trend become a reality?

_delirium 13y ago
Yes, I think it's best read as an advocacy piece.
abalashov 13y ago
Yes. I think there is no question that people like PG have a vested interest in taking patterns that favour them and socialising them into the wider industry as a descriptive account of an ongoing trend, rather than a prescriptive self-fulfilling prophecy. Any good marketer-pundit will do that. :-)

mathattack 13y ago

"When I graduated from college in 1986, there were essentially two options: get a job or go to grad school. Now there's a third: start your own company." This is an important observation. 20 years ago, the smartest people went to large companies. Now it's a question of "Join someone else's startup or start my own?" The alternative of career paths at large companies no longer exist. It isn't just social acceptance and lower cost of entry, it's that the alternative is long gone.

drugthrowaway 13y ago
You're only talking about a very, very small slice of the population - geographically centered around maybe 3 or 4 cities. This is absolutely not the case in reality though.
- mathattack 13y ago
  The slice is the top students, who used to exclusively go to large companies. Now it's not so many. My impression is the top CS and Engineering students can successfully conduct a national job search.
  - _delirium 13y ago
    The top students still mostly go to large companies. Compared to the number of top students going to companies like Google (who hired something like 6,000 people last year), grad school, quantitative finance companies, and several other options, the number of top students going to YC or otherwise starting companies is not a large number. Among my own acquaintances it seems to have more to do with people's strengths and lifestyle interests. People who are strong techies but entirely uninterested in business would rather go to Google, or even to somewhere like NASA or Boeing or IBM or Intel. People who are a bit more into entrepreneurship, and/or don't like having a boss, would rather go into starting a business. Depends on the specific technology as well: a lot more web-tech people go the startup route than hardware engineers, and certainly compared to aerospace engineers.
mikeg8 13y ago

earbitscom 13y ago

Oh man. This may be my favorite startup quote in all of history. "Investors make more money as founders' bitches than their bosses."

tptacek 13y ago
I am not as in love with that quote as you are. I'm not a fan of the term, but also, it screws with the tone. You know it's janky writing when the reader stops and rereads to make sure they just read what they think they read.
- earbitscom 13y ago
  That's why I enjoyed it so much. PG puts thought into every word of these essays. If I know him well enough to have an opinion, that sentence was crafted as much for its contents as for its tone, and that's what made it so awesome. Any disgruntled founder saying it would have been status quo. PG saying that in an essay is just pure entertainment to me.
- jacques_chester 13y ago
  I think he liked the alliteration too much to give it up.
  - tptacek 13y ago
    Masters/minions also would have worked.
    - jacques_chester 13y ago
      I was trying to think of an alternative myself and didn't strike on one.
    - sneak 13y ago
      ...and without the terribly sexist undertones, at that.
- deleted 13y ago

