[HN Gopher] An Engineer's View of Venture Capitalists (2001)
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An Engineer's View of Venture Capitalists (2001)
Author : sebg
Score : 150 points
Date : 2021-11-11 13:39 UTC (9 hours ago)
(HTM) web link (spectrum.ieee.org)
(TXT) w3m dump (spectrum.ieee.org)
| plesiv wrote:
| > The VC connects wealthy investors to nerds. There are few
| alternatives. You can self-fund by consulting and by setting
| aside money for your venture. That doesn't work.
|
| It would've been great if an explanation was given for this
| opinion. Why wouldn't this work? From my limited experience it
| works fairly well.
| CalChris wrote:
| This was written in a pre-SAAS era. The writer was talking
| about capital intensive startups. It would and it it does work
| now. Competition with a VC funded adversary is done by
| developing in stealth.
| Aunche wrote:
| This is basically how Microsoft was founded and how Gates got
| to retain so much of the company.
| mathattack wrote:
| Not impossible but not always efficient.
|
| Hard to focus on two things. Get cash today usually outweighs
| the long term building. On a macro level this is why so little
| software innovation comes from Accenture. All their focus is on
| billable hours.
|
| It's possible, just hard.
| lmeyerov wrote:
| Time and misalignment. It's distracting and hard to scale.
|
| Seed money buys time for small team to find product/market fit,
| and growth money for customer acquisition with a delayed
| payback period... and the ceiling is how reality-distorting
| your CEO is.
|
| Consulting is limited by your hours, and likely takes away from
| your experimentation, product refinement, customer success, and
| marketing $ + hours. In addition, it biases the
| product/processes towards the service as consulting immediately
| makes serious money and saas takes months/years to make even
| $100/mo. The only exception we did was limited consulting
| around customer success and co-design of features already on
| our roadmap. Super painful decision, revenue-wise!
|
| Despite strong interest, we resisted consulting services for
| our GPU visual graph intelligence platform for years to avoid
| the misalignment. Due to the recent demand for graph AI for
| analyzing problems like security /fraud / customer behavior /
| digital twins, and our interest in bundling those capabilities
| into our platform yet realizing we need to learn alongside our
| users, we flipped that decision. However, we have a base
| product, are being super picky on projects aligned with graph
| AI, and our clients also want that product goal realized long-
| term (vs more consulting.)
| lysecret wrote:
| hey sounds pretty interesting can you send me your website?
| lmeyerov wrote:
| https://github.com/graphistry/pygraphistry +
| https://github.com/rapidsai/cudf if you're coming from the
| api / ds side, and GNNs side is more of a "let's chat!"
| thing for figuring out aligned collaborations (slack/email,
| all good!)
| jpmattia wrote:
| You have to remember this article was written in 2001, when
| most "big" ventures were hardware and therefore very capital
| intensive. Google shattered that idea: Larry and Sergei
| retained an extraordinary percentage up through the IPO because
| they didn't "need" the VC money, and they were doing quite well
| without it. Many of us from the period looked at that result,
| took it to an extreme, and proceeded to self-bootstrap our next
| endeavors.
| jasode wrote:
| _> Larry and Sergei retained an extraordinary percentage up
| through the IPO because they didn't "need" the VC money, and
| they were doing quite well without it._
|
| Fyi... Google got VCs Sequoia Capital & KPCB $25 million
| around June 1999 which was about ~9 months after they started
| in Sept 1998. Before the VC funding, they also got a group of
| seed investments from Stanford professors and other
| individuals (Andy Bechtolsheim, Jeff Bezos, NBA star Shaq,
| etc.)
| CalChris wrote:
| Yes, they actually started well before Sept 4, 1998. Even
| their first angel round (August 1, 1998) predates that
| incorporation date. Various people told me that they didn't
| _need_ the A round but wanted to get the angel notes off
| the books, but that might be a backsplanation.
|
| https://www.crunchbase.com/organization/google/company_fina
| n...
|
| Stanford had functioned as an incubator, and the project
| had received government (NSF) funding. Indeed the Page Brin
| page-rank patent was assigned to Stanford. It was filed Jan
| 8, 1998 with priority to 1997-01-10. Stanford paid for that
| and Stanford legal was going to defend it.
|
| https://patentimages.storage.googleapis.com/37/a9/18/d7c46e
| a...
|
| To me the lesson of Google is early profitability gives you
| immense leverage with VCs. They had $220,000 of revenue in
| 1999. Revenue is good.
| jasode wrote:
| _> To me the lesson of Google is early profitability
| gives you immense leverage with VCs._
|
| But Google didn't have profits in June 1999. They were
| hoping for VCs Mike Moritz @ Sequoia and John Doerr @
| KPCB to bring them revenue because those 2 partners were
| on the boards of AOL and Yahoo. They wanted to try and
| sell their tech to those companies. (They eventually did
| do deals with both of them.)
|
| Later interviews with angel Ron Conway and Sequoia said
| Larry's slidedeck for investment didn't have a revenue
| plan.
|
| The "leverage" that Larry & Sergei had was that their
| search engine worked better than competitors such as
| AltaVista and Yahoo.
|
| EDIT reply to: _> But it's on record that Google had
| $220,000 in revenue in 1999._
|
| But did they have that revenue before June 1999? Maybe
| everybody's memory is fuzzy but in the books and
| recollections from interviews of that time period, Google
| didn't have meaningful revenue so it wasn't a point of
| leverage. But another leverage they had besides the best-
| in-class search engine was that angel Ron Conway was
| willing to quickly assemble a consortium of investors in
| a few days to bypass Sequoia & KPCB. It was _that threat
| of VCs losing the the deal_ was what finally got them to
| pull the trigger. Until then, those 2 VCs were sitting on
| their hands for weeks. Google 's 1999 revenue was never
| brought up as leverage. Do you have insider information
| that contradicts that?
