VCs win if enough of their bets make it big enough to offset the ones that go under. Naturally the big hits are few and the ones that fail are numerous. That means the big hits need to be huge and the failures need to have a certain cap. The latter also means you can't run a company for 10 years in slowmo until they get profitable. And the big hits need to be huge which means they need to take over a nice chunk of a market which you can only do with good funding and moving faster than everyone else.
VCs were able to control the startups they invested in to a pretty big degree.
What does that mean for founders? It means that you are putting all your eggs into one basket. A founder does not found 20 startups at the same time in the hope that one succeeds. A founder puts his effort usually into only one. So founders take a larger risk than VCs. They make it big or go bust. And the vast majority goes bust when running in supercharged mode.
What does that mean for startup employees? Well, they got the worst of all worlds. High risk and little to no upside. Their eggs are also in one basket as they work for only one company AND they don't have the huge upsides that VCs and founders have.
The whole game favors only VCs and founders who like big bets. But for the vast majority of people (which includes employees), the VC game is not a great game to play.
I think your point about employees is especially true, particularly since the large tech companies pay disproportionately so much more. If you are a senior-level software engineer, even if the startup is successful in the "unicorn" range, for most people that means an equity payout on the couple hundred K to the $1 million range for all but the very largest successes. Not bad at all, but when the FAANGS are already paying in the 250-500k range, going to a startup is you are not an exec or founder is almost always a poor financial decision. And remember, the vast majority of startups still fail outright.
Precisely. A senior engineer can certainly hope to make $400k or more per year for good performance. Not just in FAANG either - plenty of other profitable businesses are competing for the same grade of talent and thus pay in the same range.
Only a handful of almost surefire unicorns can reasonably come anywhere near matching that, and that only in the eventuality that they don't pull a Zenefits and leave you hundreds of thousands of dollars to millions of dollars short and in need of a new job.
Anecdotally, last year I was contacted by such a surefire unicorn for a role that was actually very interesting. We crunched the numbers together, and the best case scenario was them effectively matching my current comp. Which was actually a great proposition for startup comp, the best I've seen. Still, nowhere near compelling enough to upend my life for a higher risk position without any financial upside.
I worked in startups for the early part of my career, including a fairly well known one that exited. Neither me, nor any of my colleagues in that startup, nor any of the many other startup employees in my network, ever made more than a few hundred thousands on our options. Many very talented engineers made nothing at all on large quantities of options granted by several promising startups.
It's no wonder that none of the recent graduates I interview nowadays is at all interested in startups. When I ask where else they are interviewing, it's always FAANG and other high-flying profitable businesses. Even more so for senior engineers, whose opportunity cost is even higher, typically in the hundreds of thousands per year.
Even with 10-20 years of experience in the bay area at small, medium, large size software companies, I've never ever made anything close to that amount.
What was your equity compensation at these companies? Given that many (most?) companies refresh equity grants, it's very possible that after a full vesting period (usually 4 years) that you would then have multiple RSU grants vesting every year. With ~150k annually in RSUs, 150-200k base salary and 15-25% bonus is how lots and lots of people attain compensation this high.
It was always worthless Options that could never be sold. One company's options I worked for 6 years, was worth about 4K after taxes, fully vested. Our typical bonuses were 1-2%. A 10% bonus was considered very high.
> It was always worthless Options that could never be sold. One company's options I worked for 6 years, was worth about 4K after taxes, fully vested.
There's your problem.
Getting paid in options is the exact mistake I've warned about repeatedly in comments throughout this thread.
Yours is a fairly common case in SV: worked in a series of startups that "paid" you in illiquid options that ended up being totally worthless.
I'm willing to bet these very same startups encouraged you to value these options very highly: high 6 and even 7 figures, right?
These places don't pay well, because why should they? Talent is apparently willing to work their ass off for these "worthless options" that are sold to them as vouchers for surefire multi-million-dollar jackpots.
You are not alone. I have 20+ years, and I am in a senior position with a fortune 100. I don’t get paid that much. I know most of my colleagues don’t either. I think 400k+ is more common at FAANGs. 200k and below is common for a lot of experienced developers in the Bay Area.
GP has replied elsewhere that all his employers were startups that paid him in "worthless options".
Indeed, you won't ever see $400k or even $300k working for startups that "pay" you in illiquid 0.001% stakes in what will surely become a multi-billion dollar runaway success (in which unlikely case your share will be diluted to nothing anyway).
You can certainly stick your fingers in your ears and sing LALALA while the rest of us make real money,. Your life, your choice.
Aside from it being fun to work on a small team early on in your career a startup is a great place to gain experience if you come from a non traditional background or didn’t go to a top tier university.
Experience and fast career progression shouldn’t be overlooked when looking at startups.
Zenefits was a highly touted workplace benefits startup that got into huge trouble when a Buzzfeed investigation (of all things), found that one of its execs had gamed a state insurance agent exam (I think that's what it was), so their staff could essentially cheat and obtain certifications faster.
The exec in charge was fired, and a lot of their key staff had already jumped ship by then.
Zenefits is an example of a surefire unicorn that made too many mistakes and lost most of its value very quickly.
The key points are:
1. Startup valuations are highly volatile. There were plenty of startups that were valued above the billion dollar levels, then sold for 8 or even 7 figures.
2. While profitable established companies can also go south, such companies pay you in cash and liquid RSUs, so if they spiral down you just switch to a better performing company. Getting most of your pay in illiquid options means you risk losing multiple years of earnings in the best part of your career.
Specifically, tons of talented people took a job in Zenefits based on the assumption that their illiquid shares will be worth six-seven figures, and likely will never see anything close to that in real money. Same thing wouldn't happen for those paid in liquid assets.
Best bet is a growth co that offers RSUs over options and a few years away from IPO. They will generally offer you a premium over what you'd make at a similar level in a public co (to make up for the illiquidity of the stock), and if you believe in the growth story it can pay off big time.
Why RSUs over options? In CA, in particular, if you're at a rocketship, the tax benefits of early exercised options can be huge, whereas with RSUs you're paying 30-40% to the government.
Options are often not worth the paper they’re printed on. For pre-IPO, pre-acquisition, companies there’s no real market for those options. You may well be able to get better tax rates on them, but only if you can actually sell them. Compare that to RSUs which you can exchange the day they vest for actual cash, with a minimum of fuss.
For perspective here I, and everyone I know who have worked for startups as an employee, have never seen a single penny from stock options. Maybe one day I will, but I consider them to be nothing more than a potential pleasant surprise down the line.
Paper? You don't even get paper stock certificates these days. It's all electronic.
At a previous company, I exercised my stock options when I left. This cost me about $4K. Two years later, I got $12K back... not a bad return, but certainly not the "potential for early retirement" I was told when I joined.
if you have the funds to early exercise, chances are you're joining a company that isn't yet a rocketship. and of course at that stage you can't make the same comparison with what you'd get at FB because your strike price is probably in the pennies and you're getting some small % of the overall company.
Real world example: low to mid level engineers at Uber joining in 2014/2015 at this point have stock worth over $2m over 4 years if Uber successfully IPOs at $100b+. By that time, Uber was already at "scale", offering RSUs (options strike price would be so expensive that it would be a huge risk to exercise), and that $2m is almost definitely more than what you'd otherwise have received in the same amount of time working at Google or FB.
I’m about to join a startup. I just want to do meaningful work and learn new things. I view it as a learning experience. I am so fed up with corporation life. I don’t see a way out other than joining a startup or starting my own. I don’t want to deal with project managers and fill their spreadsheets anymore.
The most valuable thing I have is the remaining time I have in this life. Not the number in my bank account.
>The most valuable thing I have is the remaining time I have in this life
Then why work for a startup? Most will demand a huge amount of your time compared to other jobs. Why not pick a job which demands a sane amount of your time and spend your free time on relationships and hobbies?
All the startup employees I've talked to work 80 hours a week. Why is robots so important to you that you're willing to accomplish absolutely nothing in at least a few of the important areas of your life such as health and fitness, friendships, romantic relationships, extraneous interests, relaxation, or family?
> All the startup employees I've talked to work 80 hours a week.
Worked at many startups. Currently run a startup. No one has worked 80h weeks at any of them, except myself in the first year of creating my own startup.
If you really have friends working at startups for < 10% equity and doing 80 hour weeks, something is wrong.
I work at a startup. Neither myself nor anyone on my team works 80 hours a week. I’ve been in tech in the Silicon Valley for two decades at a half dozen startups or more and have only ever put in a few 80 hour weeks.
Doing that consistently is unhealthy and sort of antithetical to building a thriving business.
Anecdotally, I worked as a software engineer at a very small (10-15 person) startup that just got acquired by FANG, and I, as well as almost everyone else there, generally worked 40 hour weeks. My relationships were fine, I went to the gym most days, and I worked on a masters in AI on the side, and I also learned a lot more than I would have at large companies since I got to own way more complex and interesting projects than I would have if I had just taken a job at FANG.
I feel like a lot of it comes down to how strong your management team and market position are. Our CEO had a pretty crazy track record, and drove the company into a really interesting, strong position, and then wanted himself to have a good, sustainable family life, and would constantly reiterate that he wanted everyone else to do the same.
I have other friends who have had roughly the same experiences, again, anecdotally.
I can't really say for sure, but some things that stood out:
People skewed older than I expected for a startup. Most people were in their 30s, and the C suite people were mostly in their 40s. No one other than me was below late 20s, and everyone seemed laid back but competent.
