There are three parts to this essay, He doesn't explain this point adequately until the end of the second. But you still won't get what he's saying unless you're already a follower and have digested the ideas in his blog.
Venkat trades in big, hairy concepts. The one he's using here is legibility. It's when information is structured in rigorous ways, defined by those using it as an instrument of power. It is the primary tool governments use against the people. An example is making every person have a current address listed on their driver's license. Governments stack these legibility requirements up so as to control commerce and extract rents. (taxes)
Venkat's argument is that investors won the game by forcing founders to be legible, reducing the information advantage they enjoyed historically. While it may look like founders have never had more power, in reality they've lost a crucial ability, to hoard critical inside information. It's really the only advantage they have, without it, they're at the mercy of investors. The ability to dictate terms is really inconsequential, more a function of fashion than actual power. Who cares if you get 2x the money you should have gotten? With information asymmetry, founders could easily wrangle 100x.
So, the opportunity to swindle investors, the Market for Lemon Startups that created the dotcom bubble is gone. How is that a bad thing? Assuming, of course, that you are trying to infuse capital into a real business and not run a Ponzi scheme.
Intuitively, a deal in which investors have reduced risk should have more favorable terms for the founders, too, since investors don't have to discount for the risk of the business becoming another gigantic flop. Maybe you are losing the extremely remote possibility to become a billionaire and leave a trail of very disgruntled millionaires behind you, but that sounds like a good trade-off for me.
EDIT: I've read the three parts. What I took from them is that, as creating a startup becomes a "science" that you can learn at school instead of an "art", entrepreneurs become something close to outsourced product managers, and frankly, I still don't see the problem.
Why take all the risk of designing, building, and marketing a product if all it gets you is a mediocre dead-end job in a big company? Entrepreneurship used to be where the brightest could make fortunes, now that ship as all but sailed. It might not bother you, but it should. All that talent is now going to seek opportunity elsewhere, rather than building useful products and services. Is this a good outcome for society?
Here's the thing: you can always take the risk of building a product in the frontier. But the web is no longer the frontier. You can estimate the size of your market in two weeks, spending a few thousand dollars. You don't have to build a product from scratch; in fact, you could build a whole webapp running on S3 and connecting to pluggable services.
Is this a waste of our best and brightest? Frankly, I don't know. But how many brilliant, young entrepreneurs got burned out after a catastrophic failure in the old model and never recovered?
Are there historical (in the last 20 years) examples of founders who wrangled 100x investment from investors, who would now not be able to do this because this supposed information asymetry no longer exists.
His main example was Facebook. But really, you should read the essay in its entirety and get his arguments directly.
Looking further back, Bill Gates managed to steal the future right out from underneath IBM through information asymmetry. Venkat is drawing large arcs here, and he would consider IBM an "investor" for the purposes of the discussion.
Facebook's leverage was growth, not information asymmetry. Zuckerberg's personal strengths are that he is savvy, and he had knowledge gleaned from Sean Parker et al. If anything YCombinator and others help make acquiring that knowledge easier. YCombinator's strengths are as much in its alumni sharing information within the network, much the same as Sean Parker shared information with Zuck, as in anything else that happens physically at YCombinator.
I have no idea how YCombinator, the lean startup movement or any of the other miscellaneous "villains" Venkatesh identifies would prevent a new Zuckerberg from raising money at the such favorable terms again.
Re: IBM/Microsoft - As Jobs did with Xerox, as Jack Dorsey may do with Visa one day. Savvy players beating non savvy players is a trend that has happened throughout history. I do not see how any recent developments preclude that. Venkat is framing this into an elegy for the savvy entrepreneur when there is no necessity for that.
I did read the essay - all 3 parts of it. There are some interesting points about return to city states and an understanding of politics being a huge strength for entrepreneurs towards the end, and several valid points about acqui-hires becoming more and more mainstream towards the beginning. I wish he had stuck to making those points instead of trying to weave a grand theory of entrepreneurs as the new labor which does not hold.