privacybuff 13y ago

After many years dealing with VCs as an employee of startups (often very early employee) when it came time to start my own company, I knew I wanted one that would not require venture capital. Making money is not that hard (for me, anyway, I think this might be a talent, but I think it's not as rare a talent as it might seem.) I think there are a lot of startups out there who build an Instagram when they could be building a Basecamp. Further, if you're profitable, the cost of scaling is lower. The reason for this is that there are three major costs to VCs (and Paul touches on some of them). There's the huge distraction of dealing with them when raising money, but this also becomes and ongoing distraction of keeping them happy, and fielding their calls where they tell you some sector is hot and maybe you should pivot into it. (Much better than the bad old days when they would force bad decisions on you, or at least, I hope that is less common now.) The second major cost is not just the equity (which Paul touches on) but the terrible, terrible, lopsided deal terms. "Standard" terms are basically a ripoff that in no other sector of investing would be acceptable. (I'm talking about liquidation preferences and the manifold other ways of double dipping, stripping founders of their stock, etc.) Yes, they get away with this because they're investing in "to the moon" type businesses run by mostly young guys and this has been the culture. But the consequence of this is that the terms are bad for employees as well. (At least founders have a big chunk of stock, for employees the shrinking of the pool is more dramatic.) But the biggest cost of a VC is starting the clock. They will put you on a track to "go big" which really means "spend more than you're taking in and keep raising more funds", which further dilutes you. You do this until you die or get aquihired or are able to raise enough rounds to have a really big business. Everyone seems to go into it thinking they're shooting for the moon and that they'll be the next Instagram. But they won't. (almost certainly. 1/1000? 1/10,000? 1/1,000,000,000?) I think github is the model we should be striving for. Profitable almost from day one. Reinvest the profits, grow the business. Later if you want to take money, you can get a deal like they got. And if times are tough and you need to pivot, well, at least you have cash flow to fund it. I'll never forget the experience of one company I worked for. I was in right after the founders. They had a profitable business doing consulting right in their line of technology, which meant that the consultants were producing code that made the product more valuable. The consultants were paying for the product team all the overhead and the company was slightly profitable. As part of the deal to get venture capital, they had to shut down the consulting team and "focus". There was no focus being taken away by that team-- they were run by a manager and the rest of the company could ignore them... they just increased the value of the product on other people's dimes. So the team was shut down, then the VC firm dragged it all out for 6-8 months until the company was almost out of money, and gave us a bridge loan (really choice terms too, choice for the VC that is.) They put us over a barrel. It turned out the company was about 3 years too early. They would have been well ahead of the competition when the market hit and things really took off... but by the time the VC had run them into the ground. (Forcing many other terrible decisions on them in the interim.) They could have made it without taking VC money and would have been a $400M business.... (what one of the competitors sold for, even though they were much worse off than we were.) I think this story is very common. But you don't see a lot of stories like this on HN and other "startup" hangouts. You see a lot of self aggrandizing blog posts from VCs (not talking about PG here, his article is perfectly fine and he's generally on the good side of things). So, I think we have a culture of startup founders whose entire understanding of what it means to do a "startup" is one that lacks an undertanding of how VCs actually work and how dangerous they are. And most importantly, what they really cost.

newnewnew 13y ago

And this is all bad, bad, bad news for recruiting. These companies will all be fighting over the same talent pool that is growing only slowly.

privacybuff 13y ago
Are you assuming these startups are all in the bay area? I don't think PG is. I think he's saying that doing startups is becoming a broad cultural phenomenon. I think the "talent pool" really should be the whole world. There are several startups I know of who hire people completely remotely. One guy lives in thailand, the other in spain, etc.
beambot 13y ago
Actually, it sounds like a golden startup opportunity: disrupting the recruiting industry. Besides, strong job creation dynamics sounds like a generally-good problem.
mhartl 13y ago
On the other hand, it's good news for people who sell programming tutorials.
spamizbad 13y ago
I'm genuinely surprised by the wherewithal entrepreneurs have at hiring domestic talent. Anyone know why outsourcing isn't more popular- particularly among B2B startups? I'm a developer myself, but if I was an entrepreneur with no coding skills, I'd hire some guys in India to crank out my lo-fi MVP and use that to find a product/market fit and then raise money. I suppose it's not that easy though, is it?
- RyJones 13y ago
  I have seen outsourcing done many times. I have never seen even a partial success.
  - spamizbad 13y ago

7Figures2Commas 13y ago

I don't disagree with all of PG's points, but I always find it intriguing that in discussions of the current startup landscape and the future of startup investing, there's almost never any mention of the impact of the easy money policies of the major central banks over the past several years. Cheap money on an unprecedented scale has affected just about every asset class, including VC, so to discuss the future of startup investing without even considering the extraordinary monetary policies we've seen implemented since 2008 is interesting to say the least.