I probed at it during the interview and was told that everyone leaves between 5-6, and that the CEO wanted to go home to his family and didn't expect anyone to do differently. When I asked engineers things about how days and weeks went there they were very direct about how people didn't stay late and didn't dance around the subject.
The CEO had already sold multiple startups while raising his family, so I assumed that he would be able to make the company successful without setting a precedent of burning yourself out and without us being under constant threat of death.
Also yeah, I didn't make nearly what I make now that I'm at FANG. But I ended up in a higher role and with more leverage than would normally be possible at my age and experience level in the new company, and got some cash from the deal, so it's been pretty great. But yeah, if I was just trying to maximize short term dollars earned it wouldn't have made sense to work there, since I couldn't have realistically known that this was the outcome.
Look for places with diverse workforces. My experience is that managers who expect long hours also expect everyone to be 100% aligned with the company vision, and people with different backgrounds tend not to last.
Consider the compensation package a company offers. Companies that want young go-getters are more likely to offer high cash and equity; great benefits packages are better for drawing in risk-averse family types.
Also don't be afraid to ask straight-up what the working hours are like during an interview, ideally from the lowest-ranked person they'll let you talk to.
Disclaimer: I don't have strong data supporting any of this, just my personal experience and intuition from working in the bay area.
You can ask, but the ones that are terrible will tell you point blank that they care about work life balance and then simply fail to follow through.
My advice to folks is that if you don’t have a very significant chunk of the company, ie >1% then the payoff can never be good enough to compromise work/life balance.
If you’re a founder or very early and have 5% or some such the. That’s between you and your family.
one kind sent rockets and recollected them, made robots run and jump. The other kind, shrank blog posts to 140 characters, or added a timeout to short messages, removed the thumb down button, and called them a new feature.
Today, we still remember the names of da Vinci, Tesla, Turing, not because they had a successful family ...
So you're living based on how you will be remembered by strangers? That sounds incredibly unfulfilling and doesn't sound like a good way to live. In a few hundred more years almost no one will remember the names of those people either.
>da Vinci, Tesla, Turing
It's incredibly safe to say that you are not going to be as successful as these people. Almost no one achieves this much success in the sciences. At most you will probably advance your field by a few useful steps and then be personally forgotten about except in research paper footnotes.
>not because they had a successful family
You know who cares about you and remembers you more significantly than as a research footnote? Your family.
In a few hundred years nobody will remember you either: x220 the family man, who lived a complete life and raised wonderful children who went on to live very comfortable lives and have children of their own.
"I" am the best witness to my existence. Not the person giving my eulogy. Who are you to tell someone how to define what "fulfilling" means to them?
Why are you trying to tell this guy what he should value? He wants to do work that interests and excites him, and he's making the tradeoffs that balance his personal set of values - with, incidentally, far more information than you have about what those values and specific tradeoffs are.
Pursue your own balance of values with passion, and allow others to be meaningfully different from you. Their desires don't diminish yours.
I'm with you, man. I'd rather spend my life pursuing big dreams and try to do something meaningful, and leave a legacy - even if I fail and die broke, penniless and alone - then spend my life engaging in boring, pedestrian "normalcy".
I can live with failing. I can't live with not trying.
They're not working 80 hours a week. They're just saying they are, because that's fashionable. Or rather it used to be fashionable. It isn't anymore, so I'm surprised you're still hearing this.
Pet peeve: they are not working 80 hours a week. Simple number crunching. That would be working 8am-10pm every single Mon-Fri, then five solid hours on Saturday, and another five hours on Sunday. Every week. No, that's not happening.
I work at a big tech co. I almost never fill out any spreadsheet, use JIRA, use a ticketing system that strongly, worry about 'user stories', have 'hurry up and wait' deadlines and so on.
I wouldn't say all of those things are bad things.
I'd hope even the smallest of startups is thinking about how users interact with their software and organizing those interactions into some sort of prioritized backlog for development.
We definitely have a planning process, I do write things down into design docs, and do keep track of things in some spreadsheets, docs and tickets. But I don't find it an excessive, oppressive or impractical process, which is probably what the parent post is hinting to.
I would love to know about the list of "good" big companies (and good teams within them). In my direct experience, the big companies are soul crushing and monotonous and one is surrounded by mediocrity.
The best way to find out is to go interview at big cos, and ask them about all of your worries about process. One team can have a ton of process, the other can barely have any. It's really mostly a team and department basis thing.
In my limited experience in talking with other people, FAANG tends to not have as much process as finance, IBM, insurance or other 'boring big companies'.
Careful what you wish for, startups have people who will wear as many different hats as required to make it work. Corporate life may have had a really well defined job role, that may not be true in any startup you join.
I think I'm very entrepreneurial. "wear as many different hats as required to make it work", this is basically what I do for my side projects. I write both the web frontend (vue) and backend (in c++), do devops, content marketing, whereas my day job is device driver development.
Cool to know. Do you use any framework for the backend? And if you don't mind what's the project? I am thinking about using Rust for one of my projects but I am still unsure if I should use it instead of something like NodeJs or Python.
The point about FAANG paying so much gets made a lot, and that employees of startups are fools for their decisions, as if everyone's handed a dozen offers and makes a choice.
Most of us are lucky to get a single offer, sometimes after months of trying, so we take what we are given. The rosy picture portrayed on HN isn't at all accurate to my experience.
Though to be fair my current salary, as far as it is from the unrealistic portrayal of salaries here, still feels far better than almost any other job I would remotely have the capacity to do, and certainly far more than I need to live and have a pretty easy life if I were honest.
I'm payed a crazy amount of money to do something I love.
Sorry if I wasn't clear. I don't make 400k per year and I've tried to work at high paying tech companies in the bay area in the past and was rejected many times.
At one point I was close to giving up on being a developer entirely after months of failing to find work, though thankfully I had a friend from a former job who helped give me a legup to a startup he was working for.
It was that painful experience which made me grateful for what I have, even if its looked down on so much by my peers. I realized how lucky I was to be working at all.
The rosy picture I was referring too wasn't so much the salary as the ability of software engineers to get these jobs. In my experience it was a lot more like a professional sport (spend decades working and practicing in this field and you still don't have what it takes) than finding a store with a help-wanted sign and filling out an application.
I guess there's something of a paradox there... its a weird industry.
Conversely, if you can get hired to a unicorn in a position that's senior enough to have any hope of coming anywhere near top tech pay, then you are likely talented enough to work at top tech instead.
Not necessarily, as talents at that level which are valued in top tech may be different than talents at that level that are valued at growing startups.
There a variety of companies that pay top dollar for talent, straddling early stage startups all the way through established companies. That doesn't mean it's easy to get those jobs. It does mean that you should apply your talents where it fits.
BTW, you don't need to be at a unicorn to earn top EV. 1% of a 100M exit is 1M, which is more than the vast majority of equity grants I've heard of from FANG. Many people put 0 value on startup equity. Those people decrease their lifetime EV through misconceptions of statistics.
> Not necessarily, as talents at that level which are valued in top tech may be different than talents at that level that are valued at growing startups.
I worked at both. Talent overlap is quite high, far higher than is commonly assumed.
> There a variety of companies that pay top dollar for talent, straddling early stage startups all the way through established companies.
I worked in startups for many years, and most of my friends still in the field are either founders or C-level execs. They are fully aware of the top compensation for top engineers in startups presently. Startups don't match top tech comp currently. Unless you factor in the options as a sure thing, and the startup ends up exiting at unicorn levels.
> Many people put 0 value on startup equity. Those people decrease their lifetime EV through misconceptions of statistics.
This is a reflection of how many people have spent precious years of their career working for startups, and generally seeing 0 return on these options.
It's also a reflection of the perceived lack of control over this sort of deferred compensation, and various nasty dynamics that often snatch value away from rank-and-file employees, even at the last minute or past it. See the LinkedIn exit and their infamous clawback policy.
Startup options have earned this reputation for 0 value over a decade of overhype and underperformance. Far too many talented people were promised the sky and ended up with nothing after years of hard work.
I agree with your statement, but only if you consider that employees have a significant downside of working at a startup that goes under.
Usually they are able to jump ship sooner than the founder and don't loose any personal investment in the process they get more responsibilities and more independence which in turn can get them to higher salaries faster.
Employees at startup usually get paid a bit less than "market rate" but enjoy a work environment they consider to be more exciting / enriching / challenging. There are people that dislike the startup environment, or that don't think it's worth the pay cut compared to GAFAN or other BigCo - and that's OK - but for many it's not as bad as you frame it.
I would agree with all of this. I'm a first employee and I have had a huge amount of influence, responsibility, and flexibility over the years— I could easily walk to multiple other opportunities for 1.5-2x salary at this point, and having the option to do that is actually worth more to me than the cash gained from actually doing it. The career growth that has made this possible wouldn't have happened working at BigCo.
As far as I can tell, the biggest issue with most early employees is not being able to exercise your stock options— the ones that vest first you can't afford, and by the time the later ones vest, the tax bill would be too great. So if you want to leave before an exit, you're either walking from your options, bank-financing it, cutting some kind of side deal with a VC to finance it, or working out a deal with the board to buy you out over time.
As some counter ancedata, I worked at a relatively successful startup for several years and I ended up as a sr eng in big co anyway after the experience. Startup options ended up being effectively zero.
I should of hopped to big co sooner instead, I would of been significantly ahead of my life's savings goals if I did, and possibly would of bought my house at a far cheaper price because I had the money to pay for the down payment.
