9 ms·

In a world of venture capital

49 points by abecedarius 11y ago

waterlesscloud 11y ago
"Starting a business is not about doing business. Starting a new business is about raising investment." "Fundamentally, the venture capitalist is asking: will this company be able to raise money in future rounds?"
deleted 11y ago
[deleted]
lordnacho 11y ago
Wow, this is almost a description of a pyramid scheme. Investors invest because they think more investors will invest later. You need the brand name investors because investors need to see the brand name investors in your company's pitch, making it more likely there will be future investors. The firms are selling shares by promising (well, making a string indication) someone else will buy the shares at a higher price later. Also, you can make money by investing without the firm making money.
increment_i 11y ago
>> "We made the deadly mistake of thinking of MetaMed as a business that was trying to turn a profit and grow organically, rather than a start-up whose ‘profits’ would come from selling its stock to investors at a higher price. Even in the explicit context of a profitable case, this was still true." When the author explains that the goal of the startup is to profit through selling its shares at ever higher prices, it seems like he's basically saying the entire industry is a giant game of Find the Greater Fool. I'm sure I'm missing something though.
- MCRed 11y ago
  You're not missing anything. It's kind of intrinsic to the system-- when you have VC that wants really high rates of growth then they will require/force the startup to take a path that may be much higher risk but also much higher reward. When you are building a business, you have to make decisions that keep you alive. In the process you may have less likelihood of becoming unicorn but much higher likelihood of surviving. EG: I think VCs want you to take a 1 in 10,000 chance at being a billion dollar company, vs a 1 in 1 chance of being a $100M company.
michaelochurch 11y ago
What he's describing is a feudalistic, dysfunctional reputation economy. I wish there a way to make everyone realize this at once, so we can abandon this mess wholesale and come up with something else. The reputation factors dominate in light of the realization that the current Bay Area "tech" scene is built on taking behaviors (insider trading, market manipulation) that would lead directly to jail if done on public markets, and applying them to unregulated private equities. Since the people getting burned the hardest on the investment are young employees, no one seems to care, though. This is also why there will probably never be a competing VC-driven tech hub, and why VC will always be extremely local. The VC business is that way because so much of the note-sharing and market/reputation manipulation is borderline unethical and it would be suicide to put too many of the conversations that actually matter in writing.
staunch 11y ago
> Because another of the characteristic mistakes of young founders is to go through the motions of starting a startup. They make up some plausible-sounding idea, raise money at a good valuation, rent a cool office, hire a bunch of people. From the outside that seems like what startups do. But the next step after rent a cool office and hire a bunch of people is: gradually realize how completely fucked they are, because while imitating all the outward forms of a startup they have neglected the one thing that's actually essential: making something people want. http://www.paulgraham.com/before.html http://www.paulgraham.com/before.html
- danieltillett 11y ago
  It is not only making something people want, you need to make something people will pay for, either directly or indirectly.
  - adyus 11y ago
    Could it be that "want" is now a type of currency? It seems that some of the things people "want" and get for free (GMail, Facebook, Twitter) have been converted to money somehow.
datashovel 11y ago
IMO the technology industry should be focusing less on maintaining the status quo, where they are constantly and continuously dependent on VC to bootstrap businesses, and more on figuring out how to make it easier for brand new businesses to bootstrap themselves into existence. Sure it's more "glamorous" to be wooed by VC firms, or to even get in the door, but IMO it skews priorities and is probably one of the main reasons there's such a high rate of failure in technology startups. In today's environment, the real essence of what it means to "build a company from the ground up" gets lost in translation.
- rhizome 11y ago
  One thing is to consider is where the business model of VCs themselves stands on the spectrum between disruption and status quo.
  - datashovel 11y ago
    Good point. I agree it deserves some clarification. Broadly, I would define "status quo" as an environment where poor people are dependent on wealthy people. In this respect I think the "VC" paradigm is certainly worthy of the "status quo" label.
- yesimahuman 11y ago
  I think there's something here. I run a VC-backed company, and though we did that for a specific reason and have no regrets, I still feel like the world hasn't truly seen companies like Mailchimp, Campaign Monitor, GitHub, etc. (before those that raised, raised). The VC world does tend to dismiss these types of companies, which I now realize is simply out of frustration at the lack of investable opportunity in these high-margin, growing, and sustainable companies. I think we haven't given enough weight to the idea that what those companies have done is revolutionary, and is actually a lot more contrarian than the existing startup model.
  - datashovel 11y ago
    I think a huge part of it is regulations. Imagine all the successful kickstarter projects that have ever existed. Then imagine a world where, if each of those people who "purchased" from these projects actually owned a percentage of that ongoing success? I think, of the many points of attack in leveling the playing field, removing regulations that prevent small-time "investors" from owning equity in ventures is a candidate that's high on my list. Although in a way that passes the buck (ie. you're still dependent on investors and giving away equity). I am looking forward to seeing how crowd-sourced loans and such will work. For example imagine a prosper.com at scale (catered specifically toward small business loans). And wouldn't it be nice if regulations didn't prevent a small startup from creating such a crowd-sourced loan program? How about a crowd-funded VC platform? I imagine alot of things are in the works that will help reduce the importance of the middle-man (ie. the investor). I look forward to seeing how that all comes together. But none of it will get off the ground until regulations are no longer the barrier to entry.
JoshTriplett 11y ago
The other news here that I hadn't seen elsewhere: when and why did MetaMed fail? That was an idea I would like to have seen succeed. Is anyone else working on that?
- danieltillett 11y ago
  It is an idea I would like to see succeed too, but I think the problem is there is no way to make money out of this service. I suspect it would work far better as a boot-strapped business offering a very high end service to the mega wealthy.
  - JoshTriplett 11y ago
    In the short term, charge at least as much for the service as it costs. In the long term, rely on the resulting wealthy and thankful patrons.
ianstallings 11y ago
I have given a lot of thought to, which is why the bigger venture capital firms dominate the market and make oversize profits while the other firms taken together make almost no profits Is there some data on this?
TheGrassyKnoll 11y ago
AKA "The rich get richer"
throwawaymaroon 11y ago
Remember: if you're reading this, this is your world of greed, the world you choose to live in by working in SV technology. Criticism is marginalized unless it's deemed socially appropriate. Reputation is the means by which money is protected from its own idiocy. Don't mind me, I'm just on my street corner, invisible by virtue of my assigned station.