I do agree that he's unnecessarily harbingering and that the future is brighter than he paints it. But I also think that if really smart, savvy founders aren't already starting to keep away from incubators like YC and the acqui-hire path, they will pretty soon as they all start to get branded as alternative education paths.
I know I wouldn't apply to any incubator if I had a startup, I've felt this way for awhile now. They just don't seem to offer much value, rather being just a grand distraction, YC being the only one worth anything and even that's arguable. Capital isn't as valuable as it used to be, why give up control when you can generate it yourself? But it's really the only value an incubator adds.
> If anything YCombinator and others help make acquiring that knowledge easier.
Err, I seriously doubt that. He talks about these sorts of power dynamics in his Gervais series, and personal experience leads me to believe that it can't be taught. It can only be learned by making real power plays with real stakes, and losing. If you're really sharp, as Zuckerburg was, you can develop savvy early. Otherwise it takes lots of hard lumps. YC in my estimation wouldn't be any better or worse for learning power than just going it alone.
I'll assume you are not intentionally mis-stating my argument. I separated Zuckerberg's strengths into two parts: (1) savvy and (2) knowledge of how investors operate. (1) is intrinsic or learned through experience and nothing external in the current milieu precludes it's use. (2) can be taught, as it was to Zuckerberg.
Even if you assume that this is generally true, it doesn't mean that increased founder "power" has really come at the expense of investors.
The coordinated money printing by central banks around the world has injected trillions of dollars into the global economy, and the greatest beneficiaries of that have been a) firms in the financial sector and b) individuals who have significant exposure to financial markets.
This, of course, has a direct and indirect impact on Silicon Valley:
1. It's easier to raise a venture fund when LPs are doing well. Fed action has incentivized investment in riskier asset classes. Appetite for risk is broad-based and not concentrated in venture capital, but venture capital has certainly benefited.
2. Thanks to QE Infinity, the fortunes of many publicly-traded Silicon Valley companies have risen with the stock market and the IPO window is open. A handful of tech companies even sport 1999-like PE ratios. This has created enormous wealth in the Valley, much of it liquid, which has produced an angel (and super angel) boom.
Founders, particularly those with a track record and/or traction, may be able to negotiate better terms today than they could have even a few years ago, but that's largely because the dollars being invested in their companies are so cheap.
Who would you rather be: an entrepreneur who thinks he's getting a good deal because he got a higher valuation and retained more control, or the investor who gets to invest with Monopoly money?
They need to have the power to compel founders to believe that they need outside investment, and they need to trade significant amounts of equity for that.
Today, with everything available it's become easy for small companies to bootstrap their way through all stages of growth without any conventional investment. Begin with personal savings and maxing out credit cards to allow a tiny handful of founders to build an MVP that gains credibility and perhaps even generates some revenue. Then use things like crowd funding to scale up to bigger projects, mitigating the risk of burning through savings during development and of failing to get market traction at the same time. Then hit the ground running with a product that's already built and already known to be valued by the market and simply rake in revenue. Or go back and hit another cycle of crowd funding.
You don't even need a merchant account to charge people money for things. Compared to the way things were even 10 years ago the scales have shifted a great deal in favor of founder autonomy.
Today, with everything available it's become easy for small companies to bootstrap their way through all stages of growth without any conventional investment.
Can you name a large startup that hasn't taken investment? Oculus, maybe.
Begin with personal savings and maxing out credit cards to allow a tiny handful of founders to build an MVP that gains credibility and perhaps even generates some revenue.
That's incredibly risky. If it doesn't work, then you won't be able to make another attempt for years while you try to recover. The value of VC investment is that it insulates you from those risks. I've seen firsthand just how ravenous the effects can be when the "avoid investment" philosophy is taken to its extreme. So the question becomes, why not take VC investment from VCs who aren't interested in company control?
"Today, with everything available it's become easy for small companies to bootstrap their way through all stages of growth without any conventional investment."