|
| _> Revenue and early profitability is good thing for
| founders but not VCs._
|
| 100% agree about the principle in general -- but I don't
| think Google situation in 1999 is a case study of that.
| CalChris wrote:
| No, I don't think Page + Brin needed Sand Hill Road to
| introduce them to fellow Stanford alums Jerry Yang and
| David Filo.
|
| Profit isn't revenue and visa versa. But it's on record
| that Google had $220,000 in revenue in 1999.
|
| Yahoo contracted out their search back then; they started
| as a directory and they believed in that. It's not clear
| exactly when the Yahoo search deal started. But it is
| clear when the Yahoo investment was made (which was after
| Series A).
|
| Yahoo also used Inktomi and Google's leverage with Yahoo
| was that they were better than Inktomi or Altavista. But
| their leverage with VCs was that they had revenue and it
| was going up and to the right.
|
| Sun was another company with early profitability, very
| early in Sun's case. That's my main point. Revenue and
| early profitability is good thing for founders but not
| VCs.
| jpmattia wrote:
| Again, the context is important: You need to look at the
| percentages retained in those funding rounds relative to
| what was happening at the time. Their low capital needs,
| which gained them leverage, and the following high return
| spawned a generation of bootstrapped software startups. And
| since the VC pot of money is finite, hardware startups (the
| domain of the article's author) became quite unfashionable
| by the standards of the 90s.
| jasode wrote:
| _> Their low capital needs and following high return is
| what spawned a generation of bootstrapped software
| startups._
|
| I don't see how "$25 million from a VC" would be
| interpreted by outsiders as _inspiration for
| bootstrapping_. Doesn 't "bootstrapping" mean _self-
| funding from revenue_ instead of investors? Google didn
| 't have meaningful revenue & profits until 2002.
|
| I think the best way to apply "bootstrapping" (the way
| most people think of that term) to Larry & Sergei would
| be the early phase of 1996 to 1998 where they _used
| Stanford 's computers & datacenter for $0 cost_ to build
| a MVP search engine "Backrub". But a lot of startup
| founders can't apply that to their situation because they
| are not in PhD programs with the university providing a
| "pseudo AWS" for $0. (Stanford did share credit in the
| pagerank patent so they got license $$$ from Google in
| return.)
|
| EDIT reply to: _> , and realized that Google did not
| actually need the money. _
|
| What do you mean by they "didn't need the money"? How
| would the early Google survive for 3+ years with no
| revenue?
|
| Immediately after the June 1999 $25 million, they hired
| an ex-Grateful Dead celebrity chef to cook free meals for
| their employees and rent datacenter space. If Google
| didn't have any revenue, what money is there other than
| that $25 million to pay salaries of the chef, the
| employees, food, datacenters? That's the opposite of _"
| bootstrapping"_. Are you using that word in a different
| way?
| jpmattia wrote:
| > _I don 't see how "$25 million from a VC" will be
| interpreted by outsiders as inspiration for
| bootstrapping._
|
| Yes, outsiders might not see it. At the time, insiders
| saw the percentage the company retained, and realized
| that Google did not actually need the money. It opened
| quite a few eyes.
|
| Reply to your edit:
|
| > _How would the early Google survive for 3+ years with
| no revenue?_
|
| That was the point: They had revenue, and at a level that
| they did not need the VCs, which enabled them to
| negotiate the A round of $25M as well as they did. It
| would be difficult to pull that off with hardware.
| TuringNYC wrote:
| This is a bit circular, but...it doesn't work because others
| will use VC. Those using VC will make more progress because
| they wont be hindered by side gigs to bootstrap the company. If
| they have good metrics, they will also have access to growth
| capital which can either out-fund or flat out smother unfunded
| competitors.
|
| How do I know? I raised some funding for our startup (3yrs
| full-time) but bootstrapping further was unsustainable vs
| competitors who were fundraising. VC funded competitors could
| hire more, sell more, compensate more. The market becomes
| skewed.
|
| Is it good for the VC-backed competitors? Sort of. They
| survive. They have longer stories. But they get diluted. Many
| die as they try to swing for the fences (as VCs want, power law
| and all...) Some get fired by VC-dominated boards. Some are
| sent on wild goose chases by outsider funders. This probably
| happens less-so with better VCs.
| gorbachev wrote:
| It's in the context of startups that need to grow quickly to
| make it. It works perfectly fine for startups that aren't like
| that. There are plenty.
|
| Wasn't it Reid Hoffman who wrote a long article or a book about
| this?
| timdaub wrote:
| Awesome take. I've recently come to understand that the same
| problematic exists in the cryptosphere too. Here, the token
| holders act recklessly towards the engineers creating the value:
| https://timdaub.github.io/2021/10/21/on-chain-the-emperor-we...
| ghaff wrote:
| Or less charitably, the engineers are not in on the grift.
| [deleted]
| silentsea90 wrote:
| Wasn't Rubrik started as a stolen idea from a VC pitch by
| Cohesity? I have heard this rumor but I am asking, not claiming.
| sidpatil wrote:
| Dupe: https://news.ycombinator.com/item?id=29183657
| pvg wrote:
| they have to have comments to hn-count as hn-dupes
| mbesto wrote:
| > The engineers building the future deserve a fair equity share
| in the value they create; today they don't get one.
|
| I understand that this is from 2001, but oh boy has this changed
| drastically.
|
| For arguably the first time in history founders of businesses
| operate controlling interest of their stock on the public market.
| More billionaires have been minted from tech companies in the
| last 15 years. Not only have engineers gotten their fair share,
| their power is now being questioned (see Musk, Zuck, etc.).