jacques_chester 13y ago
The effect of deep pools of capital varies from country to country. In Australia, for example, superannuation funds hold about AU$1.5 trillion under management (not a large number by global standards, but Australia is a country of only 23 million). That amount will continue to rise steadily, and the rate at which it will rise is being pushed up by laws increasing the level of compulsory retirement savings. In the USA, retirement funds, hedge funds, college endowments and so on and so forth all invest in VCs. A few percent. How much do Australia's superannuation funds invest in venture? So far as I am able to determine -- nothing. We have venture funds here, but they're not really venture funds at all. They were seeded with government money; no such fund has an incentive to take true risks. The other problem with a pure monetary explanation is that it predicts that all other asset classes should have moved in the same direction. One of the reason VCs got so much money is because shares were flat for a long time; the unadorned Austrian interpretation says that shares should've risen too.
- 7Figures2Commas 13y ago
  I am not suggesting that monetary policy is everything. Secular trends, like the tendency for software and hardware to get cheaper, can't be ignored. But to ignore the direct and indirect impacts of monetary policy altogether doesn't make sense either. Silicon Valley-specific example: Facebook goes public during what many believe is a Fed-supported bull market. Insiders sell stock at close to a $100 billion valuation; it's estimated that more than 1,000 employees get to sell stock worth at least $1 million a few months later. Some of the gains realized by insiders and employees will be funneled back into startup investments as those insiders and employees become limited partners in venture funds or angel investors themselves. Now consider this dynamic across the entire tech industry. Numerous companies have taken advantage of the IPO window of the past several years, and have been able to go public at rich valuations. Many employees with equity compensation at established publicly traded tech companies have done very well too, and ironically some of the most exorbitant valuations are at large companies lacking earnings. It would be foolish to believe that none of this has impacted the amount of money being thrown at VC firms, super angel funds and startups through direct angel investment, which in turn impacts valuations, deal terms, etc. The big question: when the great experiment of the central banks ends, how will this affect the landscape for investments in startups? I have some ideas which may or may not be right, but it's simply not credible to believe that there will be no change. The fact that few investors in Silicon Valley seem to be talking about this, however, suggests that they believe they live in a vacuum completely disconnected from the rest of the economy and global financial system. The last time this happened, it didn't end well.

jacques_chester 13y ago

> One thing we can say for sure is that there will be a lot more startups. The monolithic, hierarchical companies of the mid 20th century are being replaced by networks of smaller companies. This process is not just something happening now in Silicon Valley. It started decades ago, and it's happening as far afield as the car industry. It has a long way to run. I think this is predicted in part by Coase's theory of the firm. As the transactional cost of coordinating between firms falls, the size of a firm necessary to sustain complex projects and processes shrinks. For example, it used to be that getting computing done meant leasing mainframe time. IBM wouldn't deal with small-fry, just too much work for too little return. So to get started, you needed mondo capital. Later, provisioning a server meant some faxes, phonecalls and maybe some emails; followed by sending some staff to a data centre to meet a shipment from the manufacturer and install it. This meant that you needed several actual people in the company to do this. Usually the founders and a few other people, on a weekend. These days? I type a command. My computer talks to a remote computer and they set up any amount of computing that I need. Now I need to jump in here and point out that it's not simply sticker cost. It's the full transactional cost -- cost of search, cost of integration, cost of coordination etc etc -- that is falling on many fundamental inputs to software development. The other thing that predicts the fall in firm size is the increasing productivity of developers. One of the principal ways to improve the productivity of labour is to use capital, and the past decade has seen an accumulation of capital that is stunning in its breadth and scope. For example, a decade ago, Rails didn't exist outside of 37signals. Neither did the vast ecosystem of tools that has grown up around it. Collectively these represent amazing amounts of capital that any individual can access and apply.

nileshtrivedi 13y ago
> As the transactional cost of coordinating between firms falls To be pedantic, it has to fall faster than the transactional cost of coordinating within a firm. Your point stands though.
- jacques_chester 13y ago
  Thanks, you're right. I smooshed two different costs into an aggregate when they ought to be considered independently as well.

