Sean Parker: “Little Startups Are Ridiculously OverFunded”
techcrunch.com
techcrunch.com
A good read: http://en.wikipedia.org/wiki/Theory_of_the_firm
As transaction costs go down (in general), it makes less sense for us as a society to have production/value creation organized in larger organizations (firms, companies, etc) - instead in a bunch of independent smaller groups.
Companies only exist to minimize transaction costs.
I think this is a bit of an overstatement. Another purpose of companies is to provide the benefits of a command economy (e.g., the ability of a great leader to jump from a local to global maxima) with less of the dangers of a command economy (great leader robs/kills you, poor planning screws everyone over).
E.g., central planning in the food supply can work reasonably well, but this is hardly guaranteed. Market discipline gives us the benefits of McDonald's 5 year plan, but a McBankruptcy rather than Soviet Union style food shortages if the 5 year plan fails.
I think you need a better argument than that that large corporations are here to stay, not a passing fad due to factors like transaction costs... There have been few great leaders running large corporates, although not none, and many people just enriching themselves for doing little.
No, I'm saying that embedding command economies (structured as companies) in a capitalist economy allows us to gain the benefits of a well run command economy while mitigating their harms.
This is "efficient" as it reduces friction - but when HQ makes mistakes in budgets or targets, the entire economy fails, whereas in the West, the failure is isolated to one company, and over the long term, that redundancy is massively more productive. In fact in the West, the assets of the failing company would most likely be bought by a rival, and no productive capacity would be lost. In the Soviet system, you might end up with a million tractors but no crops to harvest!
Thank you Sean Parker.
The creation of this much open source software is a true public good. The people producing it (both at small companies and big ones) may be working away at misguided projects, but it's wonderful that as a byproduct they're producing software useable by everyone. In the future, it may be obvious that the open-source side-effects of this SV generation were more value-creating than the businesses created directly.
Whether early stage startups are overvalued is a different topic to be discussed.
- Companies like Microsoft, Google, Yahoo, LinkedIn raised very modest amounts of funding and has multi-billion dollar IPOs
- Cost of creating a company (and associated technology) is down over 90% from what it was back when a lot of these companies were started.
Given these two, it's amazing to see VCs pouring in millions into startups that have nowhere near the valuation they invest at. Color is the most famous example, but there are tons of other startups raising $2-5M at pretty ridiculous valuations. If you consider that in light what Sean Parker says, regardless of his vested interest in engineering talent going to companies he's backed, it feel like what he's saying makes sense. Companies are ridiculously over funded, and VCs are doing a disservice to their investors as well as to their portfolio companies by giving more money than they need.
The costs in terms of equipment and developer talent may be smaller than they were in the mid-late 90s, but the market is much more crowded now. I don't know that those savings aren't offset by the required marketing and PR efforts necessary to differentiate your company from all of its other "social web 2.0 tweet-a-riffic" competitors.
Said another way, the less a company needs your money, the more you have to pay to get in.
No they're not. They're following the market. If they were doing a disservice to their investors, do you think the investors would just sit back and lose millions?
My theory is that 500 2 person companies have a worse chance at making a real splash than if the 100 best ideas from that group had 10 good people working on them. That's part of what he's saying - it's harder now for good startups to grow when everyone wants to and is incentivized to make their own web startup.
The other part he's saying is that people can have a larger marginal impact on the world working at a place like Facebook than they could in their own startup. For the median case, this is true.
And FB would clearly be in that 100, given the massive growth it had. For every potential FB, there are lots of borderline useless apps that get funding, and wouldn't have when FB was first funded. Those people could have instead been working on FB.
He's not complaining that startups are getting funding, he's saying that the overavailability of funding is acting as a repulsive force, keeping engineers from grouping up.
Whether that's a bad thing on the balance, I'm not sure, but it's not an unmitigated good.
I wonder if there is an opportunity for matchmaker investors to scoop up like-minded startups and consolidate early companies to build those 100 10-person winners.
Let's not forget that this entrepreneurial activity is forcing the big guys (Google, FB, etc) to be more innovative than they would otherwise be - either to attract talent or to compete with startups.
The problem isn't overfunding small startups, it's going after markets that are all hype and have little to do with innovation.