Yeah, for sure. I'm in the fortunate position of having picked (and contributed to, of course) what I believe is a winner. Part of this strategy has to be a willingness to constantly reevaluate the leadership team, progress, and strategy of the organization, and get out fast if it's no longer looking good.
I can definitely picture that there'd be a high vulnerability to sunk-cost thinking.
I agree with yours as well. But to add to that: there are VC startups that are fun and exciting to work at and there are ones that are horrible. And the same goes for big companies btw. Overall though, the chance of finding more freedom and excitement is with small VC startups, sure.
The employees that can jump ship quickly are the good performers that also live somewhere with ample opportunity. Those also are rarer than the average Joe Dev.
I'm not saying it's always a really bad dicision to join a VC funded startup. But in the majority of cases, people would probably be better off not to - at least financially. Of course (and luckily) there are more factors than that.
I think it’s just the start, soon there will be a much larger paradigm shift.
Especially in tech where there is generally a large community of supporters who are willing to fund the projects they believe in directly.
I think the Green Bay Packers is a perfect example, it’s the only “publicly owned” football team in the NFL and as a result when they need funding for large projects (like stadium renovations) they go straight to their community supporters with “public offerings of Packers stock”...which isn’t really stock at all but a certificate and small voice in corporate governance (ie election of a small number of directors). It’s so successful of a legal structure the NFL publicly takes the position they are at a competitive advantage to the other teams which are owned by billionaires.
There is no reason Startup’s shouldn’t look at the same model and cut out all VCs, incubators, etc...
The Packers model works because it's basically a scam, no one in Green Bay actually has any say over what the Packers do day to day but it feels good for Packer fans to say they own a part of the team. There's emotional buy in, it's not a rationale way to invest your money, and no one lends money with the idea that they're not going to see it again as a business.
Community support projects work for Kickstarter or Indiegogo marketing to the general public consumer, that's not the same thing as trying to build a B2B SaaS platform fixing a specific problem marketed at Fortune 500 companies.
The Green Bay Packers are valued at $2.35B...not bad for a non-profit.
How is the Packers model a scam? Because people support it and don’t get profits? Does that make the 90% of VC funded startups that fail scams? Are other NFL teams that are privately owned scams, because as I said the NFL publicly acknowledges the Packers community ownership is a competitive advantage over the other teams.
Sure maybe people won’t directly support your b2b software application marketed at Fortune 500 companies, but as a counter example many of the next fourtune 500 companies could easily adopt a community ownership model in a similar fashion as the Packers (only for profit).
People like community ownership and governance...there are many examples beyond the Packers to establish that. People don’t necessarily like the VC model and having to take money from wealthy people who take a chunk of your company just to compete on a level playing field.
It's a scam because the equity have any decision making power. It's still controlled by a small group of people aka the board of directors, the stock structure is setup that fans could not mount a hostile takeover. It's called ownership, but it's not, it has no value, it cannot ever be sold back, it doesn't grant you any say over how the team operates. The Packers are not a community owned organization, it's operates no different than any other NFL team, decisions are not made by the fans. The Packers aren't really community owned organization, a real community owned organization whose members have actual power over the organization. Those are very few and far between, are generally non profits, and in the end, no ability for outside investors to get the profits they're looking for, thus they won't bother to invest.
You hear from time to time small to mid sized business that are "employees owned and operated" but that doesn't mean every employee has the same equity, the generally ownership will have the largest stake anyway with employees having very little control or equity compared to ownership
>It's a scam because the equity have any decision making power.
Well there is no equity as there is no equity in any non profit corporation. That doesn’t make nonprofits a scam.
The shareholders elect the board and the board elects the officers and the officers control the day to day operations.
>It's still controlled by a small group of people aka the board of directors, the stock structure is setup that fans could not mount a hostile takeover
Well stockholders do get invited to the annual meeting and vote for a number of those directors.
You can claim all you want investor won’t invest when they can’t get their investment back, but again the Packers are proof you are wrong, no shareholder can recoup their investment much less make a profit, but they have no problem raising as much as $250M when they had their last 2 public offerings.
Edit: another example is the Gates foundation, supporters donate because the believe in the organization (like the Packers) yet supporters have even less rights than the Packers shareholders and obviously no chance of a “hostile takeover” and yet people “invest”/donate.
There's three ways to raise money. You can finance it (debt) or you can sell ownership (equity), or the last one, people can randomly throw money at you and expect nothing in return. The last method of raising funds are donations, those aren't an asset that can produce dividends, or earn interest, that's the opposite of an investment, it's an expense. A charitable one generally to get more favorable tax incentives.
Of course you can have equity in a non profit. That doesn't mean your entitled to profits that don't exist, it means you have a stake in the organization. And the # of outstanding stocks versus the # of stocks held by the general public is a tiny fraction of what the Packers are worth, but again those silly pieces of paper are not proof of equity or ownership, it's literally memorabilia fans traded cash for a piece of paper that says they own something even though they have no power of ownership, the annual shareholder meeting is for show, so to call it an investment like a traditional stock would be isn't fair, it's really not the same thing.
What you are describing is development office, going out to ask for donations for a cause. That's not the same as running a venture that's going to make profit for shareholders.
This is what Wefunder (YC W13) does with equity crowdfunding. It's great for companies that have passionate user bases. Even if the individual check size is small (e.g. min $100), it's a great for users who want to be part of something and great for companies who don't have to go to VC + can grow their user base.
The primary downside for startups is the cap table, but there's regulation in the works (already passed the House with near-unanimous bi-partisan support, waiting on the shutdown shitshow so the Senate can vote) to fix that.
Disclosure—I work at Wefunder, both on crowdfunding and very early cohorts (https://xx.team)
While the concepts are similar, there is a legal difference between equity crowd funding (presumably under the JOBS Act) and a a non-security instrument Public Offering exempt from securities laws (ie Packers Stock or similar)
Packers are nonprofit but there are other sports teams/organizations that have similar public offerings to raise funds/capital that are for profit entities.
You keep calling it a public offering, but the reality is, a public offering is selling parts of your company for cash, aka a stock, ownership has it's privileges, without those privileges, you aren't selling anything to the public, the public is giving you money in return for a piece of paper and a fuzzy good feeling inside. I don't invest to get a fuzzy good feeling inside. I donate for that.
Donations are not investments. They're expenses. Investments must have a return of some monetary vale, or else it's an expense.
I call it a public offering because it is a public offering ...according to the Packers and according to the SEC.
You’re really acting like an authority on “public offerings”, do you think you know more than the SEC about public offerings and they don’t know what one is? I understand your definition, it’s just not the legal definition is all.
What’s at odds is Packers “Stock” which isn’t “stock” in the common definition and understanding, but it’s still called stock, it’s just not a security or investment.
Have you even seen the Packers Public Offering Document(s) or subscription agreements? Because I’ve never seen a donation/charity issue “public offering documents” or require subscription agreements.
Edit:
>public offering is selling parts of your company for cash, aka a stock, ownership has it's privileges, without those privileges, you aren't selling anything to the public,
You should also really take a look at SEC enforcement actions against ICOs because almost none of them are “stock” nor carry privileges yet are considered public offerings.
The original story of getting rich off employee equity seems to go back to Netscape, but reading The New New Thing by Michael Lewis, I was struck by how abnormal that situation was. Jim Clark hated the VCs, identified as an engineer, seemed happy to share his winnings with everyone, and had the leverage to dictate VC terms. That story shaped tech for a while, e.g. Google bragged about how even their cooks got rich, but now 24 years after the IPO I think things have largely gone "back to normal", with investors and founders giving away less. The story's momentum still draws hopeful employees, but people are becoming more skeptical, too. Plus not every company is a Netscape or Google. . . .
That's one of my favourite books. There' also "Panic!" which is basically a curated list of newspaper articles and Lewis' columns about long-forgotten companies from the dotcom era and their business models.
What I found hilarious was Jim Clark's original vision of a "trillion dollar healthcare cost disruptor" that was Healtheon, actually IPO'd in '99, but ended up being acquired by the content mill cesspool that is WebMD.
"VCs were able to control the startups they invested in to a pretty big degree."
I don't think you're wrong, but I always thought VCs were there to hopefully guide these organizations too. Control, guide, probabbly overlap a lot. But the idea being you get capital, introductions, maybe help finding some people you need?
Granted I don't think you're wrong about the rest of it but control (when you sold yourself...), also guidance are weird venn diagrams. Not sure there is a right or wrong there.
Yeah, when a good VC owns 30% of your company they are invested in seeing this grow and succeed. There are other VC which are handsoff and do a spray pray approach to investing.
Maybe this is hopelessly naive or dumb legally difficult, but I wonder if a VC might have a slight advantage by offering funded companies a portion of the fund itself. They might be more enticing to founders. Of course there's still some severe disadvantage for employees.
I'm thinking about a Planet Money episode that discusses big-time poker folks, and they frequently trade percentages of their winnings such that if enough people do it, the few big winners are evened out over time.
You're operating under the assumption that most people have their choice of where to work. If you can work at Google or Facebook, then sure, don't go the startup route
On the other hand if you didn't go to an Ivy league you can prove yourself at a startup or advance your career faster before transitioning to a bigger company at a better position
Additionally, the particular mix of attributes you bring up (few and far between options for huge near-term growth) heavily incentivizes exploiting weaknesses in laws and/or outright violation of laws, because one of the only formulaic ways to displace entrenched incumbent businesses is to look at where they are forced to operate inefficiently due to obeying laws and then undercut them by operating more efficiently and skirting / violating those laws.