Try building a bridge or an opera house or a car factory without outside investment. There is a whole world outside our small bubble.
Those things aren't startups, just construction. Construction works on traditional lending, which provides an incremental rate of return. VC investing is about getting a small company off the ground and snagging a piece of it in the process, in the hopes that it will become a huge company in the future.
I agree. And I believe the author does and just doesn't realize it.
"Those who are attracted to true entrepreneurship are figuring out new ways to work around the traditional investor class."
Seems to me if the investors had won, this wouldn't even be possible. But as long as innovation (in any industry, not only tech) exists, people will find a way to work around any obstacle.
Well from the context of the subject of the article, YC serves as the university (this site can be seen as serving like the social environment of such to discuss things relating) to feed the "New Bankers" or the Google/Apple/Facebook's.
However what this author fails to talk about in his haste of this new order to shape up because of the fracturing social order in developed world (note not developing world because most people in the developing world have nothing to lose because they did not gain much of the fruits the developing world has), is the war that usually happens during these periods (look at what is shaping up in Spain, Greece and spreading through europe). I expect 3-d printed weapons (Hat tip to Defence Distributed and the pollitically aware hacker-culture that very much includes the so called "Pwnd" developers) to shape some role.
Developers are the "new engineers" aren't "Pwnd". The "new system" relies on them for the new working class: the Robots. And the "old system" relies on them for pretty much making technology practical to use for their whims.
The people that are "Pwnd" are going to be the people who aren't shaping the new system at all: most people in the societies of the developed world.
"If you don't become an actor, you'll never be a factor."
>Founders have never had more power relative to investors than they do now.
Easy to say coming from the new middleman getting between start-ups and funding.
If you really believe this prove it. Accept me into YC (or anyone who was not invited into YC but has a launched product), I/they will not receive YC funding but be a "mole" and go through YC and present at demo day - I promise I/they can secure funding - which means the power is not relative to Founders but shifted to YC.
Only if they have read all and not just some of your essays and groked them.
In the country where I live the startup scene is terrible - only buzzwords thrown from all sides and no substance at all. Engineers in startups expecting salaries and benefits of a big company but with nothing from the downsides. In this situation the guys with the hard cash hold a lot of influence.
Good, smart founders do. Technology and open source have reduced the power of investors. Though I know more good founders that don't take investor money, than those who do.
Founders with breakout successes get the best terms ever now; that is true. On the other hand, investors have more power to fuck with founders' careers (even years after the venture dissolves), and founders who fail are more desperate to get back into conventional careers due to the disgustingly high housing prices that exist now. Venkat talks about the old-school serial entrepreneur: the 10x hustler who learned a little bit from each failure and finally had a huge hit on his 5th attempt (usually around age 40, at which point he'd be unfundable by contemporary VC-istan standards).
That person is gone now. In contemporary VC-istan, no one gets a 3rd startup, thanks to the collusive and almost certainly illegal reputation economy that exists there. You might get a second shot if you come back to your VC bosses with your tail between your legs.
That's because VCs have set themselves up as the executives of the first post-modern company: VC-istan. "Entrepreneurs" are hustling project managers. The investor/founder separation exists to hide the Effort Thermocline (the level at which jobs become easier with increasing rank, not harder) because it exists between two companies, with a distinct power relationship of one over the other.
Hell, most VCs won't even talk to you if you were lack-of-fit for a regular corporate job. They want to fund banker kids who did Analyst -> Private Equity. (This is the MBA stereotype, but it's the 2nd tier of those who do MBAs. The top tier skip MBA school and become parasitic PEtards two years early.) True hustlers and technologists are second-class citizens; they work too hard and don't have the social polish to exploit "just like me" chickenhawking of their backers.
I might be the only person on HN who has a lower opinion of VCs than you do (I credit them with killing the first company I started) but this reads batshit to me. VC's want to fund MBAs who "did Analyst -> Private Equity"? That describes nobody I know who's raised a round, but ironically describes a couple people I know who failed utterly to raise.