Our smartest engineers should be working on ARPA-funded energy projects not how to create a new feature to keep Facebook relevant.
For later round investors it's undoubtedly in their interest to encourage these engineers to join larger firms rather than being on their own. In NYC it's especially competitive given the competition between more mature companies, early stage startups and the money wielding finance industry. The combination could lead to a 'glass ceiling' of sorts for larger companies because of the inability to attract talent; that is, until some of the smaller companies fail and these individual engineers likely end up at a larger spot.
It mirrors the consolidation of an industry. It just takes longer than some investors (like Parker) would prefer, which is the inspiration for statements like this.
[ And I'm thinking Facebook before people get on my case about financial companies creating value in the real world... ]
The overfunding is mostly a problem for those larger tech companies, not the little guys.
He's arguing against capitalism, and not making a very good one at that. While trying to sell this as an industry-wide issue, I suspect his real concerns are more immediate -- for his own ventures.
You may be right that he is either wrong or making his argument for self-serving reasons. Or he might be right.
Running a small but ambitious company forces a serious, motivated founder to think about every business function. I don't see any meaningful downside for the founders who choose to spend some time on this task, and I see a lot of upside.
Parker's complaints strike me as absurd. If he really believes they can have more impact at FaceBook, he should find a way to create special purpose vehicles within FB that allow founders to get equity in the work of a small team, rather than just getting .00005% of the sum of FaceBook.
Nice analogy. Time to move to Dantooine and work on my X-wing startup.
2. Dantooine -- this will put a hard, violent limit on the length of your startup's runway, perhaps choose a different location?
All good things in life comes from collaboration with others as much as individual contributions, but there is nothing that says that collaboration has to be imposed by a external force, like with a company. The world has ruled before with open collaboration like science, and what we call "open source", "open hardware" today.
BTW, if I could do anything to destroy the vision that all the world is going to be controlled by oligopoly juggernauts and bureaucracies, I will, including creating new companies or helping young people to renew the landscape, as facebook or Google did(when companies success in a free market, next they want to destroy it).
- says Sean Parker, the guy who owns between 2 and 7% of Facebook. Well yes, of course.
To be clear, I know that Facebook does pay quite well by industry standards (offset somewhat by the bay area cost of living) for top talent, but if this situation is causing them an issue then what they are paying (or offering in general -- money isn't always the only thing) still isn't enough.
Maybe they'll get bought via a talent acquisition but as soon as their golden handcuffs are off, they are out doing their own thing again. The reason they allow themselves to get bought via talent acquisition is to be able to easily raise money in the future.
I think Sean Parker is reacting to these types of people. I think the misconception is that the increased funding sources is what is driving these people. I would suggest that they were always there, but 5 years ago they were just living poor and working their ass off to build a startup (usually unsuccessfully).
I do believe I'm part of this group. There's no amount of money that would compel me to take a corporate job. Sometimes money isn't what matters.
No matter how good it is at a company like Facebook or Google, there will always be a point where they make you realize they have control over you. Whether it's working on a project you hate, ridiculous corporate policies, or having to kiss the ass of your manager. I've done it all for the past 15 years at a few different companies and I finally just got sick of it.
What is a "talent acquisition" if not an alternate mode of compensation to persuade individuals to "take a corporate job" who previously considered themselves above such positions? Yeah, it sounds more impressive to tell people "we got bought by X" instead of "I took a job with X," but either way they've "gone corporate." You're still dealing with the same endless HR meetings, PHBs, "culture," etc, as all the other "drones."
Yes, a good number of such "acquisition hires" leave after earn-out is complete, typically two to four years. This is actually a fairly lengthy of time for any high-value employee to hold any position in the valley these days, startup or not.
The reason they allow themselves to get bought via talent acquisition is to be able to easily raise money in the future.
Regarding the latter point, it seems that "key players" at "prominent companies" don't have too much trouble getting funding for startups when they move on, regardless of whether they were "talent acquisitions" or not.
Speaking from experience, when my previous employer got acquired by a megacorp, nobody was saying "I really don't want to work for megacorp, but maybe I will have an easier time getting funding later." No. It all came down to dollars and cents in the here and now, and the only people who turned down the earn-out offers (less than 10%) were those who had better options available.