If you take a premise that society is better off most of the time if the business is less efficient but the law is obeyed, then it makes the whole concept of modern VC-backed startup businesses generally a destructive endeavor on society.
Obviously not in every individual case, but overall and pretty consistently in the largest growth start-ups.
I'll give you another reason. VC money is geographically limited. You're essentially required to build in San Fran or NYC if you want to get your product in front of someone with the cash to fund it.
Pittsburgh has a great tech scene and a pretty good 'stable, 10 years in company' scene. It's got dick all for startups (duolingo yes there are always exceptions) because there's just no VC capital.
IMO we're mostly fine with that. It's certainly a hell of a lot cheaper to live here than San Fran.
Employees get cash, which has the lowest risk of the three players (no cash for founders, cash loss for a VC).
You reduce VC earnings by having more VC competition.
You increase founder earnings by having more VC competition as well. Also by providing a better environment for success (that VC's provide, like it or not)
You increaes employee payout by the number of competing startups for talent-> more VC and more founders better deals for employees.
There are things that tip the scales amongst the players, but its not true employees lose out as a whole: the majority of minted millionaires in this game are employees, not founders. Even more than VC's. VC's meanwhile have not great returns as an entire industry. And in the founders game, most lose out with detrmient to health, status, or family fortunes.
To your point, a lot of the traditional appeal that working at a startup has for engineers has been the options.
When you take that (significant) compensation away it should make the job much less appealing. I think a lot of younger (by which I mean years of experience in the industry rather than age) talent has forgotten or is not aware that this is why a startup job became the "done thing".
For many, they'd be better served by working at an established company (even temporarily if they have ambitions of their own startup in the future) as the package will be much better, and because the traditional upside of working for a startup largely doesn't exist anymore.
The truth is that "significant" compensation is often worth little or nothing, and always has been. For every guy who makes $400K off his FAANG options or RSUs, there's at least 100 who made nothing off of their early stage stock options.
Even assuming this arbitrary estimate were true (I don't know what the real figures are, and doubt anyone else does, so why not) then this would mean the options were worth $4K ($400k/the 1 person who jackpots) in speculative value, give or take.
Still significant for someone just starting their career.
While your stats are right, the reality is that people aren't interchangeable and life isn't a perfect game to be approached from a statistical standpoint.
For some people, "100% on" environments are the right choice, and entrepreneurial activities are a natural outlet, whether in isolation or with others. For others, traditional careers offering stability and insurance from any threat of rapid change, or even hermit-like isolation may be favorable. Personally I've fluctuated between the former and the latter, and VC has done well by me as an employee. YMMV. Do what excites you.
> What does that mean for founders? It means that you are putting all your eggs into one basket.
> What does that mean for startup employees? Well, they got the worst of all worlds. High risk and little to no upside. Their eggs are also in one basket as they work for only one company AND they don't have the huge upsides that VCs and founders have
Presumably both of them get paid for their efforts...not entirely worthless
Not worthless but the deal they get is usually a lot worse than the deal a VC gets.
Are they getting paid enough to account for the risk? A VC will make more money and have less risk (overall). An employee will most likely make not much more than working for an established company and have a high chance of losing his job within a few years.
Exactly. The idea that Founders take on so much more ”risk” than early employees, and so deserve multiple orders of magnitude more reward is laughable.
There’s no difference in the risk of a founder and employee 1. They’re both out of a job and perhaps underpaid at first.
> The whole game favors only VCs and founders who like big bets. But for the vast majority of people (which includes employees), the VC game is not a great game to play.
If you're not the capitalist then you're probably the capital.
Caveat: I'm a VC, so I definitely have a horse in this race.
A few misc comments:
- VC is not for every company. Most VCs will be the first to tell you that: if you're not trying to build for a specific type/size of outcome, then VC funding is going to suck for you, and it's going to suck for the VC. It's not at all in a VC's best interest to invest in a company that has no desire to fit the VC model.
- I think the VC model itself is a great development from the last century. The fact that someone can raise millions (more than most people earn in a lifetime!) with an idea enables a lot of innovation that would be hard to nurture otherwise. But because the failure rate is high, VCs have to bet on outlier outcomes. That works for the VC but isn't always ideal for the companies they fund (because the founder is all-in but the VC can absorb many losses as long as at least one of their investments is a big winner).
- Many VCs add value and are great, but many other VCs subtract value and are awful. I've met people from both groups over the last 6 years in this job. It's not different than most jobs: there are amazing and awful teachers, politicians, engineers, doctors, etc.
- I love all of the new models coming up: revenue-based funding (SaaS capital), funding for ad-based acquisition (Clearbanc), Indie.vc, etc. The more types of investment models there are, the better off everyone will be. If the only companies that look for VC funding are the ones that require VC funding because no other funding model would work, then that's a good scenario because no one is wasting each other's time or looking for suboptimal funding options.
>I think the VC model itself is a great development from the last century. The fact that someone can raise millions (more than most people earn in a lifetime!) with an idea enables a lot of innovation that would be hard to nurture otherwise.
I think this has actually backfired. Because with sufficient number fudging you can raise more that you would ever earn, we have a whole generation of companies that are built to look great on paper, and actually identifying and solving business pains in a profitable way is becoming a lost art. Once the gravy train of investment cash accumulated in the previous economic cycles stops, we might be in for a very painful correction.
I think the more important misalignment between VCs and founders is a temporal one--if a VC thinks a company isn't going anywhere, they can immediately write it off and get on with their lives, whereas if a founder thinks her company isn't going anywhere, they have to (or think they have to!) "keep at it" until it goes bust. So they waste 2-5 of the most productive years of their most lives going through zombie motions.
Perhaps this perception is misplaced... I know VCs will say that they want a company to go bust as soon as possible (so that they aren't investing in Picplz). And this may be true.. but do you think a founder that had serially--and rapidly--gone bust 4/4 times 4 years in a row would get funding?
> I think the VC model itself is a great development from the last century. The fact that someone can raise millions (more than most people earn in a lifetime!) with an idea enables a lot of innovation that would be hard to nurture otherwise
Isn't this what the public stock markets used to be used for, before an IPO became a way to cash out?
No, you can't take an early stage, pre-revenue company public. It takes ~7yrs plus or minus to scale a company from nothing to large enough to list on public markets, which is what VCs are for.
Sure, that's how it is now, but it definitely hasn't always been that way. The original public companies definitely were "early stage, pre-revenue," though you can argue that those were long enough ago to be irrelevant.
Intel's IPO was 2 years after the company was formed.
If you think you only need that first round of funding ($1m-$3m seed round) and would never need to raise again, then $25m+/year would be reasonable. A company like that could exit for $150m-$250m in 10 years, and if the seed investor is getting 20x or 30x on their investment, they'll be happy.
However, 1) a lot of seed stage companies predict that "this is the last round of funding we'll ever need" and that's rarely the case, and 2) because of #1 it's hard to convince investors that you'll never need to raise more money.
For most VC-backed companies -- the ones that raise multiple rounds before an exit -- $100m+/year in revenue is a good 10-year goal. That's about the level required to go public or exit for $1b+.
Investors won't be unhappy if you shoot for $100m in annual revenue but "only" hit $40m or $6m. The nature of startups is that most don't end up going public. But it's hard to see any path where you could end up with $100m+/year in revenue within a decade, then most VCs will pass.
$100M - that is the level at which an IPO becomes feasible. This implies that whatever idea you are pursuing needs to have a potential scale far beyond $100M if things go right, because you can’t IPO at $100M if investors don’t believe that $200M is around the corner.
This might be an unpopular opinion, but my view of VC money has changed significantly in the last couple years.
Raising money is a failure mode. If you are raising money it is because you failed at something and you need the money to catch yourself. This is more true for software companies than, say hardware companies, but I think is still generally true.
For example, if you are raising because you need to hire people. You have failed to find small team to cofound the company with, or you have failed at developing the necessary skills yourself.
I'm not saying that no one should ever raise money, I just want entrepreneurs to stop seeing it as some kind of badge of honor. I hear people measuring themselves on how much money they've raised way too often. You don't build great things by raising money, you build great things by building them. Measuring your company on the number of customers it has is _much_ healthier than measuring your company on how much money it has raised.
If you're trying to build a lifestyle business, yes. That's correct. Incrementally building your recurring revenue is rewarding and doesn't require outside investment and comes with no strings, which keeps the cognitive and administrative overhead of the enterprise low.
If you're making a play to win in an emerging market against seriously capitalized contenders, you might not fare so well.
In software, most of the product development is fairly bespoke, but in many other industries you require access to capital assets to do anything. Having a portfolio of well placed leases is critical for a retail play. Having capital or leverageable equity is essential for an industry consolidation play. One wouldn't pretend that the founder of a junior mining company 'lacks skills' for issuing a raise on public markets to develop a mining site.
By extension, where the value add in an enterprise is not generated from the value of a software product, but by the integration of tech with some other vertical, obtaining serious cash infusions may be the only way for the business plan to succeed.
> If you're making a play to win in an emerging market against seriously capitalized contenders, you might not fare so well.
Then it's a slightly more contrived case of race to the bottom, usually nobody wins. Except that in the case of race to overfunding, there is a parallel game of last-to-hold-the-bag going on, which some VC can win even on a failing company if they time their entry and exit right.
