36 ms·

There is something missing in the startup mind-cluster, I think. A lot of the ideas make sense from a certain perspective, even these incredible valuations and

by netcan 12y ago

There is something missing in the startup mind-cluster, I think. A lot of the ideas make sense from a certain perspective, even these incredible valuations and exits. There really is a chance to create or invest in the next Facebook. It's not a big chance, but the payoff is so big that it can fuel funding and building thousands of attempts. One of the premises of this complexes is the idea that highly impactful businesses can be started fast and cheap leveraging the internet as a marketing and distribution channel, open source software, cheap computing power and other levers of these times. If they focus on building popular useful things, the scale can get so big that monetization is likely enough to come. That is, likely enough for the investors formulas. But, what of businesses that become popular and useful and financially successful relative to the financial needs of running the business? Reddit. OKCupid. The proverbial Craigslist. What if a business can employ 100 people comfortably, serve 100,000s of customers usefully and reward the founders to the tune of millions, but not billions. Can these exist? Can they last for decades? Generations? Is it efficient to roll the dice on a hundred $10m per year businesses for the chance at one $10bn business. On paper it's a 10X improvement? I'm not trying to ad my voice to the sour grapes tasting comments about valuations and such. I'm just wondering if we can let a million flowers bloom for a longer stretch, not just for their ability to win the big-or- go-home game. I think I might be saying this backwards. Let me try it another way. A lot of the current startup thinking is premised on the idea that small teams can have a big impact relative to the cash requirements. A second idea is that a startup making a big impact has a decent chance of turning into a multi billion dollar company or a $100m+ acquisition for a multi billion dollar company. Is there no room to build on the first premise without later building on the second premise? Could Facebook have connected people as well as a 500 person company? This is a tangent to Fred Wilson's point, but I feel like it might boil down to a similar enquiry.