I would even guess that the majority of founders who are acquired by Google, Yahoo etc. leave in the first 12 months.
It is either to get the first run on the board, or to give a startup that would otherwise fail a graceful exit - but these people are entrepreneurs and do not fit into large companies.
Sean Parker should be asking what is Facebook doing to attract these types of people, not bitch about these people not wanting to join and blaming free-market funding, of all things.
That is absolutely not the case.
You often don't even hear about most Google acquisitions, or you don't know what they were even working on until they get released as Google Egg Timer or something. And even after vesting a lot of acquired employees still stick around. Some of them have families by then.
Yahoo tries hard to make them quit in disgust, but even they hang on to founders longer than that.
This is a much bigger problem than many people realize; Ryan Avent discusses it in his ebook The Gated City (http://www.amazon.com/Gated-City-Kindle-Single-ebook/dp/B005...) and on this Econtalk podcast: http://www.econtalk.org/archives/2011/10/avent_on_cities.htm... . Basically, housing costs in Silicon Valley are eating up all the salary increases tech companies are offering. Avent describes how, in the 1990s when the unemployment rate in the Valley was effectively zero and lots of people who'd read "Learn HTML in 24 Hours" were getting jobs, people still weren't flocking to the area because the cost of housing is so high.
Anyone who wants to address extremely high tech salaries needs to be very interested in housing and urban policy.
As you get older and want to buy a house and have a family? Eh, during the bubble, it was a problem. Five hundred grand for a 1bdroom condo? crazy. But these days? rents might be high, but you can get a small 3bdroom house for $300-$350K in a very safe area. By that point in your life, an Engineer's salary is going to be at least 1/3rd of that, which seems like a pretty reasonable ratio of salary to house.
I mean, yeah, if you can take a 20% paycut to live in a flyover state where you can get something giant and nice for $100K, that might look like a good deal on the face of it, but the thing is, here in the valley? there is a multitude of employers to choose from. If you are in idaho and your employer shuts down or you want to quit? likely you are going to have to move. There's a huge advantage to the employee of having many potential employers within easy commute distance.
so yeah; personally? I don't think it's a big deal for Engineers.
I'm curious where that is? In my area, the only house I saw for sale in that price range was a 1 bedroom house literally behind a strip joint.
It wasn't big; just under a thousand squarefeet, if I remember right, not counting the garage or the shed. 3bdr, 2 bathrooms; one of the bathrooms was an un-permitted conversion of a closet. (oh man. so many houses in this area have been badly converted to hold more people than was originally intended.)
The roof was in fairly okay shape; it seemed structurally pretty good. It badly needed new carpet, appliances and paint inside and out.
When was last time you looked? Things are bad right now, I mean, if you are trying to sell; I looked at rather a large number of houses over a period of a few months (we stopped looking, oh, two or three months ago) nearly all the properties we looked at were either short-sales or bank owned. Most of the places we looked at? last sold for close to 2x the current asking price.
But yeah, there seemed to be plenty of livable stuff in the Sunnyvale area for under $350K, and it gets cheaper as you get closer to San Jose.
This wasn't the cheapest thing we looked at, but most of the cheaper single family homes had more significant problems like a roof that should have been replaced five years ago.
There was a very small 2 bedroom house on America over near arques and central expressway in sunnyvale. Well under $250 if I remember right, but it needed way more work than I wanted to put in. (incidentally, it also had a poorly-done bathroom addition; this one opening to outside. at least it was enclosed.)
I could go on for hours about all the poorly-done bathroom additions we saw. At one house, someone just took a toilet and plumbed it in to the corner of their enclosed back patio. They also had a completely free-standing shower insert plumbed in to the same area.
but yeah; in that price range you see a lot of stuff that needs a whole lot of work, but you will also find a few places that are livable with new carpets.
Housing "eating up all the salary" is hyperbole, plain and simple, unless you're talking about the segment of people who make 100k+ but are still living paycheck to paycheck because they live outside their means.
It's not just housing (which costs easily 2x what it does in or near any 2nd-tier tech city) - transportation, food, and mundane but pleasant things like pints of microbrew and movie tickets are way more expensive, too.