49 points by abecedarius 11y ago

"Starting a business is not about doing business. Starting a new business is about raising investment." "Fundamentally, the venture capitalist is asking: will this company be able to raise money in future rounds?"

deleted 11y ago

[deleted]

lordnacho 11y ago

Wow, this is almost a description of a pyramid scheme. Investors invest because they think more investors will invest later. You need the brand name investors because investors need to see the brand name investors in your company's pitch, making it more likely there will be future investors. The firms are selling shares by promising (well, making a string indication) someone else will buy the shares at a higher price later. Also, you can make money by investing without the firm making money.

increment_i 11y ago

>> "We made the deadly mistake of thinking of MetaMed as a business that was trying to turn a profit and grow organically, rather than a start-up whose ‘profits’ would come from selling its stock to investors at a higher price. Even in the explicit context of a profitable case, this was still true." When the author explains that the goal of the startup is to profit through selling its shares at ever higher prices, it seems like he's basically saying the entire industry is a giant game of Find the Greater Fool. I'm sure I'm missing something though.

MCRed 11y ago
You're not missing anything. It's kind of intrinsic to the system-- when you have VC that wants really high rates of growth then they will require/force the startup to take a path that may be much higher risk but also much higher reward. When you are building a business, you have to make decisions that keep you alive. In the process you may have less likelihood of becoming unicorn but much higher likelihood of surviving. EG: I think VCs want you to take a 1 in 10,000 chance at being a billion dollar company, vs a 1 in 1 chance of being a $100M company.

michaelochurch 11y ago

What he's describing is a feudalistic, dysfunctional reputation economy. I wish there a way to make everyone realize this at once, so we can abandon this mess wholesale and come up with something else. The reputation factors dominate in light of the realization that the current Bay Area "tech" scene is built on taking behaviors (insider trading, market manipulation) that would lead directly to jail if done on public markets, and applying them to unregulated private equities. Since the people getting burned the hardest on the investment are young employees, no one seems to care, though. This is also why there will probably never be a competing VC-driven tech hub, and why VC will always be extremely local. The VC business is that way because so much of the note-sharing and market/reputation manipulation is borderline unethical and it would be suicide to put too many of the conversations that actually matter in writing.