If "Incrementally building your recurring revenue" is a lifestyle business, then lifestyle business must be a good thing. Acting as the vehicle of valuation inflation games played by VC however, I'm not even sure if that should qualify as business at all (slightly exaggerating, but "theatre troupe" is borderline applicable if earning money, now or in the future, is secondary to presenting a convincing "story" to future investors for the benefit of, and as demanded by, current investors).
I agree with the OP here, and I think it's an interpretation of terms.
If a company is "raising money" that means, in almost all cases, that they are actively soliciting or courting investors. They are doing the "Sand Hill Run" or some other such intense, grueling process which attempts to "pitch" the startup to investors in a gamified way.
I agree with the OP that this is a failure mode because in almost every case I've seen the company can't survive without it in the short-mid term.
If VC are literally hunting you down like Sequoia did with Whatsapp, I wouldn't consider that "Raising Money." They could have done without VC and been perfectly fine - probably better off long term.
This is pretty narrow thinking. The #1 reason founders should be raising VC money is to grow faster than they possibly could without it. Could Uber have grown organically without raising millions of dollars? Yes, probably. Would they have been outcompeted by competitors with significantly more money to throw at driver and user acquisition? Absolutely.
You have to look at the high-growth startup market as an exercise in game theory rather than as a single-company market. It matters a large amount what other companies could and would do if you don't take funding and grow as quickly as possible.
Time is money — which means you can buy time (i.e. shorter development cycles) with money. Sure, you can putter along with something and possibly make it big eventually, but having money allows you to accelerate that process dramatically. Being a first mover can mean the difference between dominating a market and being completely shut out of it.
I used to think the way you did ~10 years ago. Little did I know...
Back then I was running a very comfortable business. My main competitor, if there was any, opened shop with over $10M in the bank. It took a few years for things to play out but I never stood a chance.
A half dozen years later I was working on a product that I figured was original at the time. A year in or so, I learned I had two competitors that had raised over $100M to throw around. I stopped on the spot.
Measuring your company on the number of customers it has is meaningless if your possible competitor is raising 100x more than you'll earn in the next year or two.
Focus on profit and quality; yes. But then, unless you're onto something so supremely complex that essentially no one can reproduce it, rush to get money so you can focus on growing your market before someone goes after it while figuring out the former along the way.
No, financing is an important part of any business operation, and very few business that we know would have been successful without it.
Of course companies can raise too much, and consider 'a raise' as some kind of material win, and derive too much identity from it ... but that doesn't mean it's bad.
A decent round from a good fund is the a really great positive signal, perhaps the most positive.
Just because software doesn't have working capital or capex requirements, doesn't mean those costs are magic. People's time is money.
How do you even get something cofounded if you have no money? Is it failure mode to have an idea and be poor? Not everyone can afford to take zero pay until their product gets to market and starts generating returns, you still have to feed and shelter yourself and your cofounders which is very costly.
Raising money does indicate failure. Was Google failing when they raised $25M in 1998? No. They raised because in order to build out their product, they needed capital up front. Several years later, the bet paid off massively.
Companies should always be raising capital to match their expected growth trajectory. If you expect to grow by 10% a year - a lifestyle outcome - then get a bank loan because you are probably profitable. If you can grow by 100% a year then go get VC because that kind of growth would be adequate to reward the VC for the risk that naturally comes along with that rate of growth. Somewhere in the middle? Maybe revenue financing is appropriate.
I don't agree, even as a founder who bootstrapped two companies.
Nowadays, software companies are capital intensive. They don't start in a garage like in the 70s, 80s, or 90s. Are there exceptions? Sure, but they are outliers.
Marketing is one of the components that make your service or product capital intensive. Another is the level of details your product need to be in the market. In the past you were competing in the functionality now you are competing in the UX, multiplatform support, integratuon with other systems, etc.
The garage stage is usually the seed round, just like YC helps make it a formal process. Get a working provable prototype up and iterate quickly on your idea to something that works and can turn a profit. Then off you go to find customers till you show demand. That's when you evaluate whether a VC fund makes sense for your business.
Even back when SJ and Woz were in "the garage" stage building Apple 1s, they were seeded by their previous Blue Box profits and then after clear demand was proven they had Mike Markkula fund them to get Apple 2s built.
Companies will always have been and always will be capital intensive, nothing has changed there. Insurance, employees, real-estate, legal, just basic company things have always required significant capital.
If you look at the capital burnt by "unicorns" (e.g. Uber, Rappi) you will find that they are more capital intensive than in the 70s, 80s since they don't need to be cashflow positive for an undefined time and their product and marketing is much more complex and detailed. A clear example of this is computer games, in the 70s and 80s consumers were happy with a few "pixels moving" and now a game require a lot of people. That makes impossible to launch a new game from the garage except for rare indy outliers.
Who will win Lyft with ~$ 5b in investment, or Uber with ~24b? Those numbers are independent of the app being built.
My friend worked with Travis back when Uber was just a proof of concept in San Francisco. They used private limos and a basic app to connect the two. It worked, was cheap to build, and they proved demand rather quickly. I would call that garage/seed stage.
Airbnb was built and rebuilt several times with a few engineers in Brian Chesky’s apartment. They didn’t even have an official office for years at the beginning.
Your example is gaming, but all game startups use Kickstarter now as a way to fund the project upfront. It’s not really the same type of business and games are usually one-off finishes products.
This was the hard won lesson for me over the last few years and I think most VC already know this.
In fact I'm surprised any VC takes any solicitations because IMO even broaching the topic with a VC without them approaching you first is a negative indicator of growth.
All new companies are not startups. Startups need to have scalable business model.
Not all new companies with a scalable business model have the skills or risk taking ability to be a startup that actually scales.
Calling every new company that sells products in the internet a startup waters down the meaning of startup. Gradually growing and maybe becoming mid-sized business may be the best option for most. Gambling to become a very rich or starting from scratch again is low probability game. You can do it only few times and only small percentage can succeed.
I get the disdain for VCs -- it's a specific model with a specific set of failure modes. So that's fair.
What I don't understand is this dislike for investing ahead of growth or success. Why is the expectation that everything can be done bootstrapped or constantly profitable?
Companies take investment. If you're building a product that will be valuable for a long time, there will always be a period at the beginning where the entity requires somebody to put their investment into it. If the idea is small enough that one or two rich dudes with Google money can do forgo their salaries, that's great. But even a team of five for 18 months is a significant investment, and somebody needs to pony up. Should startups only consist of rich people who can afford to roll the dice?
Instead of fully rejecting the model, I believe that companies should take VC money with a finite plan towards profitability. If you take $2mil in seed money and hire a team of 8, get to $2m / year in revenue. If you want to take another bite at the apple, there will be VCs who fund you at that point. If not, you're not dead.
Real progress takes real investment. Ignoring that fact ignores a wild world of interesting, viable companies.
> What I don't understand is this dislike for investing ahead of growth or success. Why is the expectation that everything can be done bootstrapped or constantly profitable?
I don't see a disdain for investing, I see a general disdain for the misaligned incentives between founders and investors which has been around SV for decades. It's been a heated topic of debate at least since Steve Jobs was kicked out of Apple and yet the VC industry keeps growing and growing.
Paid for by?... I distrust free anything. VCs aren’t free money; healthcare is paid for by someone; professors have a salary even if tuition is waived; UBI requires cash to materialize from someone’s efforts...
Further removing people from the most important parts of life and entrusting those to a benevolent central authority is a risk I’d personally _not_ take. The lessons I learned from the most recent US presidential election is how grateful I am for separation of powers and limits on the scopes that any one person (or branch of government) can actually impose on my day-to-day life.
I’d prefer to not see UBI furloughed because two parties I’m not connected to would prefer to grandstand over a budgetary rounding error than solve problems.
UBI needs to be furloughed. UBI aka just a scheme to keep the money flowing from the prole’s wallet into altman’s pocket. Universal basic EQUITY is a different thing. But he’s not offering that.
None of these things are free. Doctors, teachers, schools, and income guarantees cost money, and that money has to come from somewhere (i.e. taxes).
The (unfortunate) reality is that for most people you either need a lot of savings or an investor to get a company off the ground [1]. I am skeptical that free education or a $10k/year UBI would change that.
[1] One notable exception is companies that can be started on the side, but UBI would not affect those very much, either.
But yet somehow Europe is a wasteland by comparison to the States for startups. In many, particularly, Northern European countries health care and college is the norm, even if UBI is further off, there are many subsidies and benefits one can have.
It is the desire, hunger, and unmet needs that creates many startups.
I don't think so; there must be many other factors. You seem to be saying that people are more motivated by not being able to afford healthcare and college for themselves or their kids, and that seems bonkers to me. If that were the motivation, people would be getting jobs at universities rather than founding startups, as most universities have fantastic health insurance and reduced tuition for employees' children. On the other hand, if I have a chronic medical condition, I can't currently leave to found a startup without risking my health alongside all the money I'm risking by quitting my job.
No that’s the opposite of what I was saying. It is OP who suggested this. I agree of course free health etc. does not make me do a startup. Otherwise many more would exist in the Nordics.
It's a testament to the propaganda that VCs set up in the last ~20 years that this is even a newsworthy article. Since the first dotcom boom, basically, the popular idea of a startup has been synonymous with taking venture capital and then building your business based on making the VC firm fabulously wealthy in the relatively near term. Of course there are a million other ways to build a successful business, but for a while this was the predominant one in the startup world. I'm glad it's changing.