That's not The Bay, that's Not Living Near Microbreweries.
Imagine you are a farmer, and the value of grain falls below the cost to produce it. Do you accept what The Market has decided, and continue growing grain for a loss?
If a software company can't get enough value out of software developers to make it worthwhile then either they need to find a way to charge more or maybe the market doesn't see the need for them to exist.
Whatever pay is required to attract engineers is the right price. The only question is; is your idea good enough to still be profitable given the price floor?
He said the internet industry would consolidate like the PC industry did. We can see that happening already, with the trend of big companies like Google, Facebook, and Microsoft acquiring smaller companies to fill voids in their product offerings, talent pool, etc. Google is the definite poster child for consolidation, having bought YouTube, DoubleClick, GrandCentral, etc.
Games are growing on social networks instead of standalone flash game sites. Techcrunch is bought by AOL.
Facebook and Twitter are becoming infrastructure too (or at least, their login systems are), but not necessarily profitable ones. Sure, they'll tell the advertisers that I'm a left-handed avocado farmer in New Orleans, but it will be the content providers who'll know when I'm looking for a book of funny kitten jokes
His two points don't seem to have any intersection that I can see.
It doesn't, if anything it slows down any eventuality of it. He's saying it does to try and scare talent on the fence and talent that has already gone the startup route by saying its a misguided and futile effot.
Ask yourself this, if this big companies werent hurting because of these loses, would they waste time making the comments in the first place? Its cheaper to try scare tactics then to offer them more money.
I think the new economy (eventually, hopefully) will be many small companies with a handful of people (read: democracy) calling their own shots, more creative freedom and an interconnectivity with other small companies that spits in the face of fear-based competitive angst and eventually creates a real revolution that more of us are proud of rather than this disgusting idea that we all should work for the Umbrella Corporation.
I heard something similar from Joel Spolsky not that long ago.
It's like a George Wallace speech. The old guard, giving speeches targeted at the "do nothing class", urging them to help suppress a revolution.
However, he is right about that the internet will consolidate as it matures. However, we should not forget as soon as consolidation happens in a certain industry the very next thing what happen is disruption. So yes PC industry is consolidated, but whoever got of the PC train and jump on iPhone/iPad/Android did good.
Make hay when the sun shines. It will start raining in the future, and there might not be a lot of warning.
In others, many talented developers are better off going to work for FB or GGL and help them get quicker to a position of total control.
1. Social psychology shows us that, smaller, more focused groups perform better and have superior productivity to larger groups, which tend to become disorganized and derailed. (http://sgr.sagepub.com/content/40/2/247.abstract) Startups tend to have fewer employees (this is universal), and, even in hugely successful companies like Google, work is divided into highly productive nuclei of coordinated, amicable teams. This is a trend that repeats in very successful companies, and when startups pick up and start gaining more employees, though they decentralize, the "small team > big force" mentality remains.
2. If you outsource all the miscellaneous things a company needs to do to get a product out, you find that a) each of those outsourced functions is done on a much more quality level than if the company tried to do it all on its own, b) the company doing the outsourcing can focus more on its principal product. This actually spreads the wealth and improved productivity for every company involved. (http://www.industryweek.com/articles/breaking_the_rules__whe...)
I could see why Sean Parker would be a bit concerned, but, really, I think the explosion of new startups is fantastic for the overall quality of products.
Ho ho ho. There is a long, long list of companies who have discovered to their cost, the opposite. And amusingly, it's getting longer.
"The problem in his view is that many of the talented engineers
and product designers who are now starting their own companies
could have a bigger impact at places like Facebook, and they in
turn will have a hard time attracting the best talent because
those people can get funded to start their own projects as well."
edit: formatting
The flip-side this creates a better market for younger or less-experienced engineers who are looking to learn and grow. This group of people will never be able to get a job with Facebook, but can certainly join a company who is willing to grow with them.
It's 2011; we are traversing inflection points of development in solar energy, nanotechnology, bioinformatics, and seeing the early, dramatic fruits of stem cell research, and Parker is bitching that the best of the best aren't keen on improving software that shares drunk photos and your latest opinion of Kim Kardashian's divorce?
Wow. Just, wow.
