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An Entrepreneurial Counter Culture is Looming – The Startup Market is Not OK

38 points by rizzn 17y ago

rizzn 17y ago
This is the final draft based on the original Hacker News thread and conversation about a month ago.
patio11 17y ago
Capital available in $200,000 chunks would be an interesting world: 1) You'd presumably want to make the offering mass-customizable, like a typical residential mortgage. There are a few levers to play with, sure, by 98% of the contract got vetted by the company lawyers once as being Good Enough and folks can take it or they can leave it. This allows you to close deals quickly, avoid spending much time teaching buyers about your process, and have the deals offered by junior staff. Most home buyers want a house, they don't want a mortgage. Most startup founders have a business to have a business, not to raise capital. (Note that this would make "comparison shopping" easy.) 2) Automate and outsource more of the process. Banks can profitably do loans for $200,000 houses because there is an infrastructure of people who can say "Yep, this is a $200k house" and FICO scores, which let you push a button and get a quick estimate of my propensity to default in a second. I know we all think we're beautiful snowflakes, but I'm willing to bet there is a function which can be evaluated cheaply that is unfair, misses all sorts of edge cases, has numerous theoretical problems, and nonetheless is Good Enough when only $200k is at stake. 3) As you reduce the amount of marginal effort in each deal, it becomes possible to scale it to the moon, in a manner similar to e.g. mortgages and mutual funds. (The fund has a lot of money, the individual investors have comparitively little money and reduced exposure to any single investment, etc.)
- rizzn 17y ago
  That's a truly fascinating take - making investment look more like home banking.
- jacquesm 17y ago
  The big reason banks can say that about a house is that there is a house, which is a commodity (or at least, they were until recently), so if the deal does not work out the bank can sell the house. Without collateral of some sort this will not work. And if you have collateral you could simply either sell that or mortgage that (and plenty of founders do).
- RobGR 17y ago
  I think without real collateral, banks should not get into this. It is very easy to file papers, slap up a web site and put some whiteboards up in cheap office, and have a "startup"; if you can get 200k a pop, vacuous startups will be manufactured at a great rate, very similar to how we manufactured $300k MacMansions for $100k a pop until that game blew up. The deposited money of ordinary citizens should not involved in something like you describe, and espeically not in collateralized startup obligations or insurance on the same or whatever else the dark-suited sociopaths will dream up. However, a VC or hedge fund might get into it, as long the investors are millionaires who can afford the losses and presumably have or can buy the educated understanding of the risks. On the other hand, if there were some sort of club or co-op I could join, that I could pay a small monthly fee, and that would then invest the aggregated fees in a new startup every couple of months, I might do that. Especially if I got to attend a monthly meeting, hear pitches from various people, network with other members and people in startups, and hopefully have an "in" should I ever apply for a job at one of the startups.
- coryrc 17y ago
  If you had an algorithm to define the solution set of future successful startups, then you could just hire employees to implement the ideas and make yourself filthy rich.
ruslan 17y ago
I read through the article but could not get the roots of "shrinking venture market" problem. Can someone please summarize/provide better explaination ?
TimothyFitz 17y ago
"The scarce talent is business model engineering and product marketing – building for scale isn’t the problem anymore. I can build a hack protytype that works well into the "validation" stage to establish a funding event or customer revenue stream then use the new capital to rebuild, hire and grow." This interestingly follows my own career growth. I was the tech lead responsible for scalability/reliability at IMVU for a long time, but eventually our bottleneck clearly shifted from reliability back to marketing/product development. Around that time I switched teams, and have since been the tech lead for our marketing team. It might sound less sexy to other engineers, but getting to be on the bleeding edge of marketing for virtual economies is constantly challenging and fun; especially with IMVU's data driven culture.
- rizzn 17y ago
  I can second that, particularly for IMVU. The economics in play there are deep and complicated on many levels.
  - TimothyFitz 17y ago
    Yeah, here's a little known fact about IMVU's economy: Most products allow derivation, which gives content creators the ability to tweak/remix/reskin the product and publish the changes back to the catalog. Pick a markup for the remixed version and presto, everyone in the derivation chain gets paid their respective markups for every sale. There are only a handful of root nodes; nearly every product is a derivation of another product.
    - rizzn 17y ago
      Beyond the product side of the economy, which is fascinating to me in it's own right (for some of the reasons you mentioned), the service economy around room rental, sales positions for goods and modeling services are just as interesting as well (let alone the complications of exchange rate, credit inflation, and other economic concerns).
    - jacquesm 17y ago
      Did you take a leaf out of Ted Nelsons book for that or did you come up with it independently ?
plinkplonk 17y ago
"Technology, however, isn’t the driver any more for startups. The scarce talent is business model engineering and product marketing" How true is this? Sounds like wishful thinking from a non programmer to me. (Please note : I am not saying that marketing/product engineering is not important. They (obviously) are. I just think "Technology, however, isn’t the driver any more for startups" is too broad a brush)