idlewords 12y ago
Venture capital is supposed to be mechanism for funding at the highest levels of risk and reward. But somehow we've decided that it's the only model for Internet companies. So a lot of companies and individuals with perfectly workable small or medium-size ideas end up inflating them to VC size to get funding, and then fizzling out. A sad side effect is that it discredits the ideas. We have a grandiosity problem in Silicon Valley. The problem isn't really VC, but the lack of alternatives along the other parts of the risk/reward curve.
- JoeAltmaier 12y ago
  Doesn't fit what I knew: that most startups are Angel funded. Or did the pendulum swing, and we're back to VC funding?
  - idlewords 12y ago
    I don't see a practical difference between the two in our industry. They're part of the same pipeline.
    - jacquesm 12y ago
      There are substantial differences between angel investors and VCs from a practical point of view, even if both will get you access to capital: - Angels rarely do due diligence, VCs almost always do. - Angels tend to look much more at who else is investing in the company, almost never want to be 'alone' or 'first'. - Also they are typically much less experienced as investors and having them on-board can be a pain, especially when you're doing a start-up outside of their field of expertise - VCs investment tends to come with some visibility perks - it is usually easier to get investment from a group of angel investors than it is to get investment from a VC
      - idlewords 12y ago
        You are certainly right. But that's a kind of insider explanation from within our world. If you're explaining the economics of computerland in broad strokes, there's no significant distinction to make between angel investment and VC. The two groups intermingle, they fund the same projects (with the same expectations of risk and growth), and they even move in the same social circles.
        jacquesm 12y ago
        > But that's a kind of insider explanation from within our world. Good point, I will have to work harder on divorcing myself from that. It's hard though. For the purpose of founders that are relatively in-experienced the two groups appear similar enough that there is little to no outward difference. That viewpoint is worth correcting.
jacquesm 12y ago
Sad to see this downvoted. You're homing in on the heart of the matter: VC goals are not at all aligned with entrepreneur goals. A good investment is not necessarily a good business because the VC does not get his/her return from just one business but from the outliers in a series of businesses. So if they don't encourage everybody to swing for the fences then they are hurting their own prospects, after all if 2 in 200 investments will be 1000 to 1 returns then the other ones statistically don't matter at all, no matter how irrational that sounds.
- alain94040 12y ago
  So true. Many first-time founders do not understand the implications of this. If you take money from Sequoia, and after years of hard work, you get an offer for an acquisition for $100M, which will make you, the founder, $10M in your pocket, set for life... would you take it, or would you rather risk it all, for a 10% chance to get to a $1B acquisition? I know that when I ask young founders, they'll casually say they'll go for the $1B. I strongly suggest you think slow and hard about this. Because some VCs will not give you a choice, and a 90% chance of making nothing from years of hard work is not fun.
  - pbreit 12y ago
    That's why it's humorous to see the same people criticizing founder/employee cashouts.
  - pwang 12y ago
    Yep, agree. I think more people faced with this question should see it posed as "90% chance of no return". (Cognitive irrationalities about asymmetric loss aversion and all that.)
  - netcan 12y ago
    I don't think it's quite as grim as that. A founder that has taken a business to $100M with a credible chance at another 10X growth period is now CEO of a substantial company. Companies of that size rarely just blow up with all equity becoming worthless. Salaries, bonuses or even equity sale can put some lump some in the founder's pockets. It certainly can turn out better to take the early money, but it's not necessarily risking it all.
lmm 12y ago
> I think I might be saying this backwards. Let me try it another way. A lot of the current startup thinking is premised on the idea that small teams can have a big impact relative to the cash requirements. A second idea is that a startup making a big impact has a decent chance of turning into a multi billion dollar company or a $100m+ acquisition for a multi billion dollar company. Is there no room to build on the first premise without later building on the second premise? Could Facebook have connected people as well as a 500 person company? If it were making less money then that's supposed to mean it was providing less value (or rather, the converse of this is supposed to be true). A $10bn business is worth 10x as much as a hundred $10m businesses, by definition - and the monetary valuation is supposed to reflect the human valuation. Corollary: if you stop working on your $10m business and instead take a 1% shot at a $10bn business, that's being more productive. And that's the game that VCs are in. The last company I worked for, and another before that, were startups that got to the $100m stage and then sold to private equity (with a merger in the mix), to become mature, profitable, "boring" but useful businesses. It does happen (admittedly this is London rather than the Valley), it's just less newsworthy. VC isn't the way to do it - that's not their business model - but in my (limited) experience they're happy to sell to the kind of entity that's in that business (private equity), and pocket the modest profit, if that's the way the business goes. As a founder you'll have to make the case for it, but it can be done.
- netcan 12y ago
  >>the monetary valuation is supposed to reflect the human valuation I think this is a misunderstood or over-extrapolated assumption from liberal economics. Especially with the economics of free or very cheap services, I think revenue can be far more disconnected from total "utility" of a business. Massive online services generate a lot of uncultured utility and it's not unreasonable (within the liberal economic paradigm) to speculate that a move which captures more utility as revenue could generate less total utility, especially when you bring high risk/reward financial modeling into valuation. There are a lot of companies like you describe in the b2b generas. But services for consumers, especially those which are essentially communication services, seem to come up against this sell or grow pressure. I think twitter, Facebook, and many other services which sold at an earlier stage might have better served their "mission" as company's an order of magnitude smaller. Think of the impact wikipedia (a nonprofit, but I think it's relevant) has had. How could that value possibly be represented by revenue or valuation. Twitter is now under tremendous pressure to create a hyper-profitable advertising business to rival Facebook & Google. Twitter is now 4,000 employees and almost $2bn annual budget (growing at X 2.6 p/a) under pressure to turn twitter into a revenue machine within 12 months. They are employing armies of bizdev, ad sales and support to try and meet this goals. Does that kind of Twitter stand a better chance at value creation than an 800 employee Twitter with a $400k budget would have had?

by netcan 12y ago

idlewords 12y ago

Venture capital is supposed to be mechanism for funding at the highest levels of risk and reward. But somehow we've decided that it's the only model for Internet companies. So a lot of companies and individuals with perfectly workable small or medium-size ideas end up inflating them to VC size to get funding, and then fizzling out. A sad side effect is that it discredits the ideas. We have a grandiosity problem in Silicon Valley. The problem isn't really VC, but the lack of alternatives along the other parts of the risk/reward curve.

JoeAltmaier 12y ago
Doesn't fit what I knew: that most startups are Angel funded. Or did the pendulum swing, and we're back to VC funding?
- idlewords 12y ago
  I don't see a practical difference between the two in our industry. They're part of the same pipeline.
  - jacquesm 12y ago
    There are substantial differences between angel investors and VCs from a practical point of view, even if both will get you access to capital: - Angels rarely do due diligence, VCs almost always do. - Angels tend to look much more at who else is investing in the company, almost never want to be 'alone' or 'first'. - Also they are typically much less experienced as investors and having them on-board can be a pain, especially when you're doing a start-up outside of their field of expertise - VCs investment tends to come with some visibility perks - it is usually easier to get investment from a group of angel investors than it is to get investment from a VC
    - idlewords 12y ago
      You are certainly right. But that's a kind of insider explanation from within our world. If you're explaining the economics of computerland in broad strokes, there's no significant distinction to make between angel investment and VC. The two groups intermingle, they fund the same projects (with the same expectations of risk and growth), and they even move in the same social circles.
      - jacquesm 12y ago
        > But that's a kind of insider explanation from within our world. Good point, I will have to work harder on divorcing myself from that. It's hard though. For the purpose of founders that are relatively in-experienced the two groups appear similar enough that there is little to no outward difference. That viewpoint is worth correcting.