I agree with the general point of the article that taking VC money leads to a "get rich or die trying" binary mindset which may not be right for all startups. For many startups, it's not necessarily to become a unicorn to be successful, bring riches to their employees, and in general build a better world.
However, there are some points that I don't agree with especially this: "Would Facebook’s leadership have ignored warning signs of Russian election meddling or allowed its platform to incite racial violence if it hadn’t, in its early days, prized moving fast and breaking things? Would Uber have engaged in dubious regulatory and legal strategies if it hadn’t prioritized expansion over all else? "
Of course, this is subject to survivorship bias but I think it's generally agreed that part of the reason Facebook was able to grow so quickly and Uber was able to capture markets and be the market leader were exactly those things: Moving Fast, Breaking Things, and focused on growth above all else. In hindsight, if they hadn't done that, it's possible that we wouldn't care at all what they did because they wouldn't be the giants they are. There are tradeoffs with every strategy and these two unicorns chose the ones that led to their dominance even if it came with some headaches later on.
To be fair, the NYC VC scene is also abysmal. From what I've experienced there are less than 5 established VC firms (on their 3+ fund) in the city with an eye for vision investing and really want to get behind Founders. I think I made fundraising much much much harder for myself by focusing heavily on raising in NYC. Sadly, many SF folks won't invest in NYC startups due to proximity, so then you're faced with moving your company to SF.
Just curious, if you're dissatisfied with NYC and the ~5 established funds you've experienced, have you expanded your search parameters a bit? Meaning, looking around in a bit wider regional area, or looking at little-less-established firms? For example, across the river in Newark, NJ, there's : https://newarkventurepartners.com/ .
One thing that not many people talk about: there's an oversupply of VC funds spawned by the technological waves of the 90s (internet), 2000s (mobile) and everything in between. Today there isn't a clear wave, yet those funds need to deploy capital. Now there are too many funds pursuing not enough VC-worthy opportunities. The VC bubble will pop sooner or later.
'Oversupply' could simply be communicated in a different supply/demand equilibrium.
Cheap capital is probably not such a bad thing for Entrepreneurs. More bad companies get funded, but that's not so bad. More good companies that wouldn't have seen the light of day will also get funded.
There's only a 'bubble' if there can be a significant correction. If the US economy goes into heavy recession, then maybe there will be a steep pullback in VC. But otherwise, VC as an asset class may just not get the returns of yesteryear, which is fine.
As an outsider, I find myself disappointed everytime a company goes public, and VCs seem to be (1) a stepping stone to that and (2) motivated by the same concerns.
As a consumer, I find that the shareholders never have my interests at heart, not even indirectly (everyone wants to make money, but a private company seems more likely to decide they make money by actually providing me value). This feels like a massive failure on either (1) my understanding or (2) the market as a whole.
Am I wrong about VCs being the same basic issue, only with fewer players?
I think what you're describing is really a part of the decision making process by founders and initial investors who are taking the company public or shopping equity to VC.
The default mode of a company is to increase shareholder wealth, but a company that clearly communicates to potential investors and the market as a whole that they have a different metric of shareholder value (e.g. social conscience, environmental concerns, customer experience) can still be successful in taking a company public or raising funds from VCs, they'll just be selling equity to a different, if overlapping, group of investors.
Companies that want to do good and don't think through how going public or taking investment will change the incentives on which the company operates are destined to end up in the default mode.
As always, try to put both your consumer and investment dollars in companies that understand that.
> a company that clearly communicates to potential investors and the market as a whole that they have a different metric of shareholder value (e.g. social conscience
You're talking about things like Ben & Jerry's social contract. I think those are great. But here I'm talking about values like "We want to make money by making great widgets people are happy to buy". Most companies say such things, but after they go public the value seem switch to "find every way to increase the margins and take the lowest thresholds of quality and customer satisfaction that we can have and still remain in business". Compare, say, what Comcast says about customer service and what customers say.
The ideal of capitalism is that you can have profit AND happy customers. And I know it's possible, I've seen it any number of products...but I also see tons of successful companies get "killed" by short term greed, even if that company sticks around and is profitable - compared to what it was, it is dead.
So let's stay I start a startup, grow and manage to take it public, what happens next? Is the company expected to keep growing indefinitely? What happens if growth is stagnant, but the company is profitable?
I also hear about the mid-life and late stage of companies. Can you explain what these terms mean and how being in these stages affects the company?
Are there any good examples of publicly traded companies which have lasted a long time (more than a few decades) with minimal impact of the "we have to keep growing" mindset?
Finally, what are the pros and cons of being private without vc funding and being a public company?
And what role does VC play in the broader economy? Does it manage eg pension money? Are there good resources to understand the lifecycle of VC funded companies and what role VC plays in the broader ecocomy?
There definitely are companies that are on the stock market without a growth mindset. One way to identify them is to look for companies that return a significant amount of money to their stock holders in the form of a dividend.
Many REITS fit this description as utilities and telecom companies.
I'm always surprised this answer doesn't come up more, but I guess these companies aren't particularly sexy.
Note: These companies still feel market pressure. No one is staring at Duke Energy expecting them to grow 15% a year, but people would be pretty frustrated if DUK broke its 13 year 4.5% dividend streak.
> Are there any good examples of publicly traded companies which have lasted a long time (more than a few decades) with minimal impact of the "we have to keep growing" mindset?
Are there publicly traded companies which _didn't_ have a thirst for growth? By definition, companies which go to the lengths of raising money on the stock exchange are exactly those who grew beyond small business / private equity levels. So this question seems paradoxical to me.
I should have worded it differently: what I was trying to ask was - publicly traded companies by definition have to keep growing and have the "we have to keep growing" mindset, and this often negatively impacts the products eg- facebook showing ads way too often, collecting more user data and it's parly driven by the desire to keep growing and earning more ad dollars. Fb is a perfect example of a product going downhill as it grows. Are there companies which continue to make products loved by users even though they have the "we have to keep growing" mindset? One example was Apple, but they are starting to faulter, increasing prices way too much. Some gaming studios are publicly traded and seem to be doing fine. The WWE company also seems to be doing fine. I'm looking for such examples but companies which have been around longer than that.
I see, something like sacrificing long term viability for short term growth? Since jacking prices may give you a great quarter but destroy your brand in the long run.
My understanding is that big value stocks which pay dividend have less pressure to grow, while growth stocks use growth rate to justify their extreme PE ratios, and so might seek it more.
You could look at it more like their are companies like Ford that look a very long time to build a supply chain and distribution network that may have hammered long term innovation thinking, innovation is required to sustain growth over very long periods of time, and many huge companies either don't focus on that because of other business complexities, or because the supply chain is so tight it's very hard to undo and re-tool to innovate.
Lots of good questions. Maybe a primer on the relationship between a VC and a founder would be helpful.
Say you are a founder, you've got a killer idea, you think you can change the world with this idea but you need capital to bring it to life. Say you can demonstrate on a small scale that your idea does work, you have analysis that the market will support your idea, but you need money again to make it a reality. VCs come in, say we'll give you a boat load of cash today, in exchange for a hefty portion of your company, based on an evaluation that we're going to make. They usually take a board seat, and will be a part of your company's leadership, but remember the goal of the VC on the board may not always align with what other board members want for the company, VCs are looking to make the company's evaluation value grow so their investment is worth more than they spent, usually for a set amount of time or some sort of liquidation event occurs, be it acquisition, IPO, or shutting it down.
VCs work within a fund, a set amount of capital to invest, and that fund generally has a timeline, say 10 years, for the fund to end and realize any and all profit and losses and close the fund down. Once a company goes public, the VC can choose to do what they want, including completely selling all the shares they can convert into straight cash, or holding onto it, or devise some other strategy to distribute stocks to it's limited parters (the other groups of capital such as pension funds, college endowments, etc. etc.) for them to do what they wish.
Early/Seed, Mid-Stage, Late stage, these are generally terms to describe where a company is, and sometimes can be seen as part of the VC chain, seed / series A, Series B-C, Series D and above if additional rounds of funding are needed.
There are plenty of companies that exist to purely exist and serve their customers, by the time a company goes public, VCs are generally long gone as their funds have run their course. The VC model is a relatively new investment invention compared to industrial companies of the early 1900s in manufacturing let's say.
The pros and cons of a public vs private company can fill an entire textbook. They're just different models of operating, with different legal ramifications, different things you can and cannot do as a public company versus a private company, as well as access to capital which as a public company comes much easier (sell your share to the public) than it can when you have to pitch private investors.
In the broader economy, VCs play a small part, endowments, pension funds, other investment groups, may as part of their investment strategy partner with various VC and PE firms. But there's there's a diversity of firms that operate VC funds, it's not all just in one company (although one could argue Softbank Vision fund is just that), and each VC and PE firm has their own investment philosophy on how they stay successful.
Good for them. I'm not going to pretend I'm actually in a place where I even have the ability to make the choice that these founders made, but I've been reflecting deeply on whether I will seek VC support in the future, and I'm pretty set against it. At least I'm set against any VC's based in SV.
I don't think they're bad people or anything, and even quite like some individuals who work for VCs. But the way they operate, seems to perpetuate monoculture and wealth inequality. I know first-hand there are brilliant, ambitious people outside of the SV/NYC bubble, and I don't think VCs really give any care about those people besides perhaps offering to pay to relocate them. As a result, the mindset of these VC people is increasingly isolated from the nation and world as a whole. I've read so many stories about how they are encouraging diversity by funding immigrants who went to Stanford, as if race/sex/nationality is the whole picture. Where are the founders who grew up in trailer parks or projects? Who speak with a noticeable apppalachian, southern, or AAVE accent? Who worked their butts off in the military and community colleges/state colleges, because those are actually the most accessible doors to learning for Americans not from privileged backgrounds? Where are the people who want to build things, but value their family, extended families, local and religious communities more than the promise of extreme wealth in in a few select cities?