- TimothyFitz 17y ago
  I think his point is that scaling up on the web is a solved problem, which is mostly true. If you look at most startup's pitch/plan the biggest risks are not in technology. Steve Blank would say there's Market Risk (will your customers want it?) but minimal Invention Risk (can you deliver it?). Contrast this with biotech where you're trying to cure diseases. Minimal market risk, tons of invention risk. Read more here: http://steveblank.com/category/vertical-markets/ http://steveblank.com/category/vertical-markets/
  - plinkplonk 17y ago
    "his point is that scaling up on the web is a solved problem, which is mostly true" Maybe, but that isn't what "Technology, however, isn’t the driver any more for startups" means. "Technology" is a lot more than "scaling on the web", even in software based startups. "Steve Blank would say there's Market Risk (will your customers want it?) but minimal Invention Risk (can you deliver it?). " Steve Blank is also careful to qualify that statement with "for some types of startups" (unlike the author of this article, hence my "too broad a brush" judgment). Assuming every software startup, even when the web is used as an interface, is a "web 2.0" startup with minimal Invention risk is intellectual laziness. "The scarce talent is business model engineering and product marketing" This doesn't have any supporting arguments/evidence/data. sounds like something a non programmer MBA type person, for whom of course programming is easy and programmers are commodity hires (like say receptionists) would say. I'd like to hear a supporting argument for why great programmers, who are what startups are usually desperate to hire, are not "scarce talent", but marketing folks are. Sure, for some startups, that is no doubt true, but as a generalization it seems too broad, which was my point. So yes I've read Steve's book too and like it a lot :-), but I don't think this dichotomy of risks supports the original article much.
danielrhodes 17y ago
I found the article was rather long and a bit confusing. I wanted to summarize and clarify it: There are more companies these days, but VCs are funding the same number of companies as before with the same huge expectations. Why not instead fund more companies with a lower amount of cash so as to not miss some opportunities. My answer: putting all your eggs in one basket in a competitive environment will likely lead to better results than spreading the money out among a bunch of different baskets. Most startups are going to fail anyways, even with $200K of funding because the markets they are hitting are not that huge, not to mention all the other hurdles. What funding a bunch of different companies does is make a clear market winner harder to come by, which screws everybody. It's better if there was one clear winner sooner rather than later. My bet is handing out smaller investments like $200K would actually make the IPO market worse since most companies would get too tired to ever make it big enough to IPO. The quick answer to why IPOs have not been good recently (other than the economy sucking): Sarbannes-Oxley made it very expensive to IPO with big requirements which means that the next best exit is selling. To sell, you have to get big fast to become attractive to suitors. Profitability/revenue is not a requirement/important for selling to a larger company (they use startups to cheaply get new talent and good ideas rather than quickly adding new revenue streams). So why don't more companies focus on revenue as a backup plan? It's very distracting and doing so means you might only scrape by. With such a do or die environment, the goal is not to create good businesses which will survive, just ones that will become great. The good thing is that as it has become cheaper to run a startup, people have more options and can create self-funded sustainable businesses aimed at smaller markets. You won't become a billionaire doing that, but you'll get by. That's fine with VCs though, they are after big returns. If you are comfortable with creating such a business, by all means do so, but don't be pissed when a VC is not interested, even if it does make a little money. There is clearly room for both. If you do hit on a massive market opportunity, they can always catch up with you later. So what is something like Y Combinator? It is a cheap way to vet companies for VCs and angels who see too many startups without enough information on them to make a good value judgement on whether they'll succeed. You don't need $200K to do that, you just need a small amount of money.
- sielskr 17y ago
  The writing in the parent is significantly better than the writing in the original post (the web page not on Hacker News). So, thanks, danielrhodes, for summarizing!
wattersjames 17y ago
With cloud computing rising to prominence as the underpinning of many modern web applications the amount of technology already 'assumed' in any new application design. This trend seems to align with John's key point.
jf781 17y ago
I really am enjoying the thread here on my post. Interesting to see some of the comments thinking that I'm anti-development with my quote about product mktg and validation is the scarce resource. Of course great architects and developer are the scare resource but I've seen many code a great solution right now a cul de sac of no market. to me the biggest issue driving this counterculture that I'm seeing is "trust" of the capital markets. Especially since most of the productive actors in this marketplace have lived in a successful open source movement culture for 25 years. The capital markets (VCs) are at odds with this culture. There are many other points in the post that I would be happy to discuss if there is interest.
lsc 17y ago
do you really think handling a (non-technical) investor will be less work/less distraction than contracting part time? Sure, contracting takes time away from what you want to do, but it's pretty easy, and clients don't push you to do things that may not be in the interest of your customers.