jacquesm 12y ago

Sad to see this downvoted. You're homing in on the heart of the matter: VC goals are not at all aligned with entrepreneur goals. A good investment is not necessarily a good business because the VC does not get his/her return from just one business but from the outliers in a series of businesses. So if they don't encourage everybody to swing for the fences then they are hurting their own prospects, after all if 2 in 200 investments will be 1000 to 1 returns then the other ones statistically don't matter at all, no matter how irrational that sounds.

alain94040 12y ago
So true. Many first-time founders do not understand the implications of this. If you take money from Sequoia, and after years of hard work, you get an offer for an acquisition for $100M, which will make you, the founder, $10M in your pocket, set for life... would you take it, or would you rather risk it all, for a 10% chance to get to a $1B acquisition? I know that when I ask young founders, they'll casually say they'll go for the $1B. I strongly suggest you think slow and hard about this. Because some VCs will not give you a choice, and a 90% chance of making nothing from years of hard work is not fun.
- pbreit 12y ago
  That's why it's humorous to see the same people criticizing founder/employee cashouts.
- pwang 12y ago
  Yep, agree. I think more people faced with this question should see it posed as "90% chance of no return". (Cognitive irrationalities about asymmetric loss aversion and all that.)
- netcan 12y ago
  I don't think it's quite as grim as that. A founder that has taken a business to $100M with a credible chance at another 10X growth period is now CEO of a substantial company. Companies of that size rarely just blow up with all equity becoming worthless. Salaries, bonuses or even equity sale can put some lump some in the founder's pockets. It certainly can turn out better to take the early money, but it's not necessarily risking it all.

lmm 12y ago

> I think I might be saying this backwards. Let me try it another way. A lot of the current startup thinking is premised on the idea that small teams can have a big impact relative to the cash requirements. A second idea is that a startup making a big impact has a decent chance of turning into a multi billion dollar company or a $100m+ acquisition for a multi billion dollar company. Is there no room to build on the first premise without later building on the second premise? Could Facebook have connected people as well as a 500 person company? If it were making less money then that's supposed to mean it was providing less value (or rather, the converse of this is supposed to be true). A $10bn business is worth 10x as much as a hundred $10m businesses, by definition - and the monetary valuation is supposed to reflect the human valuation. Corollary: if you stop working on your $10m business and instead take a 1% shot at a $10bn business, that's being more productive. And that's the game that VCs are in. The last company I worked for, and another before that, were startups that got to the $100m stage and then sold to private equity (with a merger in the mix), to become mature, profitable, "boring" but useful businesses. It does happen (admittedly this is London rather than the Valley), it's just less newsworthy. VC isn't the way to do it - that's not their business model - but in my (limited) experience they're happy to sell to the kind of entity that's in that business (private equity), and pocket the modest profit, if that's the way the business goes. As a founder you'll have to make the case for it, but it can be done.

netcan 12y ago
>>the monetary valuation is supposed to reflect the human valuation I think this is a misunderstood or over-extrapolated assumption from liberal economics. Especially with the economics of free or very cheap services, I think revenue can be far more disconnected from total "utility" of a business. Massive online services generate a lot of uncultured utility and it's not unreasonable (within the liberal economic paradigm) to speculate that a move which captures more utility as revenue could generate less total utility, especially when you bring high risk/reward financial modeling into valuation. There are a lot of companies like you describe in the b2b generas. But services for consumers, especially those which are essentially communication services, seem to come up against this sell or grow pressure. I think twitter, Facebook, and many other services which sold at an earlier stage might have better served their "mission" as company's an order of magnitude smaller. Think of the impact wikipedia (a nonprofit, but I think it's relevant) has had. How could that value possibly be represented by revenue or valuation. Twitter is now under tremendous pressure to create a hyper-profitable advertising business to rival Facebook & Google. Twitter is now 4,000 employees and almost $2bn annual budget (growing at X 2.6 p/a) under pressure to turn twitter into a revenue machine within 12 months. They are employing armies of bizdev, ad sales and support to try and meet this goals. Does that kind of Twitter stand a better chance at value creation than an 800 employee Twitter with a $400k budget would have had?