| akshayshah wrote:
| You're right: funding is extremely founder-friendly right now.
|
| From my perspective, though, the original article is talking
| about everyday engineers (the "technical team"). If you're an
| early, senior engineer at a startup, you might be offered 1% of
| the company. Over the early years of the company, you're often
| critical to the success and velocity of product development -
| usually just as critical as the technical cofounder. After four
| years, your company is acquired for $1B! Your 1% has been
| diluted to 0.75%, so you walk away with $7.5M. After long-term
| capital gains, you pocket a bit more than $6M. Objectively,
| you're now very wealthy - if you're still relatively young,
| this is enough money to buy a nice house, fund your retirement,
| and do some angel investing, even in the most expensive cities
| in the US.
|
| Meanwhile, the technical cofounder walks away from the same
| story with $200M tax-free. That's _dynastic_ wealth. Does the
| founder 's additional year of work justify this difference?
| What about the partner from your primary VC, who's likely to
| personally take home tens of millions despite doing nothing
| more than investing other people's money and sitting in the
| occasional meeting?
|
| This is the rosiest scenario - the engineer, founder, and VC
| all earn life-altering amounts of money. Things get much worse
| if you're a less senior engineer, you're hired after the first
| large round of funding, or (especially) the company's exit
| isn't as good. In all those situations, the founder and VC
| still get a life-altering windfall, while the senior engineer
| might barely get enough to retroactively bring their salary up
| to market rate.
| e1g wrote:
| You can continue that line of reasoning: there is surely an
| equally competent and hard working engineer in some large
| company, or Europe, that for the same 4 years got $0 extra on
| top of inflationary increases. You got $6M - how much should
| you redistribute among those competent developers to make it
| fair?
|
| Maybe you took some risks, maybe you didn't. Maybe the
| founders took more, maybe they didn't. But at some level, if
| neither engineer showed up for work, the world would be
| largely the same. If the founders didn't act as prime movers
| at a critical inflection point, there would've been one fewer
| IPO and a lot less value creation for everyone to try to
| split up.
| m_ke wrote:
| It's worse than that, the VC gets millions in management fees
| and a 20-30% carry on a diversified portfolio so they take on
| no risk. There's literally no downside for them and they push
| companies to take on a ton of risk because they're looking
| for 1% of their investments to return the whole fund, which
| makes no sense for an employee who only has a tiny fraction
| of shares in one of the companies.
| fraserharris wrote:
| More likely you got options, and they are taxed as income at
| a liquidity event (acquisition, IPO)... unless you were
| confident enough in the startup to execute those options &
| immediately pay the resulting taxes out of pocket. And you
| have to have that confidence before the valuation is too high
| & the taxes are unaffordable to absorb.
| akshayshah wrote:
| For sure! I tried to paint the rosiest possible scenario
| for the early engineer.
| laurent92 wrote:
| You forgot that the engineer got paid from day 0, plus 1%
| equity. While the cofounder got the idea, filtered it among
| all bad ideas, pitched and mounted it, and was on 100% risk.
| I have the same discussion with my employees, they want 100k$
| per year from day one with guarantees of permanent
| employment, then they want equity.
| robocat wrote:
| > If you're an early, senior engineer at a startup, you might
| be offered 1% of the company.
|
| The alternative for the senior engineer is to start a clone
| competitor with 25% ownership.
|
| The reason an engineer accepts 1% is because: 1. they would
| be starting their horse after the race has started, 2. they
| don't have the skills to be a CTO or found a team, 3. they
| don't want to take the risk. Those 3 things are worth the
| real money, not just being an engineer.
|
| If an engineer wants to own 25% at founding, they need to
| become a founder rather than bitch about the reality that
| your employer will pay you as little as possible to acheive
| what they want. Oh, and mathematically a founder clearly
| can't give 25% to more than 4 senior engineers that join
| subsequently ,and why should they?
| epicureanideal wrote:
| > The reason an engineer accepts 1% is because ...
|
| In the case of most people I've spoken to, the reason they
| don't start companies is they don't have the savings to
| work on it for 6-12 months, and gamble on getting accepted
| into YC or another angel/accelerator. They don't have a
| safety net to fall back on if that fails.
|
| > they don't want to take the risk
|
| As many many articles have discussed, this is more about
| having personal financial security than any difference in
| personality or character.
| robocat wrote:
| > they don't have the savings to work on it for 6-12
| months
|
| A founder* is a hacker that never uses excuses.
|
| Virtually any single person in the US can find a way to
| work for a year with low expenses, if they accept
| compromises. Appropriately enough for this thread,
| perhaps even by offering a very small percentage of
| equity to a friend to board.
|
| Edit: How many founders have divorces, neglected children
| and ignored parents? How many founders avoid a
| relationship? Not a requirement to neglect family, since
| a successful founder is likely to be skilled at finding
| good compromises in business, and likely to use the same
| skill making reasonable compromises with their family
| life.
|
| * think foresight combined with bricolage, jugaad,
| engineering compromise, 'rubber band, bailing wire and
| bubblegum' solutions.
| https://news.ycombinator.com/item?id=29164495
| epicureanideal wrote:
| > A founder* is a hacker that never uses excuses.
|
| A founder* is a hacker that has at least a quarter
| million dollars of liquid money, or access to that from
| immediate family or close friends.
|
| * based on the actual research around this
| laurent92 wrote:
| Hard to believe car repair shops or taxi businesses can
| ever get started, since they need a million more things
| than a desktop and a chair. And yet they do, and they
| don't get millionaire in the end.
|
| So, you don't need a quarter million dollars to start a
| startup. I did it with $12000 that I had saved from my
| previous job, spent over a year, with a little consulting
| nightjob.