Those people are out there, and they are capable and ready. I know it's still just talk, but very soon, I'm going to put my money and my body where my mouth is and return to NC. I'm going to build things with those people. If by good fortune we see success - the money won't go towards making rich californians richer.
lol yeah if you're talking about "diversity" in terms of who VC funds I can guarantee it will be a combo of white+indian+east asian men for the next couple decades in terms of who gets the phat funding
There are a lot of women-only funds but in terms of total capital + efficacy so far they are essentially nominal
My take on work is there's always someone who will be your boss and dictate what you can and cannot do. If you bootstrap, then it'll be your paying customers. If you take family/angel/seed money, then it'll be them and their expectations. If it's VC money, they will have a seat on the board and expect you perform. If it's the public market, then every quarter you'll be expected to show significant results.
I fail to see how a nightmare isn't just code for, I don't like what this person wants me to do, I did this startup to get away from having a boss, but feel free to correct me if I'm wrong.
I appreciate the thoughts, but no. That's not what is going on here. Without going into too much detail, if anything the problem is essentially the opposite of what you're describing.
I think TFA did a better job with that than I ever could.
Regardless, my short summary is that VCs, in my experience, are the worst of people who don't give a shit about you or your team, and just want to see more and more money. I don't want to deal with or be involved with people like that.
Edit: Also I should note, many of our VCs pitched themselves as 'angel' and 'impact' investors. So, while I didn't expect them to just hand us free money, I also didn't expect quite the level of cut-throat behavior we've seen.
Good for you! Doesn’t seem like a hard fork in the road though. You could probably raise a round much easier on way better terms now that you’ve proved the business. Maybe you’ll hit a point where the infusion of money really would make a difference.
Well, that's kinda expected isn't it? Also keeping in mind that essentially 9/10 startups fail, VC's are well aware of that and basically treat you that way. Welcome to the lions den!
On the other hand, you could easily argue that almost everything is "just business". The doctor is there to treat you, not care about you, your boss is there to extract labor from you, not care about you, your child's teacher is there to impart knowledge, not care about her.
Such black-and-white separation of concerns doesn't really fit well with being human, IMO. In most of these cases we want something less than intimacy but more than indifference.
For everyone bitching about VC's demand on speed and profits, it wouldn't be any different working inside of FAANG. Your team is given a time limit on how fast it can work and it will need to make the parent organization money otherwise it'll get shut down and re-org'd after a year or two.
If you bootstrap a company, and it's successful enough to turn a profit, you're still at the mercy of finding a steady stream of customers. Most successful bootstrapped companies usually find 1 or 2 anchor companies that then start dictating how your company should run so that you can get paid and continue the relationship. Also, companies will prefer to have other options, so your bootstrapped company will be one of many options. (or replaced internally)
There really is no magical solution to working and making money. You should just approach this problem as, I want to build a company, I believe in this idea so much I'm willing to risk a lot to make it happen. If a VC gets you what you need but forces you to get there in 3 or 4 years time, but you think you need 5, it's not like you have a better option to prove your idea, so figure out how to get there in 3 or 4.
From the investor point of view, there's a clear problem with the VC model as described.
How do you establish that a VC has any skill? If the game is to throw a load of money at different firms, in the hope of getting 99 losers and a massive winner, how do you tell the good ones from the bad ones? Keep in mind there's noise; a guy with alpha might have a bad day before going to meet Uber or Facebook. He then gets 100 losers instead of 99. Or vice versa.
This is called skewness in traditional markets. People can sell options and make money quite often, until they blow up, ie the reverse of what I described above.
There also seems to be opportunity in less-than-insane growth. I've invested in a couple of firms personally, via connections. Small businesses, with a few sticky customers, and decent scale potential (they both sell via the internet) that need a little bit of cash to grow. You can't throw a few million bucks at any one of them, but you can get a reasonable rate of return. I suspect there's opportunities like this everywhere, but the VC theme creates so much attention people forgot there was an investment world before VC was a thing.
It's easy -- you build a lifestyle business or you build a big, usually scalable, business. If you are building a lifestyle business, VCs most probably even won't give you money. To grow one needs money. If you are building a big business the options are to take money as a credit or get VC money. Usually, banks do not credit those risky assets. So, the solution is obvious.
Another thing -- for a lifestyle business it's just very hard to hire anybody good without options that have no chances to be executed. Also, a good business model without aggressive growth could be copied easily by a big company that targets the same audience. Yeah, it's difficult to build a Basecamp. There are just so many examples that managed to do that. Even Atlassian took VC money at some point to be able to secure stability for the team.
So, there is no sense in the article. If founders were clueless enough not to understand what they get into by taking VC money, maybe they deserve the results.
It's important to understand from the get-go that VC money is just a tool that serves a very particular goal. If one does not target that goal, not need to get the money.
One problem with rejecting venture capital (or any other form of external capital) is that the founders (and likely the early employees) are investing in the company, in the form of lower pay.
Which is all fine and dandy, but the founders are likely risking most of their net worth, including the potential income of some of their best years. Taking outside capital not only means growing faster, but also diversification.
Another problem this article misses is that it's quite arrogant to assume a founder has other means to build a company. Most founders are quite honestly usually young and that also means they lack capital, but would otherwise be brilliant and the perfect person/team to create the next Facebook/Uber.
I think most startups who don't use external money try to grow from their own cash flow. Which in turn means lower payout and wages to the founders or early employees.
"No VC" can also mean the founders take on loans, angel investors or friends&family.
As someone who helped design than a 100 startups in various capacities and has been heavily involved with the whole VC scene one of the things that I kept seeing was the misalignment between the founders and the VC's type of skin in the game.
A founder for most startups is either trying to find product/market fit or raising money. Many VC/Angels are great for the operational/financial side of the advice but at least in my experience when it came to finding a proper market for your company their advice often sounded right but wasn't possible to implement for various reasons as it was very generalized.
One of the primary and perfectly reasonable reasons is that VC's are thinking about an entire portfolio of companies and doesn't have the same kind of skin in the game as the founder which mean they will think differently and less contextual about the companies.
There is definitely an argument to be made for the fact that it's not the VC's job to care about the specific company more than they need to and there are plenty of VC's out there who are perfectly able to care properly but it's also a very exaggerated market and let's be frank not everyone who has money to invest have a lot of experience in "the work".
After I left Square in 2017, I wanted to find a way to help both with getting much faster to product market fit but at the same time also having the opportunity to provide capital alongside which I believe will align my interest with the founders much more.
So I ended up deciding to set up a creative venture studio which so far has been a great decision as it allows me both do my own and invest either capital or sweat equity in other companies AND I get to meet some really amazing people from around the world.
Aniyia Williams, who started the nonprofit Black & Brown Founders, said a venture-funded system that encourages many failures for every one success is particularly unfair to black, latinx and women founders who “are rarely afforded the opportunity to fail, period.” Members of these organizations, she added, see more value when whole groups in their communities thrive, rather than venture’s winner-take-all model.
The transition from good-of-the-few to good-of-the-many means we might be at a crossroads in finance. Agism, nationalism and even wealthism (among many others) have been running rampant for centuries. Discrimination is so interwoven into US culture and history that the major issues of our time (like wealth inequality) probably require revolutionary rather than evolutionary solutions.
I've also been watching a lot of VICELAND lately and have been following the mantra of: cultural revolution requires personal evolution.
That’s just the way VC works. HN posters who have never raised a round of financing in their lives love to pontificate about how cheap money is these days and how easy it is to get funded. It does look that way from the outside. However, this is actively harmful to the psychology of struggling founders, because raising money is objectively difficult. The people who don’t treat it as such are in for a world of hurt and / or disappointment in the future.
Get customers. But also, ask founders for advice and seek accelerator programs for mentorship if VC is something you want to pursue. Financing is much more nuanced than HN / movies make it seem. There’s tremendous selection bias around advice because a good proportion of founders who succeed at it are unreasonably lucky. A good chunk more, though, just grinded it the hell out — and those in this category will often just tell you they worked really hard and got lucky.
Be persistent. Build your company. Luck comes to those who position themselves to be lucky.
Thanks. Indeed, I've found relationships and building trust to be incredible factors of success that often get missed out in all the entrepreneurial advice out there. And trust comes from just working really hard for your customers.
I've also found that some VCs don't get what we're doing (because they're not part of the industry) and some do. At least here in the UK anyway. So I've shifted my strategy somewhat to try and leverage corporate VCs while also getting them to bring us into the enterprise market.
For those on the outside, especially outside the tech scene all together, looking in, a multi million dollar series A for a company of under 10 employees looks like easy money, compared to say someone trying to run their mom and pop retail shop. Of course most people forget that this money isn't free, there's cost and expectations around how that money will be used.
We raised on indie.vc terms, but not with Indie.vc - just a group of angels. Best decision we made. Now we’re profitable, and get to be in control of our future decisions - including whether to raise more or not.
Highly recommend folks checkout the indie.vc terms - I describe it as even more founder friendly SAFE note. Not every investor will be comfortable with it. Took us longer to raise and lost out on potential investors and plenty of funds as a result; but was still worth it in the end IMHO.