I'm calling this comment out. I think you made that up. Show me I'm wrong.
Your bit about about "nobody getting a third startup" is also directly contradicted by people I know who have done exactly that, and raised in their 40s. In fact, I think it's likely that more people raise real VC rounds in their 40s than do in their 20s, and that you're just paying attention to a small niche of social media startups.
My 100% non-scientific study has been that the biggest hurdle towards getting funded is getting funded the first time. Even if you failed three times, as 0-3 you are more likely to get funded than the guy who is 0-0 and trying to navigate the system for the first time.
I'm calling this comment out. I think you made that up. Show me I'm wrong.
I won't, if only because:
(a) some of these people I like, even if I find private equity (and, thus, the company they kept in their career-building years) distasteful. Associating innocent people (by name) with a problem just to make a point is something I'd rather not do.
(b) the ones I hate I know well and identifying them would give information about my career history that I've chosen not to share. For example, I worked for a truly evil (management-wise; the engineers were fine) startup in 2011-12 and I've thus far kept the world from knowing which one. I have strategic reasons for keeping that way. I could probably destroy that company if I wanted to, but I'd prefer not to do so. If they succeed, it makes me rich. (I don't have equity, but I have dirt.) However, anyone who is considering working for an NYC startup can ping me and I'll do a yes/no on whether it's That One. (I have convinced a lot of people not to work for them.)
You can believe me, or conclude that I'm drawing a conclusion based on limited experience and not believe me. I'm not making it up, but I don't have longitudinal data, just a large set of observations because I talk to a lot of people. I'll admit to that.
Now, I will admit that all of my direct experience comes from New York VC-istan. I haven't been to California in almost 5 years. For all I know, it could be totally different out there but, based on the people I talk to on a regular basis, it seems to be same shit, slightly different stink.
> "I could probably destroy that company if I wanted to, but I'd prefer not to do so. If they succeed, it makes me rich. (I don't have equity, but I have dirt.)"
This is not the right move long term. If they've wronged you move on, maybe blow the whistle if its complete BS. Resorting to extortion is not going to make you any friends who take pride in their ethics and who therefore won't screw you over in the long term.
When I blew this whistle on Google, I pissed off a lot of engineers even though I never had a problem with them. And, in that case, it didn't really hurt them at all because a single whistleblower can't take out Google. The worst it has to fear is mild embarrassment.
The lesson I learned is that whistleblowing often angers the wrong people. In a better world, only wrongdoers would suffer, but that doesn't seem to be the world that exists. Google's horrible management is still horrible; its otherwise disinterested engineers (who I'd be inclined to like) seem to be the ones upset about it. Which might suggest that it wasn't the right course of action, since the wrong people feel attacked while the deserving targets don't seem to have changed.
If I blew a whistle on this startup, I'd probably end it (unlike Google, on which I had no real effect). Unfortunately, it'd be engineers who'd suffer (losing jobs, when the company folds) but management would be OK. That's the problem. The good guys are more vulnerable to that sort of thing than the genuine malefactors. The CEO's independently wealthy and has flat-out said he doesn't care if that startup fails (since the investors took it away from his original vision-- to something much better than what he started with). If I blew a whistle on him, I'd just take that firm off his books and he'd move on to some other project.
Now, if they have a huge success, then that changes. In that case, engineers get their payoff no matter what I do, but managers risk personal embarrassment (as they deserve, because that company's whole management team is unethical). So, then it might make sense to divulge. Right now, though, I'm just nervous that it would hurt the wrong people.
In fairness, they all founded Justin.TV. It's significantly easier to get a third startup if your second startup was a success, and I think the OP was talking about having two failures in a row.
I have nothing but respect for the justin.tv people and product, but may I ask what criteria you're using here to define it as a success? I would have called it a pivot, albeit a great one.