|
| "What about if you have 3 kids, 2 dogs, 1 swimming pool
| and 7 secondary flats."
|
| Entrepreneurship is not owed to you. What we're owed is
| renewing the elites if they are doing a bad job, using
| companies that start and replace the existing ones.
| Facebook, Whatsapp, Tesla and SpaceX didn't exist 20
| years ago, and 84% billionaires are first-generation
| billionaires, the rest are women and got rich by
| inheritance or marriages. So elites are ~96% renewed at
| my generation.
|
| Job done.
| [deleted]
| el_ravager wrote:
| A founder is a sociopath who steals from the workers.
| repomies69 wrote:
| > They don't have a safety net to fall back on if that
| fails.
|
| However many people also start companies without safety
| nets. Some of them fail and they might have drastic life
| moments, but in tech you always find some job, in fact
| your failed startup might be seen even positive by some
| employers...
| yardie wrote:
| When my startup failed I did contracting for a while. And
| the trauma probably kept me from pursuing startups for
| almost a decade. Our angel skipped off back to SV and I
| went back to the European job market with no professional
| references, no employer to verify my qualifications, and
| no real network. And I had a baby on the way.
|
| > your failed startup might be seen even positive by some
| employers.
|
| It's gotten much better since those days but having that
| startup is seen as an asset to the right company.
| mbesto wrote:
| > the reason they don't start companies is they don't
| have the savings to work on it for 6-12 months, and
| gamble on getting accepted into YC or another
| angel/accelerator. They don't have a safety net to fall
| back on if that fails.
|
| Which is part of the reason for their compensation.
|
| Did the first few factory workers and car design people
| at Ford become millionaires (in their equivalent
| dollars)? Probably not, but if you're the first engineer
| of a Twitter, Google, etc. it's not unreasonable to see
| your net worth to reach 7 figures, if not 8 figures.
| Early engineers are compensated just fine IMO, they are
| just taking a big gamble relative to the market (i.e.
| $500k annual salary at Google).
| yibg wrote:
| How would the cofounder's share be tax free?
| nzmsv wrote:
| QSBS
| JohnJamesRambo wrote:
| It was too low in 2001 and has now swung too far the other way.
|
| https://en.wikipedia.org/wiki/Mean_reversion_(finance)
|
| Like most things, the gray area in the middle with checks and
| balances is probably best.
| loldk wrote:
| What can we do to make sure you don't stop being correct?
| rq1 wrote:
| Vulture Capitalists.
| CalChris wrote:
| At least two of my friends have had their ideas stolen and funded
| separately.
|
| The first startup I ever worked for, one of the founders had done
| diligence for a VC and stole the idea. The founder, knowing the
| VC, was by definition a bankable exec.
| geophile wrote:
| Variation: The "VC pet" (love that term) steals an idea. That's
| how care.com started:
|
| http://archive.boston.com/business/technology/articles/2009/...
| CalChris wrote:
| Yeah, it is more accurate than _Entrepreneur In Residence_.
| fmajid wrote:
| The glut of capital (too many investor dollars chasing too few
| opportunities) has changed the balance of power quite a bit
| since.
| doctor_eval wrote:
| Well this certainly hit a nerve with me:
|
| > They told me: "We think you should resign." I left; the
| problems didn't.
|
| When there is a conflict between the engineering and money
| talent, the money is going to win. It doesn't matter if you're
| right, if you're not rich and connected.
|
| I wish I'd understood this, and done more to nurture a direct
| relationship with my VC instead of letting the angel handle that
| side of things.
| 1cvmask wrote:
| The part on VCs being risk averse when it comes to innovation is
| quite common:
|
| One company I worked with had an innovative idea for a firewall:
| build it with programmable logic and it works at wire speed. Wire
| speed meant no buffering, no data storage, and therefore no need
| for a microprocessor or for an IP (Internet Protocol) address.
| Simple installation, simple management, but so different that
| experts--even those from programmable logic companies--didn't
| understand it. To them, proposing a firewall without a
| microprocessor and an IP address was like proposing a car without
| an engine. No funding. Back to work at a big company. Worse for
| them; worse for us. The industry loses. Progress is delayed.
| repomies69 wrote:
| The fact that VC's didn't invest in that single idea doesn't
| tell anything about them being risk averse or not.
| nickdothutton wrote:
| Reminds me of the Sunscreen SPF-200 Firewall from the mid 90s.
| Interfaces has no IP address nor even an IP stack on them. It
| was effectively a secure bridge when operating in "stealth"
| mode.
| https://docs.oracle.com/cd/E19047-01/sunscreen31.sec/806-412...
| buro9 wrote:
| > One company I worked with had an innovative idea for a
| firewall: build it with programmable logic and it works at wire
| speed
|
| Ah, that's the idea I had at Cloudflare and we then built it as
| Firewall Rules. Externally it looks like it's a HTTP feature
| only and just a WAF type tool, but internally it's an extremely
| fast matcher that can work on any traffic and at different OSI
| layers so it forms part of the DDoS protection, bot protection,
| magic transit, etc. It's also in things like the URI rewrite...
| because fundamentally it's all just "match things" and
| associate actions with the matched things, usually the actions
| are deny, rate limit, allow, challenge... but no reason the
| actions can't be to transform, duplicate, log, etc too.
|
| Just wireshark like matching at the equivalent of wire speed
| (for what that means at whatever layer you're working on)
| without having to have buffering or that pcap phase normally
| associated with firewalls or wireshark.
|
| The same wireshark-like rules can also be translated into SQL
| easily enough, so it's possible to run a firewall rule over the
| logs and see what would've matched (it isn't perfect, logging
| isn't that complete... but for the most common scenarios it
| works well enough).