One would almost dare to think that helping people communicate is useful or something crazy like that!
What do people's beliefs and perceptions have to do with reality?
Not that people shouldn't speak for the causes of their choosing, but you do lose some rhetorical impact if you only do so once you have a horse in the race.
[1] http://www.avc.com/a_vc/2011/03/a-challenge-to-startup-lawye...
[2] http://www.quora.com/Aaron-Greenspan/In-Fifty-Days-Payments-...
Sean Parker is concerned that not enough talented people work at a company he has a stake in. That's fair, but only that company can benefit if his concern is alleviated (at the cost of others).
I'm concerned that an entire industry of companies has been quashed by anti-competitive laws, not just in California, but nationwide, raising prices for merchants and consumers across the country due to monopolistic business tactics that have been well-documented. It's affected my company, as well as about ten I've gotten e-mails from and probably a hundred that never started up in the first place or don't want to admit that they're caught up in it, too. Therefore it seems a bit broader than my own self-interest. And you can call me selfish, but I don't see any other self-interested parties stepping up to the plate on this one.
The counterpoint to the horse-in-the-race argument is that there is absolutely no way I would have known anything about money transmission laws unless I had a horse in the race. Some of these topics are pretty esoteric and I think that it's good when specialists speak up about them.
You can work for a big company that serves billions of people, claiming that you are making an impact on the world, while in reality doing nothing.
On the other hand you can start your own company, perhaps only directly impacting a few hundred people, and still accomplish the goal of maximizing your change on the world (as that was your ceiling).
What I'm saying is that, if you believe Parker's argument, it isn't necessarily against an engineer's best interests.
EDIT> Limiting the discussion to tech, if you want to have the biggest possible impact, you should be working on AI or IA.
Interestingly, we (http://feefighters.com) had 2 of our 4 interns leave us in the past week because they got accepted to YC (2 different projects). I guess we should feel good because we're picking smart people who want to work for us, but we'd rather have them with us!
The aspect I dislike is when startups say that they are in for the long haul then sell a few months later. Makes it hard to trust a startup that the investment in time you spend to get up and running on their product will be worth it.
Wow what a narrow definition of success!For example by working for facebook how can I get every child in third world countries to get a decent education?How can I get every woman in rural india to break free from male dominance?
My respect for Parker just took a strong hit!
Parker suggests that one reason it will end badly is
because the Internet industry will ultimately consolidate
just like the PC industry did in the 1980s and 1990s.
There is no reason the computing industry cannot be more flat than it has in the past. I believe it is highly likely the industry will continue to fragment. Android, IOS, Windows7, BBX... there will be more platforms in the future, not less. More diversification, not less. The game has changed forever, as it should.
I wouldn't be surprised to see a smaller set of niche hardware companies pop up going against that trend, and I certainly see the state of software at the moment fragmenting further, not consolidating more. While Facebook and Google theoretically are dominating the distribution channels again, in reality those channels can be leveraged by smaller players easily. As if every boxed windows copy in 1995 had an empty slot where you could put your own company at low cost.
I can't tell you how much it pains me as an android user to see an app only available for the iPhone. As a developer, it's magnitudes worse to have to send messages to my users saying "we'll be getting to an [x] platform app soon!" when realistically it just stunts our growth to develop the same thing 3 times.
I can't wait for the end of this native app nonsense.
As an iOS developer I recommend that you try to understand how much more intellectually satisfying developing for the iphone is than android or HTML5!
That's what everyone says in a bubble: "History won't repeat itself this time!" Unfortunately, while industries and companies change and evolve, human nature (specifically fear, greed, and hype) doesn't change. The wise learn from history while the rest keep repeating the mistakes from 15-20 years before.
The idea that history repeats itself is, itself, dated. Technology changes things in ways people cannot really predict. The only thing you can reliably predict is what is expensive to do today will be cheap tomorrow. What these many small startups will collectively build on top of cheap "cloud services" and "mobile devices" will change the world.
What happens when all the developers with extremely low debt loads are snapped up by the Big firms to start-ups attempting to acquire tech co-founders and dev talent?
It is not that anyone is over funded, its that those with low debt loads and dev talent is in fact a finite amount and when its gone from the market prices adjust upwards..