staunch 11y ago

> Because another of the characteristic mistakes of young founders is to go through the motions of starting a startup. They make up some plausible-sounding idea, raise money at a good valuation, rent a cool office, hire a bunch of people. From the outside that seems like what startups do. But the next step after rent a cool office and hire a bunch of people is: gradually realize how completely fucked they are, because while imitating all the outward forms of a startup they have neglected the one thing that's actually essential: making something people want. http://www.paulgraham.com/before.html http://www.paulgraham.com/before.html

danieltillett 11y ago
It is not only making something people want, you need to make something people will pay for, either directly or indirectly.
- adyus 11y ago
  Could it be that "want" is now a type of currency? It seems that some of the things people "want" and get for free (GMail, Facebook, Twitter) have been converted to money somehow.

datashovel 11y ago

IMO the technology industry should be focusing less on maintaining the status quo, where they are constantly and continuously dependent on VC to bootstrap businesses, and more on figuring out how to make it easier for brand new businesses to bootstrap themselves into existence. Sure it's more "glamorous" to be wooed by VC firms, or to even get in the door, but IMO it skews priorities and is probably one of the main reasons there's such a high rate of failure in technology startups. In today's environment, the real essence of what it means to "build a company from the ground up" gets lost in translation.

rhizome 11y ago
One thing is to consider is where the business model of VCs themselves stands on the spectrum between disruption and status quo.
- datashovel 11y ago
  Good point. I agree it deserves some clarification. Broadly, I would define "status quo" as an environment where poor people are dependent on wealthy people. In this respect I think the "VC" paradigm is certainly worthy of the "status quo" label.
yesimahuman 11y ago
I think there's something here. I run a VC-backed company, and though we did that for a specific reason and have no regrets, I still feel like the world hasn't truly seen companies like Mailchimp, Campaign Monitor, GitHub, etc. (before those that raised, raised). The VC world does tend to dismiss these types of companies, which I now realize is simply out of frustration at the lack of investable opportunity in these high-margin, growing, and sustainable companies. I think we haven't given enough weight to the idea that what those companies have done is revolutionary, and is actually a lot more contrarian than the existing startup model.
- datashovel 11y ago
  I think a huge part of it is regulations. Imagine all the successful kickstarter projects that have ever existed. Then imagine a world where, if each of those people who "purchased" from these projects actually owned a percentage of that ongoing success? I think, of the many points of attack in leveling the playing field, removing regulations that prevent small-time "investors" from owning equity in ventures is a candidate that's high on my list. Although in a way that passes the buck (ie. you're still dependent on investors and giving away equity). I am looking forward to seeing how crowd-sourced loans and such will work. For example imagine a prosper.com at scale (catered specifically toward small business loans). And wouldn't it be nice if regulations didn't prevent a small startup from creating such a crowd-sourced loan program? How about a crowd-funded VC platform? I imagine alot of things are in the works that will help reduce the importance of the middle-man (ie. the investor). I look forward to seeing how that all comes together. But none of it will get off the ground until regulations are no longer the barrier to entry.

JoshTriplett 11y ago

The other news here that I hadn't seen elsewhere: when and why did MetaMed fail? That was an idea I would like to have seen succeed. Is anyone else working on that?

danieltillett 11y ago
It is an idea I would like to see succeed too, but I think the problem is there is no way to make money out of this service. I suspect it would work far better as a boot-strapped business offering a very high end service to the mega wealthy.
- JoshTriplett 11y ago
  In the short term, charge at least as much for the service as it costs. In the long term, rely on the resulting wealthy and thankful patrons.

ianstallings 11y ago

I have given a lot of thought to, which is why the bigger venture capital firms dominate the market and make oversize profits while the other firms taken together make almost no profits Is there some data on this?

TheGrassyKnoll 11y ago

AKA "The rich get richer"

throwawaymaroon 11y ago

Remember: if you're reading this, this is your world of greed, the world you choose to live in by working in SV technology. Criticism is marginalized unless it's deemed socially appropriate. Reputation is the means by which money is protected from its own idiocy. Don't mind me, I'm just on my street corner, invisible by virtue of my assigned station.