|
| This work is OSS, the language syntax and a table matcher (used
| for the HTTP part) is all here
| https://github.com/cloudflare/wirefilter/tree/cloudflare and
| it's in Rust. For other systems the rule may be translated to
| eBPF for the matching part, etc. A blog post with an overview
| is here https://blog.cloudflare.com/how-we-made-firewall-rules/
| .
| yjftsjthsd-h wrote:
| I'm pretty sure they're suggesting doing it all in hardware,
| not more clever software
| melony wrote:
| Microsoft and many other big data centers are now doing
| exactly this via FPGA NICs.
| woah wrote:
| Having dealt with VCs, I'm kind of confused by this comment. In
| my experience, they do not delve deeply into the tech. I'm
| guessing this is because most of their portfolio companies fail
| for non-technical reasons. They mostly assume that if you're
| pitching it, you can build it.
|
| To me it sounds like they were not convinced that the product
| would have any selling points over existing tech. Would this
| type of device save any money? Another thing that may have
| happened is that perhaps the pitch was heavily focused on the
| tech and it made their eyes glaze over.
| sangnoir wrote:
| VCs tend to have an easier time funding already-validated
| ideas: having an established competitor, or seeing other VCs
| fund similar companies. It's lazy, but they can afford to be
| lazy - if they miss their chance on your revolutionary tech
| and you somehow succeed, they'll fund the next startup that
| copies you.
|
| The other day I saw a commenter who worked at a wind power
| startup that failed to get subsequent funding because
| Alphabet shutdown Makani, and their take away was the idea no
| longer seemed viable.
| gumby wrote:
| > In my experience, they do not delve deeply into the tech.
|
| I suppose it depends on how deep the technology is. If you're
| building a site using react, fine. If you're developing a new
| semiconductor process or new pharmaceutical agent, they'll
| want more info.
|
| My companies have all been of the latter sort, and so had
| serious technical DD. I've also done deep dive like that on
| behalf of investors.
| h2odragon wrote:
| For a while there some folks (cant recall the name) had a IPv4
| firewall system based on DOS, with a similar idea of being an
| "out of band" filter that was not part of the network being
| filtered.
|
| Fact is, it's simple enough to do that with any OS and equally
| as hard to certify that the separations are actual and have no
| leaks.
|
| Now they're writing whole server/response chains in eBPF and
| stuff same idea but inverted, perhaps.
| buescher wrote:
| Didn't Netscreen (acquired by Juniper) do basically that? I
| think they had an ASIC but I definitely remember their claim to
| fame was doing packet filtering in hardware.
| ChrisArchitect wrote:
| why submit again after yesterday?
|
| Other old, previous discussion:
|
| _14 years ago_ https://news.ycombinator.com/item?id=113655
|
| _8 years ago_ https://news.ycombinator.com/item?id=6369357
| m_ke wrote:
| Most of it is still relevant and most people on here are not
| old enough to have browsed HN 14 years ago.
| ChrisArchitect wrote:
| not saying it's not relevant, not expecting ppl to have seen
| it, but there's discussion there in those threads and it
| doesn't really need to be re-upped/repeated convos. Can enjoy
| it without commenting/upvoting it.
| binbag wrote:
| It's a good article but some parts of it don't ring true, or
| perhaps things have changed since it was written (in 2001).
|
| For example, the investor director a VC appoints to a board does
| not generally get any stock options - just a fee for attending
| board meetings (generally paid to the VC firm, not the
| individual). It also feels unlikely that a VC today would appoint
| their own CEO - it does happen, but it is far more likely that
| they would either back the existing management team or not invest
| at all, such is their view of how critical the team's quality is
| to the company's prospects.
|
| The author also describes the VC and its appointed CEO taking
| ~75% of the company. I've never seen anything like that happen -
| investors usually end up with about ~30% stake, regardless of
| what funding phase you are at.
|
| The paragraph about the 'down round' scenario is bizarre. There
| would need to have been serious failures in the
| company's/founder's legal work to allow this type of
| retrospective revaluation to occur. I've never heard of anything
| like this.
|
| I guess the reason for these oddities is because the landscape
| was very different in 2001, when we were just emerging from the
| dot com boom, but I'm not sure. Can anyone else comment?
|
| Anyway, overall it's a really good article, and the final parts
| ('Fixing the problem') was pretty insightful, since things like
| this have actually happened since then.
| davidw wrote:
| Things were definitely different in the dot com era. I have
| stories...
|
| I think things are a lot better now from what I see.
| pge wrote:
| The down round situation was probably the result of anti-
| dilution protection, meaning it was baked into the previous
| rounds documents, not something that was renegotiated. Anti-
| dilution protection basically says that if the company closes a
| Series B financing at a price lower than the price of the
| Series A, the Series A investors get an adjustment to their
| fully-diluted ownership (ie get additional ownership). In the
| worst case, the Series A shares are effectively repriced to the
| Series B price, but most often the adjustment is much less.
| These terms would be part of the Series A term sheet and deal
| documents, not something that is raised when the Series B
| occurs.
| erik_landerholm wrote:
| The world is so different now and a lot of that change was
| spurred on or created directly by YC. super thankful, raising
| money still sucks, but it really sucked back then.
| sealeck wrote:
| I could be misreading, but I believe that this article is from
| 2001, not 2011?
| 1cvmask wrote:
| It is from 2001
| nakedshorts wrote:
| How have things changed since 2001? My opinions only:
|
| 1. VCs don't sign nondisclosure agreements: yes you will be
| laughed out the door if you demand one.
|
| 2. VCs are sheep: yes, make sure your startup hits one of the hot
| buzzwords (metaverse, ai, etc) to maximize interest.
|
| 3. VCs aren't technical: diligence these days is even more of a
| joke than it was back then.