JumpCrisscross 13y ago

"If there were a reputable investor who invested $100k on good terms and promised to decide yes or no within 24 hours, they'd get access to almost all the best deals, because every good startup would approach them first. It would be up to them to pick, because every bad startup would approach them first too, but at least they'd see everything." Sounds like a classic intermediation problem. The classic intermediation solution is a market maker who defaults to funding any start-up that meets pre-posted requirements. The intention would be to off-load the illiquid stake as soon as possible. The thesis is that liquidity conditions are restraining venture capital flows more than any shortage of risk capital. The plan may still achieve escape velocity if net transaction efficiencies outweigh the information asymmetry costs, i.e. the "6 weeks" liberated from fund-raising enhances valuations fast enough to make up for the duds accepted in the name of speediness. ROFRs and other anti-transfer mechanisms diminish the appeal of this idea.

rdl 13y ago

If investors don't do the option pool shuffle, don't have mandatory minimum amounts to invest, don't waste everyone's time, and don't dick around for control provisions (board seats, etc.), I wonder if that ceases to be a "Series A" and is just followup very large seed rounds. i.e. does calling it a "Series A" when in fact it has terms closer to seed make it more or less likely to happen? Doing two seed rounds (maybe one for $1-2mm, and a later one for $5-10mm) seems like an easier way for this to "just happen without conscious thought" than redefining A rounds themselves. I've certainly heard of people raising <$500k early on genuine seed terms, and then $5mm+ on "seed rounds" which are essentially Series A minus control. Then you end up with crazy $100mm Series A rounds happening later.

Eduard 13y ago

I'm curious about the n² algorithm, and what n stands for with respect to batch size.

TheMakeA 13y ago
PG discussed this a bit over here: https://news.ycombinator.com/item?id=5464451 https://news.ycombinator.com/item?id=5464451

hooande 13y ago

The current venture capital model is all about social dynamics. Almost everything that VCs do is intended to remind founders that they are the supplicants asking for money, and the VCs are the wealthy financial professionals who are the gatekeepers of their social class. If you've ever been to a major VCs office you'll know exactly what I mean. The decor is all marble and old money. It's designed to let visitors know that the VCs are rich, powerful and important, more so than the founder who is coming to seek capital. It's not that the VCs are bad people, trying to manipulate founders with psychological mind games. It's that this is the way things were done for most of the 20th century and most VC firms are still playing by the old rules. Most of the things that pg complained about specifically fall into this category of social dynamic reinforcement. Why do VCs make raising money into a ridiculously drawn out process of months of email after email? Because only the powerful side of the negotiation can do that. Those who are serious about getting a deal done answer the phone when it rings. The boss can afford to wait until they have time on their schedule. Why do VCs compel founders to accept more investment money than they might need? Again, it's a power thing. When you go to the bank and ask for a loan they don't convince you to take $5MM more than you asked for. This is because bank loans have become a commodity and they need your business as much as you need their money. VCs are fighting commoditization with everything they have. They like a system that makes them much more important than the other side. The kind of VC that pg said would get "all the best deals" is one that valued founder's time as much as their time. That placed the founders financial needs on the same level of their financial needs. Well, what VC wants to play that game? It's smarter to preserve a system that you are firmly at the top of than it is to lower standards to get more deal flow. Right now the Sequoia brand is worth it's weight in platinum, which means that they get to dictate terms entirely. It will be a long time before they change the way that they do business in order to cater to the needs of any given founder. I'm not saying that VCs are malicious or evil. They are generally very intelligent, capable and good people. It's just that they are they are caught up in an antiquated system that places too much value on social status and position. Most VCs worked their lives to get there, they aren't going to give it up even if it's the right thing to do. I think the real question is: Why doesn't Paul Graham start this mythical founders first VC firm? People trust him with money and he's proven that he can put common sense over his ego. He has the respect of the community and as he said himself, if he followed his own advice he could get all the best deals.