38 points by rizzn 17y ago

rizzn 17y ago

This is the final draft based on the original Hacker News thread and conversation about a month ago.

Capital available in $200,000 chunks would be an interesting world: 1) You'd presumably want to make the offering mass-customizable, like a typical residential mortgage. There are a few levers to play with, sure, by 98% of the contract got vetted by the company lawyers once as being Good Enough and folks can take it or they can leave it. This allows you to close deals quickly, avoid spending much time teaching buyers about your process, and have the deals offered by junior staff. Most home buyers want a house, they don't want a mortgage. Most startup founders have a business to have a business, not to raise capital. (Note that this would make "comparison shopping" easy.) 2) Automate and outsource more of the process. Banks can profitably do loans for $200,000 houses because there is an infrastructure of people who can say "Yep, this is a $200k house" and FICO scores, which let you push a button and get a quick estimate of my propensity to default in a second. I know we all think we're beautiful snowflakes, but I'm willing to bet there is a function which can be evaluated cheaply that is unfair, misses all sorts of edge cases, has numerous theoretical problems, and nonetheless is Good Enough when only $200k is at stake. 3) As you reduce the amount of marginal effort in each deal, it becomes possible to scale it to the moon, in a manner similar to e.g. mortgages and mutual funds. (The fund has a lot of money, the individual investors have comparitively little money and reduced exposure to any single investment, etc.)

rizzn 17y ago
That's a truly fascinating take - making investment look more like home banking.
jacquesm 17y ago
The big reason banks can say that about a house is that there is a house, which is a commodity (or at least, they were until recently), so if the deal does not work out the bank can sell the house. Without collateral of some sort this will not work. And if you have collateral you could simply either sell that or mortgage that (and plenty of founders do).
RobGR 17y ago
I think without real collateral, banks should not get into this. It is very easy to file papers, slap up a web site and put some whiteboards up in cheap office, and have a "startup"; if you can get 200k a pop, vacuous startups will be manufactured at a great rate, very similar to how we manufactured $300k MacMansions for $100k a pop until that game blew up. The deposited money of ordinary citizens should not involved in something like you describe, and espeically not in collateralized startup obligations or insurance on the same or whatever else the dark-suited sociopaths will dream up. However, a VC or hedge fund might get into it, as long the investors are millionaires who can afford the losses and presumably have or can buy the educated understanding of the risks. On the other hand, if there were some sort of club or co-op I could join, that I could pay a small monthly fee, and that would then invest the aggregated fees in a new startup every couple of months, I might do that. Especially if I got to attend a monthly meeting, hear pitches from various people, network with other members and people in startups, and hopefully have an "in" should I ever apply for a job at one of the startups.
coryrc 17y ago
If you had an algorithm to define the solution set of future successful startups, then you could just hire employees to implement the ideas and make yourself filthy rich.

ruslan 17y ago

I read through the article but could not get the roots of "shrinking venture market" problem. Can someone please summarize/provide better explaination ?

TimothyFitz 17y ago

"The scarce talent is business model engineering and product marketing – building for scale isn’t the problem anymore. I can build a hack protytype that works well into the "validation" stage to establish a funding event or customer revenue stream then use the new capital to rebuild, hire and grow." This interestingly follows my own career growth. I was the tech lead responsible for scalability/reliability at IMVU for a long time, but eventually our bottleneck clearly shifted from reliability back to marketing/product development. Around that time I switched teams, and have since been the tech lead for our marketing team. It might sound less sexy to other engineers, but getting to be on the bleeding edge of marketing for virtual economies is constantly challenging and fun; especially with IMVU's data driven culture.

rizzn 17y ago
I can second that, particularly for IMVU. The economics in play there are deep and complicated on many levels.
- TimothyFitz 17y ago
  Yeah, here's a little known fact about IMVU's economy: Most products allow derivation, which gives content creators the ability to tweak/remix/reskin the product and publish the changes back to the catalog. Pick a markup for the remixed version and presto, everyone in the derivation chain gets paid their respective markups for every sale. There are only a handful of root nodes; nearly every product is a derivation of another product.
  - rizzn 17y ago
    Beyond the product side of the economy, which is fascinating to me in it's own right (for some of the reasons you mentioned), the service economy around room rental, sales positions for goods and modeling services are just as interesting as well (let alone the complications of exchange rate, credit inflation, and other economic concerns).
  - jacquesm 17y ago
    Did you take a leaf out of Ted Nelsons book for that or did you come up with it independently ?

plinkplonk 17y ago

"Technology, however, isn’t the driver any more for startups. The scarce talent is business model engineering and product marketing" How true is this? Sounds like wishful thinking from a non programmer to me. (Please note : I am not saying that marketing/product engineering is not important. They (obviously) are. I just think "Technology, however, isn’t the driver any more for startups" is too broad a brush)