|
| 4. VCs don't take risks: second time founders can get funding
| just off their name, yes.
|
| 5. Venture funds are big: IMO, there's way too much capital
| chasing too little talent these days.
|
| 6. VCs collude: absolutely, make sure you don't tell VCs other
| firms you're talking to before the term sheet.
|
| 7. VCs don't say no: very annoying, they'll string you along
| forever.
|
| 8. Your idea, your work, their company: biggest change since 20
| years ago. Founders have way way more leverage these days. You
| can negotiate insane valuations (and therefore tiny dilution)
| compared to even 5 years ago. You can also fight harder for
| provisions that maintain board control in favor of the founders.
| The risk of a VC being seen as "founder unfriendly" is way higher
| than fighting you, a single company out of 100s in their
| portfolio.
| varelse wrote:
| This is a great essay. And I have kept more than one employee
| working with me at BigCo by explaining the odds of success of the
| expected return for being an engineer vs a TLA at startups. It
| actually used to be work to make this case but now the case makes
| itself. And bonus you're just being honest.
|
| In one case where the person was offered a CTO spot I encouraged
| him to leave. The company failed and that's okay but at least it
| was an interesting opportunity as opposed to indentured
| servitude.
|
| The real dilemma is that when your ideas are revolutionary you
| really have to bootstrap them yourself because VC has no interest
| in them despite all the platitudes and happy talk. And this essay
| nails that very thing.
| winterplace wrote:
| Related:
|
| - https://spectrum.ieee.org/u/nick-tredennick
|
| - https://en.wikipedia.org/wiki/Nick_Tredennick
|
| - https://www.researchgate.net/profile/Nick-Tredennick
|
| - Dropbox: https://news.ycombinator.com/item?id=29175816
|
| - Amplitude IPO AMA:
| https://news.ycombinator.com/item?id=28696641
|
| - Understanding Startup Offers:
| https://news.ycombinator.com/item?id=28644653
|
| - Early Employee: https://news.ycombinator.com/item?id=29176216
|
| - Unicorn Startup Equity:
| https://news.ycombinator.com/item?id=13426494
|
| - Michael Seibel, Twitch:
| https://news.ycombinator.com/item?id=29175453
| akshayshah wrote:
| For founders, a lot has changed about VC funding since this
| article was written - much of the VC criticism still rings true,
| but founders often end up with much larger ownership shares and
| better funding terms.
|
| IMO, YC catalyzed a lot of that change. I don't always agree with
| every partner's latest think piece, but I appreciate the changes
| they've brought to startup funding.
| nynx wrote:
| Capitalism often avoids real innovation and sticks to the safe
| path. I suspect we'd be technologically a lot farther along in
| important ways without it.
| aliswe wrote:
| I believe that is daydreaming almost by definition though...
| you should also consider the fact that a number of technicians
| have become insanely rich from their technological innovation
| as well.
|
| bucheit for example?
|
| these people are interested in investing in technology further
| leveraging technology to spread wealth (i guess)
| binbag wrote:
| I wouldn't be so sure. How do you allocate resources and pick
| the best prospects in your alternative, presumably centrally
| directed, economy?
| nynx wrote:
| Centrally directed economy? No, that most likely wouldn't
| work. There is a lot of room for free-market economies that
| are very much not capitalist.
| m_ke wrote:
| The alternative to capitalists picking who gets funded
| doesn't have to be central planning. You could have a
| consumer driven model where citizens get to allocate money to
| new research and development, similar to the democracy dollar
| idea that Andrew Yang was pushing. This would allow money to
| trickle up to the best companies instead of "trickling down"
| and getting captured by the rich.
|
| If each American got to distribute 5 thousand a year to
| businesses, researchers or infrastructure the world would be
| a much better place. I'm sure none of them would allocate it
| to advertisers or tools that spy on them.
| winterplace wrote:
| Could you expand on your point about the distributing?
| Banana699 wrote:
| This whole argument (it isn't yet really, but it's developing
| into a very familiar one) is a huge waste of breath IMHO,
| suitable more for heat than light.
|
| For one thing, "Capitalism" vs. "Central Planning" are
| strawmen abstracted from competing families of concrete
| approaches that, while similar in very broad strokes enough
| to justify the strawmen abstractions, are wildly different in
| specifics. The "Capitalism" of Singapore, Switzerland, and
| USA are so wildly different underneath the superficial names
| and slogans that any discussion of them that views them as
| basically the same is necessarily going nowhere. Sometimes
| humans' amazing ability to recognize very loose patterns just
| turns out to be a foot gun like that.
|
| For another, Innovation (or risk-taking ventures or whatever
| you want to call it really) is an institution thing, a
| culture if you will, the challenge of building an institution
| goes way far beyond what type of managment you choose for it.
|
| DARPA and NASA are both bureaucratic bodies that produced
| amazing innovations and took incredibly risky ventures, Nokia
| and Xerox were once risk-taking cowboys that got averse and
| stagnated.
|
| The canned response to this is always 'Yes but you can always
| found your own company and eat their lunch, that's why
| capitalism is superior', this is wildly wrong on a lot of
| things, but the most jarring blindspot is that it assumes all
| innovations have the capacity to carve out a market from the
| established. This isn't true in general, it just so happened
| that digital cameras, personal computers or smartphones are
| so amazing they can jumpstart a new market out of thin air
| and take on existing companies head-on, but what if you have
| a search engine innovation that can make search 50% better
| (less spam and SEO trash, more discoverability, etc..), a 50%
| better search is an amazing innovation, but good luck going
| against Google with that and that alone. If nothing else,
| they will just buy you and put you in the drawer if you make
| too much of a fuss.