Success = has traction in a market large enough to be of interest to a VC. Usually that's the hard part of entrepreneurship; if you can demonstrate you've attained that once, getting funding for subsequent endeavors is a lot easier.
VC's are a tiny slice of the economy and have little impact on the vast majority of companies.
In the wider world there is a near surplus of capital that has been driving down investment returns for hundreds of years. Not that long ago 15% ROI was considered a poor investment now your doing good to make half that. So, if anything capital is losing most of it's power.
PS: Also, VC's are managerial not capital. You don't need any mony to start one just convince a other managers that are investing still other people's money that you know what your doing.
Sure, but that's all there is left for a lot of people, once they're trapped in high-COL areas and unable to properly bootstrap.
Bank loans want personal liability, which rules out anything that has more than a ~5% chance of failure. Even the mid-risk/mid-growth tech companies (derided as "lifestyle businesses" by VC-istan) have 10-30% 5-year failure rates. So they're out. There really isn't anything to fund these mid-risk/mid-growth companies. VCs don't like them, because the company's goal is to be independent, not an overwhelming corporate megalith.
Savings/bootstrapping work if you have them, but I challenge you to find a 30-year-old in SV who (a) has appreciable savings, and (b) wasn't lifted by a connection ("acqui-hire" welfare checks count as "lifted"). Such people are fairly common outside of SV and NYC, which might surprise you. I know a few programmers out in PA who, even though they make (just slightly) less than I do in salary, they're my age and worth half a million. They were able to actually fucking save money.
Perhaps I am a moron for chasing the prestige of the VC-istan and Wall Street jobs, throwing me into a city where landlords win and talent struggles. My "savings" is the career benefit of having spent my 20s in NYC, but it's questionable how much that matters. I'd rather have the autonomy that comes with money and the credibility that comes with having higher-quality work experience.
VC-istan (and, to a lesser degree, Wall Street with its bonus system) are economies where, instead of savings, you put everything you have (time, money, energy) into this weird system that distributed outsized rewards, intermittently, to a lucky few. Wall Street is more decent than VC-istan, I feel like. Wall Street is some part meritocracy (esp. prop trading) and some part connections, but it's honest about what it is. VC-istan is a who-you-know economy that pretends to be a meritocracy, and if you call the lie by it's name, people fuck with your career in the worst kind of way.
How is anyone trapped in a high-COL area? I understand it can be difficult to leave an area, particularly one with lots of jobs, but sometimes you don't have optimal options in life and you have to figure out which one is the least worst. In this case, the hypothetical person you're talking about is trapped by his inability to make a difficult decision. Nothing more and nothing less.
> Savings/bootstrapping work if you have them, but I challenge you to find a 30-year-old in SV who (a) has appreciable savings, and (b) wasn't lifted by a connection ("acqui-hire" welfare checks count as "lifted").
I am in my early 30s, live in SV, have a liquid net worth in the low six-figures and have never been "lifted" by an acquisition or acqui-hire. I was nearly broke twice in my 20s.
> Perhaps I am a moron for chasing the prestige of the VC-istan and Wall Street jobs, throwing me into a city where landlords win and talent struggles.
You were not thrown into a city, you chose to be there. As you said, you chased "the prestige of the VC-istan and Wall Street jobs."
And please stop this ranting about landlords. People who earned money, invested it in property and generate income by renting said property out are not gaining at your expense, at least no more than the farmer who grew the food you eat.
If your rent is too damn high, move.
> VC-istan (and, to a lesser degree, Wall Street with its bonus system) are economies where, instead of savings, you put everything you have (time, money, energy) into this weird system that distributed outsized rewards, intermittently, to a lucky few.
I'm not seeing what you're seeing in the parent comment. Which of his points were incorrect? If the answer is "none", I might consider apologizing for implying they wrote that comment in bad faith.
It's not unusual for a 30-year-old in tech in SV to have half a million banked, even without a previous acquisition or acqui-hire. How do you think companies like YouTube and GitHub get founded?