One thing I don't understand about VC money, and i'm not even sure how to phrase this, are the founders of startups able to pay themselves enough that they're set even if the business fails? What's to stop intelligent people from getting funded, paying themselves large salaries, and then not really caring if it fails or not because you're a couple hundred thousand dollars richer?
VC try to filter out such founders - but it happens and it is the reason of why VCs want quick outcomes and avoid the middle ground of slow growth profitable companies. They want their companies either go down quickly or grow up enormously also quickly, because the more time it takes the easier it is for the founders to make good life out of it without giving back anything to the investors.
This is the principal-agent problem and VCs have a particular way of working around it, traditional private equity has another way and banks have yet different one (and crowdfunding does not https://medium.com/@zby/the-problem-with-crowdfunding-81b53f...).
Thanks for this, now I know exactly what I was trying to ask and the answer. I wonder if more companies moving away from VC opens the door for more founders to take advantage of the principal-agent issue.
Of course. That's part of raising capital, is funding employee salary. Of course it's not a "they're set", it's a market rate salary given the size of the company and the role you do for the company.
What's to stop VC fraud? Generally when you accept VC money, you're giving a board seat to said VC, who is there to yes guide with experience, but is also there to protect their investment.
> What's to stop intelligent people from getting funded, paying themselves large salaries, and then not really caring if it fails or not because you're a couple hundred thousand dollars richer?
The same thing that many VC-backed companies like to ignore (Airbnb, Uber as the most egregious): laws and courts. This kind of behavior can be classified as fraud, intentional bankruptcy or securities law violations.
The Babe Ruth effect of VC's needing big hits and the entire industry being a hits-driven business (unicorns, PG's Black Swan Farming, etc.) is a relic of the VC industry being not-long-tail compatible (i.e. offline).
This will change, and more money will be made in the fat long tail than the hits.
Most heavily-VC funded companies die Young, even if they make it to IPO, like SGI (now reconstituted as NVidia). VCs don't care about companies, they want to make a quick buck and get out. Most successful startups are self funded for most of their life, e.g Microsoft, Dell, Google, Amazon.
The parent made a point about self-funding. Microsoft was entirely self-funded out of operations, post the initial capital put in by Gates & Allen. It was wildly profitable, with extraordinary margins, at the point where it took a tiny bit of VC. They didn't take VC because they needed it to finance the business, they took it for the relationships they were trying to cultivate to lure talent.
The famous Fortune article about the IPO covers all of this:
They also didn't IPO because they specifically needed the money from the IPO.
The parent comment carefully qualified their statement this way:
"Most successful startups are self funded for most of their life"
Emphasis on most of their life. Amazon was financed by VC for only about the first 2 1/2 years. Uber for example is nearly a decade old and still drinking from the VC tap; Quora is another example of that. Amazon's IPO was just under three years after the founding. Thereafter most of their business expansion was financed by operations in one form or another (including a bunch of debt they took on).
Dell may have been a dorm room startup, but VC influences exists even in it's first early years from Lee Walker who I don't believe was just a simple salaried employee but must have invested some of his own money for equity, and it had meteoric growth in the first few years from dorm room project to full fledged multinational company with a very quick IPO.
The real problem is that we don't have a more effective capital model. While there's lots of experiments in funding going on, no-one's really figured out a risk model that works in good times let alone bad.
Fundamentally new businesses fail at a high rate, it's the nature of new businesses. But that means cost of capital is going to be high to cover the cost, but without high-growth it's hard to justify that cost (and that's not even getting into things like fraud which are a big reason new businesses can't get financing)
I remember about 8 years ago when I was founding a company to repair cell phones. The local municipality had a program where I could meet with a mentor to help me set up a company. Create a business plan and estimate costs and revenues, which could serve as input to a loan application with a local bank.
In this scenario, the bank charges interest and does not get an ownership stake nor input into how the company is run.
Whatever happened to this way of doing things? What is it about VC that is so much better than small loans from a traditional lending institution?
If you find these critiques of VC are resonating but also feel like a bit of capital, a mentorship group, and shared resources would help you build a sustainable profitable business, then I'd love any questions or comments on our Shared Earnings Agreement structure: https://earnestcapital.com/shared-earnings-agreement/
What is Zebras Unite or any of the startups/venture firms mentioned in this article ... and why are any of them considered meaningful or impactful organizations?
The idea that startups are rejecting venture capital en masse on the basis of interviewing a hodge podge of random startups and micro VC's this journalist seems to be friends with is absurd.
Love that this message is getting out and resonating with so many people. If you're interested in seeing some more talks from companies in this realm, we have videos at http://inflectionconf.com/blog
If money is the soul reason you're working, it's pretty hard to beat FAANG. Came from FAANG and now doing the startup thing. The experience you learn at startup is priceless. But don't come in thinking you'll get rich. That's the gravy part.
Seems strange to have a NYT article about this without mentioning Basecamp/ 37Signals. They've been a proponent of the bootstrapping model for a decade.
venture capital should be minimal in initial rounds. Nowadays most of the startups know their potential, good or bad. They understand how their competitors are making and how much their startup will be worth. So, I see the point why they are rejecting the VC funds. Most startups nowadays are looking for buy outs or acquisitions on different terms
Moving towards the model where a portion of early VC investment goes straight into the pocket of the founders and early employees, as bird has done.
If I've built a company with an implied valuation of 200 million, why can't I bank a couple of million for a rainy day?
I've heard VC's state with a straight face that this is a misalignment of incentives.. apparently if the founder is financially comfortable they aren't "hungry".. this from a venture capitalist who is guaranteed a juicy carry whatever happens to their fund I find this insulting.
Hard to turn VC money down when it’s practically free.
None of the founders I know that raised seed capital even had a business plan.
Hard to turn down $1,000,000 when all you have to do for it is say yes. Maybe go to a few meetings, make a PowerPoint. I mean really. Some of these investors haven’t even asked for any metrics, a web app was enough. It’s... shocking how cheap VC money is.
VC money is not free, there's a real cost to it, it's written on the term sheet.
VC money is relatively easy money to obtain versus trying to grind for the same amount of capital yourself, but there's certainly a cost to any transaction.
Have you raised VC money recently or in the past? Raising is far from easy - in fact the opposite in my experience.
It's a full-time job for 1 person for months, or even the better part of a year. That's one founder taken away from keeping customers happy and building on the product.
As a founder attempting to raise pre/seed in 2018, saying yes without much in exchange for funding is how I might have imagined fundraising to be in 2012-2014. Certainly not in 2018 or 2019 without relationships w/ VCs, in my personal experience.
VCs asking for order of magnitude ~$100ks ARR before a seed round in '18 and '19 makes total sense for VCs. Lower risk of failure with revenue as evidence.
If we get to that point of ARR, we are closer to being a free cash flow positive business and will consider forgoing VC altogether.
Reasons why I'll probably never take traditional venture capital again:
- Costs are low enough I don't need them for much if anything.
- I'm unwilling to accept any form of liquidity preferences. Not under any circumstances. They don't get to further offload risk upon other owners like cowards, they have to ride the same risk train as every other owner. Liquidity preferences and the various types of abuses deployed through them are the greatest scams going in the VC world. In a typical start-up there is no greater way that VCs cheat the other owners.
- I don't believe in vesting the founders in cases where they've built the initial product over time (eg 6-12 months). I found the company, I build the product, I launch the product, the VC gets to ride my train, then they want me to vest my existing ownership. Nope. My shares are already fully vested, it's my company. These days I only allow VCs to pitch me, I never pitch them. If you build something that matters at all, the VCs seek you out anyway. In the US there's a hundred billion dollars in VC money every year desperately looking for ventures, make it beg for your attention.
- VCs are only allowed to have common shares. They ride in the same boat as everyone else. They get no choice in the matter.
- There is a lot more money chasing few decent start-ups. That equation is only going to continue to get worse in the favor of the founders. There are a lot of reasons for this, including the cost of starting up being low, and also the requirement for the Fed to keep interest rates permanently low so the US Government doesn't collapse (that will perpetually keep money sloshing around the system looking for returns, feeding bubbles, etc). Just ~4% on a soon-to-be $30 trillion in public debt would collapse the US Government, they can never allow that, which tells you how they're going to be forced to behave over time. There will be periods of ups and downs to this, however it's going to be higher ups and higher lows for loose capital over the near term, due to the Fed flooding the system with liquidity (at least for the next few decades, who knows beyond that).
These terms are non-negotiable. The VCs can take a hike if they don't like it. For practical purposes there's an unlimited supply of other capital and other VCs, especially if you have something good at all.
This is how all start-ups should deal with venture capitalists for the next 20 years or so, until something breaks with how the Fed is going to be forced to finance the US Govt with perma low rates. Capital is in a begging position during that time, use that fact to your advantage.
VCs were able to control the startups they invested in to a pretty big degree.
What does that mean for founders? It means that you are putting all your eggs into one basket. A founder does not found 20 startups at the same time in the hope that one succeeds. A founder puts his effort usually into only one. So founders take a larger risk than VCs. They make it big or go bust. And the vast majority goes bust when running in supercharged mode.
What does that mean for startup employees? Well, they got the worst of all worlds. High risk and little to no upside. Their eggs are also in one basket as they work for only one company AND they don't have the huge upsides that VCs and founders have.
The whole game favors only VCs and founders who like big bets. But for the vast majority of people (which includes employees), the VC game is not a great game to play.