|
| This problem is standard in evolutionary approaches to
| optimization. Despite the wildly different specifics of
| things that humans call 'Capitalism', they all share a very
| broad faith in the power of competition as an optimization
| process and a constraint-driven solution discovery algorithm.
| Well, that's called Evolution, and it heckin sucks sometimes.
| There are probably millions upon millions of good biological
| designs that got extinct because they weren't lucky enough to
| carve out a niche out of the chaos.
|
| Evolution is basically saying 'If you don't like how it is,
| make your own species and eat their lunch' to the beings
| playing it, but sometimes, a lot of times, insanely good
| mutations aren't enough to build a new species, or they can
| build a new species but it will be eaten in a heartbeat by
| the established ones for reasons unrelated to its efficiency.
| Just look at the human eye, there is an incredibly dumb
| design flaw where fibers connecting it to the brain warp
| around in a funny way and cause a blind spot in its midst,
| the brain corrects it automatically by simply lying to itself
| (I mean, uhh, 'Interpolating'). This wasn't enough to drive
| humans extinct, you might object that this is okay because
| Evolution is actually optimizing for survivability, not the
| best eye, so a species that manages to survive despite a dumb
| flaw in its sensor suite is just par for the course. But this
| a huge problem for competition-driven innovation, because we
| actually want to optimize for the best eye, a dumb design
| flaw in the eyes of a stagnant behemoth that refuses to die
| like Google is a very bad thing for us.
|
| Innovation is just an insanely hard problem no matter how you
| look at it, and it's always solved in real life by ad-hoc
| competition-planning hybrids that is always fragile to
| stagnation, to which it eventually (almost always) falls
| prey. The Capitalism-CentralPlanning debate, if it's to be
| productive at all, should just stick to standard boring
| economic issues (ideally by discussing concrete approaches,
| not vague semantic clouds), because innovation is just a red
| herring that supports neither party of the debate.
| winterplace wrote:
| Summary of above: Survival is sometimes chance and is not
| always optimized. Best to avoid too much generalization
| when thinking. Some things are very different even though
| they are called the same name.
| specialist wrote:
| _" Venture funds are big:
|
| ... The VCs running a $1 billion fund don't have the time to
| manage one thousand $1 million investments.
|
| VCs collude:
|
| ...
|
| I attended a recent talk by a VC luminary, who gloated over the
| state of the venture industry, after money for technology start-
| ups was scarce. Here's my summary of the VC's view:
|
| "A year ago there was too much money available, so there was too
| much competition to fund good ideas. ... Valuations are
| reasonable and, with few rivals in each sector, new markets will
| develop--as they might not have with many rivals."
|
| This is nonsense. ... I'm not talking about market size or market
| opportunity...; I'm talking about rates of innovation."_
|
| --
|
| What's this called? What do economists call it?
|
| Why isn't it obvious?
|
| --
|
| Attempt to restate problem:
|
| Large investors prefer fewer, larger deals. Because of attention
| scarcity and transaction costs.
|
| Today, we have excess idle capital under performing AND zillions
| of unfunded ideas, unending needful work not being done.
|
| This applies to all investors. VCs, governments, megacorps, etc.
|
| The genius of Y Combinator is reducing transaction costs,
| enabling more ideas to get funded efficiently.
|
| How do we (society) do A LOT more of that? How do we make broad
| portfolios the norm?
|
| --
|
| Policy platform statement:
|
| Lacking other ideas for how to connect capital with small to
| modest investments, I support wealth redistribution.
|
| Radical repeated cashectomies and stifling regulations for the
| current 0.1%.
|
| Radical laissez faire and near free capital (zero interest loans,
| grants, government largess) to seed small, young business
| development.
|
| Ridiculous, audacious, ambitious moon shot programs. X-Prizes,
| stipulate that all funds must allocate some fraction to high risk
| high reward efforts, genius grants, a firehose of funding for
| academia, arts, culture, community building, whatever. Basically
| recreate the New Deal's CCC. Set some benchmark, like target
| funding of say 1% of GDP.
|
| Naturally, I support UBI, universal health care, free childcare,
| jubilee style bankruptcy protections, and so forth. For the very
| pragmatic reason of unlocking human potential by reducing
| (removing) individual risk.
| phkahler wrote:
| >> Large investors prefer fewer, larger deals. Because of
| attention scarcity and transaction costs.
|
| >> Today, we have excess idle capital under performing AND
| zillions of unfunded ideas, unending needful work not being
| done.
|
| That might be a consequence of the concentration of wealth
| that's been happening. Not only does a VC have limited
| attention, but there aren't many ideas that need billions of
| dollars to fund. It might be better for startups to have twice
| as many rich guys with half as much money. OTOH maybe there's a
| way for them to spread it around more with a layer of oversite?
| But they'd need trusted oversite, and I'm guessing that's hard
| for them to find.
| dang wrote:
| Past threads:
|
| _An Engineer 's View of Venture Capitalists (2001)_ -
| https://news.ycombinator.com/item?id=6369357 - Sept 2013 (54
| comments)
|
| _An Engineer 's View of Venture Capitalists_ -
| https://news.ycombinator.com/item?id=113655 - Feb 2008 (26
| comments)
| hhaha88 wrote:
| Our culture likes to believe workers are free of state
| intervention, quotas like Soviet Russia.
|
| But here we have yet another story of how the rich, protected by
| government, guide our agency.
|
| America is a subtle con like that. The rich are protected by
| government, and then dictate economic agency and priority.
|
| Effectively government has granted others the power to do what it
| cannot officially.