brudgers 13y ago

A pyramid is a lousy model. It fights gravity. A better model with a similar shape is a funnel. With seives. Gravity does most of the sorting, though sometimes the apparatus needs a shake to keep things flowing. YC doesn't select stones to set on top of other stones. It filters a stream. It amplifies what makes it past the interviews. It reduces friction to help companies keep moving. There's less statefullness than in pyramid construction. HN is a scouting network, not a quarry. The process doesn't chisel companies to the desired batter. It develops talent and sells it on. Like Ajax. A pyramid is an anti-pattern for disruption.

adventured 13y ago

"If there were a reputable investor who invested $100k on good terms and promised to decide yes or no within 24 hours, they'd get access to almost all the best deals, because every good startup would approach them first" Mark Cuban does that, and you can email him at will. I've dealt with him and his team, he's extremely fast in deciding (an email or two), and his team is extraordinarily easy to work with. Cuban also doesn't care where you're located. The only catch is that he has to be personally interested, generally speaking, in what you're doing. However I don't think Cuban gets access to all the best deals. Being located in San Francisco or Silicon Valley is clearly a substantial benefit to having access to a lot of the best new startups. I think location will continue to matter in that regard.

jpdoctor 13y ago

I'll add a major forward-looking issue: The Federal Reserve has been issuing free money, and that party is over. It won't affect the next A or B rounds, but exits in about 3-5 years are going to dry up much like they did the last time the Fed tightened.

calhoun137 13y ago
I'm not sure where you got the 3-5 years figure, but my understanding was that the fed has issued a lot of money that has not entered the money supply yet. According to [1], there has been a 259% increase in the monetary base, but only a 35% increase in the money supply. This is obviously really scary, since it implies that the dollar is likely to suffer massive inflation at some point. [1]http://www.marketoracle.co.uk/Article40113.html http://www.marketoracle.co.uk/Article40113.html
- jpdoctor 13y ago
  Since the money supply (M2, eg) includes the monetary base (M0), the link is confused (at least about nomeclature.) Monetary base in red (you can see where they started printing in the past few years), Money supply in blue http://research.stlouisfed.org/fred2/graph/?g=kcD# http://research.stlouisfed.org/fred2/graph/?g=kcD#

wilfra 13y ago

"investors make more money as founders' bitches than their bosses." Hall of Fame quote right there.

harryh 13y ago
Not really as it gets cause and effect backwards.

jseliger 13y ago

There are still a lot of people who'd make great founders who never end up starting a company. You can see that from how randomly some of the most successful startups got started. So many of the biggest startups almost didn't happen that there must be a lot of equally good startups that actually didn't happen. This is also true of a lot of writers; I wrote some about it here (http://jseliger.wordpress.com/2012/07/29/links-the-time-for-novels-technology-in-universities-programming-and-writing-academia-and-more/ http://jseliger.wordpress.com/2012/07/29/links-the-time-for-...), and will quote from Tim Parks’s “Does Money Make Us Write Better?“: When they are starting out writers rarely make anything at all for what they do. I wrote seven novels over a period of six years before one was accepted for publication. Rejected by some twenty publishers that seventh eventually earned me an advance of £1,000 for world rights. Evidently, I wasn’t working for money. What then? Pleasure? I don’t think so; I remember I was on the point of giving up when that book was accepted. I’d had enough. However much I enjoyed trying to get the world into words, the rejections were disheartening; and the writing habit was keeping me from a “proper” career elsewhere. John Barth and William Goldman almost quit too and have written about it. How many anonymous but important artists got within a hair of success but couldn't make it over that line, who, instead of being artists who "almost didn't happen," didn't happen? The Internet is enabling a much more direct way of judging artists, much as it does startups, and I'm struck by the comparisons between artists and startup founders that run throughout pg's essays.