TimothyFitz 17y ago
I think his point is that scaling up on the web is a solved problem, which is mostly true. If you look at most startup's pitch/plan the biggest risks are not in technology. Steve Blank would say there's Market Risk (will your customers want it?) but minimal Invention Risk (can you deliver it?). Contrast this with biotech where you're trying to cure diseases. Minimal market risk, tons of invention risk. Read more here: http://steveblank.com/category/vertical-markets/ http://steveblank.com/category/vertical-markets/
- plinkplonk 17y ago
  "his point is that scaling up on the web is a solved problem, which is mostly true" Maybe, but that isn't what "Technology, however, isn’t the driver any more for startups" means. "Technology" is a lot more than "scaling on the web", even in software based startups. "Steve Blank would say there's Market Risk (will your customers want it?) but minimal Invention Risk (can you deliver it?). " Steve Blank is also careful to qualify that statement with "for some types of startups" (unlike the author of this article, hence my "too broad a brush" judgment). Assuming every software startup, even when the web is used as an interface, is a "web 2.0" startup with minimal Invention risk is intellectual laziness. "The scarce talent is business model engineering and product marketing" This doesn't have any supporting arguments/evidence/data. sounds like something a non programmer MBA type person, for whom of course programming is easy and programmers are commodity hires (like say receptionists) would say. I'd like to hear a supporting argument for why great programmers, who are what startups are usually desperate to hire, are not "scarce talent", but marketing folks are. Sure, for some startups, that is no doubt true, but as a generalization it seems too broad, which was my point. So yes I've read Steve's book too and like it a lot :-), but I don't think this dichotomy of risks supports the original article much.

danielrhodes 17y ago

I found the article was rather long and a bit confusing. I wanted to summarize and clarify it: There are more companies these days, but VCs are funding the same number of companies as before with the same huge expectations. Why not instead fund more companies with a lower amount of cash so as to not miss some opportunities. My answer: putting all your eggs in one basket in a competitive environment will likely lead to better results than spreading the money out among a bunch of different baskets. Most startups are going to fail anyways, even with $200K of funding because the markets they are hitting are not that huge, not to mention all the other hurdles. What funding a bunch of different companies does is make a clear market winner harder to come by, which screws everybody. It's better if there was one clear winner sooner rather than later. My bet is handing out smaller investments like $200K would actually make the IPO market worse since most companies would get too tired to ever make it big enough to IPO. The quick answer to why IPOs have not been good recently (other than the economy sucking): Sarbannes-Oxley made it very expensive to IPO with big requirements which means that the next best exit is selling. To sell, you have to get big fast to become attractive to suitors. Profitability/revenue is not a requirement/important for selling to a larger company (they use startups to cheaply get new talent and good ideas rather than quickly adding new revenue streams). So why don't more companies focus on revenue as a backup plan? It's very distracting and doing so means you might only scrape by. With such a do or die environment, the goal is not to create good businesses which will survive, just ones that will become great. The good thing is that as it has become cheaper to run a startup, people have more options and can create self-funded sustainable businesses aimed at smaller markets. You won't become a billionaire doing that, but you'll get by. That's fine with VCs though, they are after big returns. If you are comfortable with creating such a business, by all means do so, but don't be pissed when a VC is not interested, even if it does make a little money. There is clearly room for both. If you do hit on a massive market opportunity, they can always catch up with you later. So what is something like Y Combinator? It is a cheap way to vet companies for VCs and angels who see too many startups without enough information on them to make a good value judgement on whether they'll succeed. You don't need $200K to do that, you just need a small amount of money.

sielskr 17y ago
The writing in the parent is significantly better than the writing in the original post (the web page not on Hacker News). So, thanks, danielrhodes, for summarizing!

wattersjames 17y ago

With cloud computing rising to prominence as the underpinning of many modern web applications the amount of technology already 'assumed' in any new application design. This trend seems to align with John's key point.

jf781 17y ago

I really am enjoying the thread here on my post. Interesting to see some of the comments thinking that I'm anti-development with my quote about product mktg and validation is the scarce resource. Of course great architects and developer are the scare resource but I've seen many code a great solution right now a cul de sac of no market. to me the biggest issue driving this counterculture that I'm seeing is "trust" of the capital markets. Especially since most of the productive actors in this marketplace have lived in a successful open source movement culture for 25 years. The capital markets (VCs) are at odds with this culture. There are many other points in the post that I would be happy to discuss if there is interest.

lsc 17y ago

do you really think handling a (non-technical) investor will be less work/less distraction than contracting part time? Sure, contracting takes time away from what you want to do, but it's pretty easy, and clients don't push you to do things that may not be in the interest of your customers.