| Robotbeat wrote:
| I think you're exaggerating the level of agency the government
| has here or actual intent versus unintended consequence, but I
| think you're right about the effects. One reason I think elon
| has been wildly successful is not that he's way smarter than
| everyone else but just that he's a physicist/engineer-type that
| actually managed to become rich enough to control his
| businesses and dictate priority. A rich guy who is actually
| technically smart (as well as relatively competent business-
| wise) and at least in the early days did a very good job of
| identifying/listening to/empowering people smarter than him on
| some task (in part because he had the broad physics background
| to grok what they were talking about).
|
| There are doubtless a lot of other Elons out there, but we just
| haven't empowered them. Maybe also some that are a bit more
| emotionally stable.
| hhaha88 wrote:
| I'm saying the government purposely puts no agency into the
| issue of inequality.
|
| That, rather than allow the story government could, we
| require people to cater to unelected elders who judge and
| manage our agency even though none of us signed a contract at
| birth recognizing our agreement with the arrangement. We're
| talked into after the fact; or we can die. It's legalized
| shakedowns for lunch money.
|
| You're getting hung up on technicals. I'm challenging the
| story that the US is free of oppressive behavior because it's
| not government performing the behavior. I don't have a
| contract requiring me to believe Zuckerberg is a billionaire,
| his forces can assign net worth to me though?
|
| Take PGs four quadrants of conformity. Why stop at 4? Did he
| run out of numbers? There are billions of people on the
| planet; why not an essay that suggests then a billion
| quadrants of conformity? The effort means little to PG, just
| a few different letters. Why does his boundary matter?
|
| If we're allowed to filter as we choose why not filter you
| all out?
|
| Is that the political narrative we want to foster on Main
| Street? 5% of the population hunts; this contemporary
| logistics system provides for everyone. Following
| billionaires who filter out those who don't conform to their
| preferred of their 4 categories ... why not filter out a
| minority of billionaires through hefty taxation to empower
| all the Elons we aren't. Pre-Reagan taxation empowered a lot
| of these guys families, then they changed the rules.
|
| Change them back.
| sokoloff wrote:
| > Take PGs four quadrants of conformity. Why stop at 4? Did
| he run out of numbers? There are billions of people on the
| planet; why not an essay that suggests then a billion
| quadrants of conformity?
|
| At one level: because the root word of quadrant means
| four/one-fourth, so once he got to 4, he did run out of
| numbers [of quadrants].
|
| He probably picked to use quadrants in large part because
| categorizing people's broad behavioral tendencies into a
| billion groups isn't that helpful of a mental model
| simplification. "People in group 24,825,726; those are the
| tattletales who like Brussel Sprouts, are left-handed,
| allergic to oak pollen, love dogs, hate cats, taste
| quinine, can roll their tongue, are AB+, and prefer
| sleeping in cool rooms." How does that make for a readable
| essay?
| hhaha88 wrote:
| Why groups? Why not 7 billion points.
|
| Everyone is their own political agenda, their own
| emotional timeline of experience.
|
| Why does an arbitrary 1 of 7 billions semantic view of
| the gradients mean more than anyone else's except for his
| politically protected privilege?
|
| And of course we're not supposed to discuss that here.
| This forum has an obligation to high mindedness first.
| Questioning the assigned figurative value of someone who
| is a random non-contributor to millions of others, and
| open discussion about how they may be actively harming
| them, is not allowed to launch.
|
| Stick to the rules of bounding everyone else into
| quadrants. Oh wait, though; you all are everyone else to
| me. I only see points bounded by quadrants. I'll just
| stick to thinking of you as a point on a Cartesian plane
| ... what a novel math object he discovered.
|
| The whole thing was elementary math object and biased,
| insulated, white guy political opinion. I'm banal?
| sokoloff wrote:
| > Why does an arbitrary 1 of 7 billions semantic view of
| the gradients mean more than anyone else's except for his
| politically protected privilege?
|
| I read his essays long before YC was founded. (Online
| first and then in dead tree reprint format.) I chose to
| read them because they were interesting and thought-
| provoking not because of some claimed politically
| protected privilege.
|
| If other authors resonate more with you, I think it's
| reasonable for you to read their opinions instead.
| hhaha88 wrote:
| Well, maybe it's me but it all translates to "here's a
| Cartesian plane and how one random dude would describe a
| bunch of points on it."
|
| My value store is not old school business networks, but
| the network available to everyone. It's all electron flow
| in machines, with boundaries ingrained by history.
|
| I see value in novel information design. The history of
| overloaded human languages and my age related overload on
| them makes me question what they really offer except
| traditional attempts at political persuasion.
|
| Meh.
| woah wrote:
| There are a huge number of rich engineers out there
| Robotbeat wrote:
| How many rich physicists?
| maxk42 wrote:
| How many poor ones?
| dang wrote:
| Please don't take HN threads on generic ideological tangents.
| That's in the site guidelines:
| https://news.ycombinator.com/newsguidelines.html.
|
| More generally, please don't use HN for ideological battle.
| That's also in the site guidelines. The reason we ask people
| this is not because we're against your ideology, but because in
| the big Venn diagram of internet conversation, there's almost
| no overlap between the "ideological battle" bubble and the
| "curious conversation" bubble. We want _curious_ conversation
| here.
|
| We detached this subthread from
| https://news.ycombinator.com/item?id=29187971.
| varispeed wrote:
| The problem that VC has become a new normal is the asymmetry
| between how big corporations and wealthy people are taxed versus
| employees. It's not uncommon that a millionaires effective tax
| rate will be in single digits, whereas an engineer may be paying
| even as much as 55% of tax and that even before local taxes and
| bills. The taxation needs to be rebalanced otherwise you create
| those new gods who gatekeep who can run with their business idea
| and who cannot. I'd say VC is a result of improper regulation of
| capitalism and the fact that corporations and wealthy individuals
| through lobbying and corruption were able to amass wealth that is
| anomalous. The solutions for this won't be pretty.
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