quackerhacker 13y ago

there's a third: start your own company I'm going play the role of semantics really quick. I like how PG differentiates between a startup and a company. What I've learned while coding, and dealing with Angels are the differences in stages...so I'll share my definitions (with dev examples) 1. Idea: just a concept, like an app 2. Project: the investment (usually time) we as entrepreneurs put in, like coding an app 3. Startup: just launched/deployed and ready to improvise as you grow, now your in the App Store and are out of beta 4. Business: your in the black, or at least have a projected growth rate of being there (u made angry birds) I see why the startup stage is the greatest risk/reward investment, because in my eyes, it's like you just turned on the engine, everyone hears the growl, but you haven't spun the wheels yet.

csomar 13y ago

Right now the limiting factor on the number of big hits is the number of sufficiently good founders starting companies, and that number can and will increase. I do share this opinion. Creating value has no limits. You can create as much value and wealth as you can.

netcan 13y ago

"The monolithic, hierarchical companies of the mid 20th century are being replaced by networks of smaller companies." "There might be 10x or even 50x more good founders out there. As more of them go ahead and start startups, those 15 big hits a year could easily become 50 or even 100." I wonder how those two things work together. The first predicts a world with more, but smaller businesses. The second seems to predict no change in the threshold for success. If the future really does allocate a larger portion of the pie to medium seized companies (say, 100 - 500 employees to take an arbitrary definition of 'medium'), isn't that definition of success and associated financing model problematic? There isn't much of a market for medium sized tech companies that have moved past rapid growth. Without that market, VCs can't get their money back. The essay talks about opportunities for more risk tolerant investors at the bottom of the pyramid (earlier stage, smaller investments). That seems to cover the idea of more, cheaper, riskier startups. But, the other idea about a higher resolution economy implies (I think) a need for smaller lower risk investments too.

ubershmekel 13y ago

I'm very curious about the VC/Angel probabilities of success. Of the 511 startups, how many bootstrap or above? How many die after the first investment? From the post we know ~2% will grow to a ~billion usd valuation.

beat 13y ago

I worry about this a little, not because I think pg is wrong, but because what he's saying is what I as an early-stage founder really want to hear. Anytime someone is saying something I really want to hear, I turn on the extra radar, to make sure I'm not wishful-thinking.

beat 13y ago

Another little concern I have, and not touched on in the essay... will M&A activity keep up with the increase in the number of startups? The trend toward acqui-hires is distressing. The practical definition is buying out a startup for their staff, not their product. IPO is not the primary outlet for software startups. Most successful exits are from acquisition by larger companies. So while pg clearly illustrates a situation in which founders are gaining power over investors, I think we're looking at another, worrisome situation where potential buyers have more power over startups. Competition will be up, and prices will be down. Worse, handing more power to the relatively slow, cautious big corporations will encourage their already bad habits of dithering.

falicon 13y ago

With a larger number of startups, there will likely be some amount more of hits per year, but I think the cap (or even large percent of growth) is not actually determined by this. Rather, I suspect that the 'about 15 big hits a year' is actually more about the public (and how many 'new' things the masses will actually adopt a year) than it is about the overall number of new startups each year.

6thSigma 13y ago

Once the JOBS Act regulations go through and companies can crowd-fund for equity, early rounds should go lightning fast. The problem is it will be difficult for the crowd-funding websites to organize and adapt with regulations and the new marketplace that is being created. For instance, if there are 1,500 investors in the Seed round, how do you decide who the official advisors are? Will people be wary investing in companies without a known advisor or investor already "in?" And if so, will that mean that crowd funding won't be necessarily all that helpful to companies struggling to find that first investor?

balsam 13y ago

i think the most interesting takeaway, that none of the comments touch on, is PG thinks there are a finite number of good ideas (even though this is currently larger than the number of good startups.) this probably means that (he thinks) that the number of good ideas is a simple function of the number of technological breakthroughs in a given year. so, in fact, it might be possible to comprehensively list all of the good ideas, in a RFS, for example.